Sanli's FY21 Revenue Better Than Expected

• Sanli Environmental (SGX:1E3)'s FY21 revenue declined 9.8% to S$60.5m, better than expected if taking into consideration the 2- month lockdown in Apr-May 2020 when all construction work were halted. Labour shortage and additional COVID-19 preventive measures added to costs and construction delay. Work has stopped in Myanmar (10% of revenue) since the political upheaval in Feb 2021.

Higher O&M Revenue Offset Lower EPC

• The fall in EPC (Engineering, Procurement and Construction) revenue (-20.5%) was partly compensated by more higher-margined operations and maintenance works (+33.9%).
• Share of O&M (Operations and Maintance) has risen to 29.1% of revenue (FY20: 19.6%) and 56.8% of gross profit (FY20: 40.5%). Still, margins for both segments were dragged down by the higher costs.
• Overall gross margin fell 3.7 ppt to 7.3%. Net profit was 5.1% higher at S$0.3m, helped by a S$3.1m government grant.

FY21 Is Likely to be the Trough for Sanli's Earnings

• Singapore is heading towards a vaccination rate of 80% by Sep 2021 that enable further relaxation of movement restrictions and borders to re-open. This would allow more foreign workers to return, and construction projects to be ramped up.
• We expect revenue to grow by 10% and 15% in the next two years, and gross margins to return to FY19’s level of ~14%.

Demand Intact

• Singapore’s public sector still make up the bulk of its projects. Sanli Environmental’s recent S$73m contract win from COVID-19 remains the greatest risk.

Buy

• Our estimated EV (Enterprise Value) of Sanli Environmental is S$49.6m, derived from DCF at WACC of 15.6%. With net cash of S$17.3m, Sanli Environmental's equity value is S$66.9m translating into target price of S$0.249.
• Sanli Environmental has an asset-light balance sheet, as its work are high in engineering content. Our target price for Sanli Environmental translates into EV/EBITDA of 14.3x and 10.8x for FY22E and FY23E, respectively.

Source: SAC Capital Research - 28 Jul 2021