UNITED ENVIROTECH: Sharp discount to peers

Perspective| 08 February 2010

Originally published on www.nextinsight.net.
This article is reproduced here as part of our collaboration with NextInsight.

By NextInsight

Dr Lin Yucheng, chairman & CEO, United Envirotech, has been a Singapore citizen since 1993. NextInsight file photo

DR LIN YUCHENG has reason to be delighted with his company's just-announced Q3 results but he is not thrilled that United Envirotech’s shares still trade at a sharp discount to its peers.

Over lunch with analysts last Thursday, Dr Lin, the chairman and CEO of United Envirotech, brought up his observation that the market was according his peers a much higher valuation.

WATER STOCK	Market cap (S$m)	Recent price (S$)	PE (historical)
UNITED ENVIROTECH	117.9	0.27	11.8
HYFLUX	1,832.3	3.46	29.1
ASIA ENVIRONMENT	81.4	0.19	6.1
EPURE	1,070.7	0.83	19.6
SINOMEM TECHNOLOGY	240.5	0.47	27.0

Source: Bloomberg

Over time, the market could re-rate his stock – if United Envirotech continues to deliver handsome earnings growth.

There is a piece of public information that seems to point towards that happy outcome: United Envirotech has an order book of S$140 million for its industrial wastewaer treatement projects that would be recognized over the next 18 months.

That works out to an average of S$23.3 million per quarter, which is a significant increase as any back-of-the-envelope calculation will show.

RISING QUARTERLY REVENUE, RISING PROFIT

UNITED ENVIROTECH	Revenue (S$m)	Net profit (S$m)	Net margin (%)
Q1 (Apr – June)	8.845	1.1	12.4
Q2 (July –Sept)	11,289	3.1	27.5
Q3 (Oct –Dec)	18,752	5.15	27.5

Assuming Q4 (ending March 2010) sees revenue of S$23.3 million, the total revenue for the current FY 10 would be S$62.2 million (ie, S$38.9 m for the first 9 months + $23.3 m).

That is a 45% jump from the $42.9 million for the previous financial year.

Assuming the next financial year has S$23.3 million multiplied by 4 quarters in revenue, one would get $93.2 million, which would be an increase of 50% year-on-year.

Here the assumption is that United Envirotech does not enjoy any contribution from any new contract that it may get from now on.

That assumption is very conservative. Take a look at CIMB-GK’s forecast in a report on Jan 10 this year, as follows:

FYE MAR	2008	2009	2010 F	2011 F	2012 F
Revenue (S$m)	51.2	42.9	77.3	159.2	201.5
Growth (%)	116	-16	80	106	27
Net profit (S$m)	8.5	3.7	15.2	24.5	33.5
Growth (%)	363	-57	314	62	37
PE @ 34 c	13.3	36.9	9.8	6.1	4.4
Dividend	0.3	0.3	0.3	0.3	0.3
Dividend yield	0.9%	0.9%	0.9%	0.9%	0.9%

Source: CIMB-GK, Jan 20

In his Jan 20 report, CIMB-GK analyst Gary Ng forecasts far higher revenue for even this current financial year and for the next.

He has a target price of S$0.56, reflecting FY11 earnings, and 10x earnings multiple.

This is still below the mid-cycle valuation, and is at a discount to bigger peers who were re-rated upon awards of overseas contracts (e.g. Epure, Hyflux).

”We like UENV for its projects visibility in the municipal sector, and its proven execution in overseas projects," wrote Gary.

The company offers "excellent value" trading at 6.1x FY11 P/E against its 3-year core earnings CAGR forecast of 37%, according to him.

Recurring revenue increased in Q3 FY10 as a result of higher quantity of wastewater treated.

At the time of the report, the stock price was 34 cents, much higher than the 27 cents it closed at last Friday, pulled down by the overall market downturn.

Now, let's look at several highlights from the recent Q3 (Oct-Dec 09) results of United Envirotech, which operates in a niche servicing petrochemical giants such as Sinopec, CNOOC, and CNPC in China:

* Cash and cash balances stood at S$43.4 million. The company is in a net cash position.

* Net cash used in operating activities was $9.1 million (ie, there was a net outflow), mainly attributable to a $20 million tender deposit placed for a project. The money has since been returned to the company after Dec 31.

* Revenue stood at $18.8 m, which was 114.3% higher year-on-year.

* Net profit was $5.2 million, which was 383.6% higher year-on-year.

* Recurring revenue for treatment of wastewater at 5 projects that it maintains rose by $1 million, to $3.6 million, as a result of higher capacity of wastewater treated. United Envirotech's recurring revenue has been on climbing over the years – an interesting trend of assured revenue, and which positions the company in a position to spin off the treatment business as a water trust.

▲United Envirotech 0.405 +0.025 +6.58% Discuss »
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