• Good 3QFY15 performance
• Maintain HOLD with S$1.65
• Should tender part of shares to CITIC

Good set of 3QFY15 results

United Envirotech Ltd (UEL) posted a good set of 3QFY15 results recently. Revenue jumped 81% YoY (also +10% QoQ) to S$116.1m, lifted by a 74% YoY jump in engineering revenue, which we understand came from its Fuzhou project, a 38% increase in treatment revenue, as well as an addition of S$11.4m of external membrane sales. However, gross margin eased to 40% from 46% in 2QFY15 and 47% in 3QFY14. Reported net profit jumped 49% to S$12.5m, but it was about 25% lower QoQ due to the lower profitability. 9MFY15 revenue climbed 80% to S$287.8m, easily matching our full-year forecast, while reported net profit surged 143% to S$51.7m; core earnings of S$37.6m met about 95% of our FY15 forecast. We raised our FY15F revenue by 16%, but kept core earnings unchanged, as 4QFY15 is usually seasonally slower. However, we bumped up our FY16F revenue by 28% and core earnings by 23%.

Likely less focus on pure EPC work

Going forward, management says it will continue to harness its strength as a fully-integrated water solutions provider; but UEL says it will focus less on pure EPC (civil works) but more on supplying components of the water treatment facilities, including membranes. Management believes that this is a more efficient use of capital and will also improve its margins.

CITIC offer should turn unconditional by 23 Mar

Separately, the offer from CITIC Ltd and KKR & Co to acquire a majority stake in UEL at S$1.65 cash/share should turn unconditional by 23 Mar; this as the consortium has gotten all the necessary government approvals in China. We also understand that CITIC has committed to subscribe for between 30m and 50m of new UEL shares at S$1.65 each. As before, we view the move as positive as the SOE will give UEL access to cheaper funding, help open more doors and expand its reach into other regions of China.

Maintain HOLD with S$1.65 FV

Maintain HOLD with S$1.65 FV – investors should consider tendering part of their shares as offer looks attractive (and slightly rich).

Source: OCBC Research - 17 Mar 2015