• EPC order book ~S$230m
• Eying more O&M income
• Downgrade to HOLD

Disappointing end to FY14

United Envirotech Ltd (UEL) recently posted a disappointing end to FY14. Revenue of S$202.3m, up 9.3%, and was about 3.8% above our forecast; the boost came mainly from the increase in treatment business from S$40.6m to S$62.6m. But net profit fell 31.9% to S$20.1m, and only met 58.2% of our FY14 estimate. UEL declared a final dividend of 0.3 S cent versus 0.5 S cent a year ago.

Maintains largely positive outlook

Going forward, management continues to maintain a pretty positive outlook for the water industry in China. Currently, we understand that UEL has an EPC order book of around S$230m, with the bulk coming from the S$200m worth of contracts it had secured in 3QFY14, where most will be completed in FY15. UEL believes that the recent acquisition of the membrane manufacturing business of Memstar will transform UEL into a vertically integrated water treatment solutions provider, empowering the group to expand its client base in and beyond China. And as before, UEL is still on the lookout for more waste water treatment plants to add to its portfolio.

Several material changes

Anyway, in wake of the Memstar acquisition, we expect to see several material changes. The key would be the change in earnings contribution from associate level to the group’s topline. We also expect to see a large dilution in shareholdings as 174m new shares will be issued to shareholders of Memstar. At the same time, KKR will also convert US$51.1m of its CBs to 136m shares; this will result in S$4.5m interest savings per year. UEL’s total share base would increase from 594m to 904m.

Downgrade to HOLD

Nevertheless, we believe that things will improve in FY15 – we bump up our revenue forecast by 7.5%; while we expect core earnings to double to S$41.9m, it is still 13% lower than our previous estimate. However, the recent interest in water treatment plays warrants a higher 28x peg (versus 20x before), and our fair value only eases to S$1.30 (from S$1.36). But as the stock looks fairly priced, we downgrade our call to HOLD.

Source: OCBC Research - 4 Jun 2014