United Envirotech Ltd - 1HFY12 results mostly in line (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.325

Fair Value: S$0.42

1HFY12 results mostly in line. United Envirotech Limited (UEL) reported its 2QFY12 results last evening, with revenue climbing 9.6% YoY to S$25.2m; this largely aided by higher treatment revenue, which grew 54.5%, due to the additions of Hegang 50k m3/day treatment plant and Nansha industrial treatment plant. But net profit tumbled 38.7% YoY to S$3.7m, hit by labor cost, interest cost and taxes. But on a sequential basis, the group showed a pretty good performance, with revenue rising 21.3% and earnings 4.9%. For 1HFY12, revenue grew 1.4% to S$46.0m, meeting 51.7% of full-year estimate, while net profit fell 29.5% to 7.3m, or 41.8% of our FY12 forecast.

Maintains optimistic outlook. Going forward, UEL remains fairly upbeat about its prospects in China, as it believes that there is still a growing demand for membrane-based water and wastewater treatment services; and it further believes that its advanced technologies, particularly Membrane Bioreactor (MBR), have a competitive edge in treating wastewater of a greater complexity to meet the stricter discharge limits. As a recap, the group has recently acquired another waste-water treatment project in China; this after exercising a call option to acquire the entire equity interest of Tongji Environmental (China) Pte Ltd (Tongji) for RMB34.03m. Tongji is the holding company of Aton Environmental (Shenyang) Co, where the latter has a 30-year BOT (Build-Operate-Transfer) concession agreement with the municipal government to treat 50k m3 of wastewater daily.

Finances backed by recent CB issue. While the group recorded cash balance of S$31.9m as of end-Sep, its coffers has just been topped up by the recent completion of US$113m worth of convertible bonds issued to KKR; this is expected to result in a net inflow of US$110m. Given the current credit crunch in China, we believe that the funds inflow could not have come at a better time - this will provide UEL with the financial muscle to pick up potential acquisitions on the cheap. In any case, we estimate that the group is already sitting on an order book of around S$70m, which can be recognised over the next 12 months.

Paring fair value to S$0.42. While 1HFY12 revenue was largely in line, higher cost pressures have depressed earnings. As such, we are using slightly lower margin assumptions and our earnings estimates for both FY12 and 13 drop by 8.4%. And because of the increased volatility in the market, our DCFbased fair value also correspondingly drops to S$0.42, but we maintain BUY for a potential upside of 30%.