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Despite Opportunities, United Envirotech Seems Expensive
Tradeable, Tradeable Ideas | 09 June 2014
By: Lim Si Jie
Articles (169) Profile
  1. Revenue and EBITDA rose but net profit fell by 32.3 percent in FY 2014
  2. Completion of Memstar acquisition is part of United Envirotech’s plan to strengthen its comparative advantage.
  3. United Envirotech is positioned to benefit from growing demand in membrane-based water and wastewater treatment services, especially in China.

FY 2014 Financial Statement Summary

United Envirotech recorded a rise in its total EBITDA to $54.3 million for its full year ended 31 March 2014 on the back of a 9.3 percent increase in revenue to $202.3 million. United Envirotech’s recurring water treatment revenue grew 54.3 percent to $62.6 million for FY2014

However, net profit fell by 32.3 percent to $21 million for FY 2014.

Reasons For Decreased Net Profit
Net profit for FY2014 dropped mainly due to minimal contribution from newly secured EPC (Engineering, Procurement and Construction) projects. There were minimal contributions from new engineering contracts with a total amount of approximately $200 million secured during the last quarter of the financial year ended 31 March 2014. Most of these projects will be completed in FY2015, ending 31 March 2015.

In addition, Finance costs arising from the Medium Term Note(MTN) bond of $100 million and additional bank borrowings for investment projects which resulted in the increase of financial cost of $4.6 million also ate into United Envirotech’s bottom line. Returns from newly invested projects have also yet to be reflected financially for FY2014. Moving forward, finance costs arising from the convertible bond will be reduced after it was partly converted to ordinary shares on 11 April 2014. The reduction in finance costs is expected be around $4.5 million.

Foreign currency translation was also another reason for a drop in net profit for United Envirotech. Strengthening of the US$ against $/RMB resulted in the foreign currency exchange loss of $1.4 million as compared to gain of $2.1 million in the last corresponding year ended 31 March 2013.

Comparative Advantage
The Group’s advanced membrane technologies, particularly Membrane Bioreactor (MBR), have a competitive edge in treating wastewater of a greater complexity to meet stricter discharge limits and also to reclaim the treated wastewater for reuse more effectively and efficiently.

United Envirotech also completed its acquisition of Memstar Technology Ltd on 11 April 2014. The acquisition will secure upstream membrane manufactoring capability and enables the Group to be a vertically integrated water treatment solution provider.

In addition, the acquisition also allows the Group to benefit from the growth of the membrane business from the Memstar group, arising from the strong membrane technology, research and development capabilities and capacities. This will in turn strengthen the Group’s value proposition to attract and retain new clients.

There is a growing demand for membrane-based water and wastewater treatment services, particularly in China. This is mainly due to the stricter discharge limits imposed by the Chinese government and the shortage of water supply in various parts of China. The 12th Five-year plan by the Chinese government has incorporated clear directive to increase investment in environment and water related projects.

In February 2014, the Group secured the largest Membrane Bioreactor (“MBR”) project in China with a treatment capacity of 200,000 tons per day. This further affirmed its advanced membrane technologies and its competitive edge in meeting China’s stringent discharge standards.

With the completion of the acquisition of Memstar in April 2014, the Group has become a vertically integrated water treatment solutions provider. This will empower United Envirotech to expand its client base in and beyond China. It is expected that Memstar will contribute significantly towards its revenue in FY2015.

Much Promise But At A Premium
In my opinion, United Envirotech is still riding on possibilities instead of past performance. We can see that in terms of outlook and capabilities, United Envirotech is bullish. However, in terms of past performance, it is rather bearish. With a net asset value of $0.53, it doesn’t give investors any margin of safety to take a position.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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