DBS Vickers maintains 'buy' call on SIIC Environment and $0.25 target
Analyst: Tan Ai Teng (left)
• Water capacity to double to 8m tons, WTE capacity to triple to 10k tons by 2016
• Beneficiary of positive industry outlook; beyond acquisitions, SIIC can still grow through upgrades /phased expansion of portfolio
• Maintain BUY, DCF-derived TP of S$0.25
Growth drivers: acquisitions and asset injection. To become a top player in China's environmental space, SIIC reaffirmed its plan to add 1-1.5m tons of water asset and 2k tons of waste-to-energy capacities each year to reach 8m tons of water and 10k tons of WTE capacities in 2016.
Apart from acquisitions and funding, investors were also keen on the potential injection of 47% parent-owned General Water Company (5.5-6m tons of water capacity) into SIIC.
We understand works are in progress but the timing is unknown. Management believes the parentco would inject the 47% stake into SIIC even if the remaining 53% stays with CECEP HK, SIIC's 2nd largest shareholder.
Given a healthy project pipeline and potential sale of government assets, SIIC's growth plan is on track.
Room for organic growth. Growth via tariff hikes may be gradual as only 10-15% of its portfolio is reviewed each year. However, there is huge upgrade opportunity as 75% of SIIC's water plants are below China's policy of Grade 1A discharge. This suggests ample room for future upgrades to higher standards. However, we feel plant upgrades would be longer-term growth boosters, after acquisition targets are exhausted.
Considering dual listing. SIIC continues to deliberate this exercise as a dual listing may not lift valuations further, but expenses would surely increase to maintain two listings.
Overall, we are positive on SIIC's steady progress and well laid out plan to ride on China's secular development in the environmental space. Maintain BUY and S$0.25 TP.