• Non-China contract of S$17.5m
• More driven by China WWT industry
• Maintain HOLD with new S$1.50 FV

Sizable non-China contract

United Envirotech Ltd (UEL) has just been awarded a MYR45m (~S$17.5m) EPC contract in Johor Bahru, Johor, Malaysia. This is to construct a sewer pipeline and a sewage treatment plant that is expected to commence immediately and be completed by end 2015. According to management, the contract represents the first of three module projects to provide sewer network and treatment system with a capacity of 250k population equivalent. While UEL does not expect the project to have any material impact on its EPS and NTA for FY15 ending Mar 15, we note that the contract value already exceeds its Malaysian subsidiary’s FY14 revenue contribution of MYR40m.

China’s WWT action plan due soon

While the award of this sizable contract is noteworthy, we believe that the market is probably keener on UEL’s prospects in China’s WWT (waste-water treatment) industry. Recall that the Chinese government had earlier proposed a CNY2t (US$320b) action plan to reduce pollution emissions, improve drinking water safety, and promote eco-friendly industries. We understand the draft has been submitted to the State Council for approval and could be put into legalization soon. Industry watchers believe that industrial clients are likely to bear the brunt of the new policies and may see them outsource their treatment processes in order to comply with the tougher standards.

UEL still looking to expand portfolio

And should this happen, we believe that someone with UEL’s expertise and track record in running WWT plants could be a direct beneficiary. Management continues to be on the lookout for good WWT projects to add to its portfolio. The TOT model works best for UEL because it provides the company with an existing plant that it can not only provide immediate cashflow but also offers the opportunity for expansion/upgrades, raising both treatment capacity and tariffs.

Maintain HOLD

In view of the positive development, we bump up our FY15 and FY16 earnings forecasts by 1.5-2.8%. We are also rolling forward our 28x peg to blended FY15/FY16F EPS, thus raising our fair value to S$1.50 from S$1.30. But the recent run-up may have captured most of the good news in its share price, hence we maintain our HOLD rating.

Source: OCBC Research - 25 Jun 2014