• Integrated water treatment specialist
• Acquisition to bring synergies
• HOLD with new S$1.43 FV

Decent start to FY15 as expected

United Envirotech Ltd (UEL) made a decent start to FY15, with 1Q revenue jumping 51% YoY to S$66.3m, boosted by a 59% surge in its treatment business to S$20.5m, 23% jump in its EPC business to S$38.4m, as well as the maiden contribution of S$7.4m from external membrane sale. Recall that UEL recently acquired the membrane manufacturing business of Memstar. Net profit nearly tripled to S$22.5m, in part aided by an exceptional gain of S$14.2m arising from the disposal of Available-for-sale investment (likely Memstar shares). Excluding the one-off gain, we estimate core earnings would have come in around S$8.3m, still up around 45% YoY, meeting 20% of our full-year forecast; revenue met around 24%.

Upbeat about membrane business

Going forward, UEL believes that there is a growing demand for membrane-based water and waste-water treatment services, especially in China; this driven by the stricter discharge standards imposed by the government and also water shortages in various parts of the mainland. With the recent acquisition of Memstar’s operations, UEL is now a vertically integrated water treatment solution provider; management is confident that its advanced membrane-based water treatment technology, coupled with the synergies from the acquisition, will give it a competitive edge in securing more projects. The group also expects the demand for membranes to remain robust.

Adjusting for acquisition

While the results were mostly within our expectations, we are adjusting our numbers to factor in the Memstar acquisition. While we bump up our FY15 revenue forecast by 4%, we trim our earnings forecast by 6%; this in part to account for higher operating and interest expenses. Even though we are keeping our 28x valuation peg, our fair value  slips from S$1.50 to S$1.43 (now based on FY16F EPS versus blended FY15/FY16F previously), as we also account for the enlarged share base. Maintain HOLD - we see further acquisitions of transfer-operate-transfer (TOT) projects as the next catalyst.

Source: OCBC Research - 19 Aug 2014