Excerpts from analyst's report


tanaitengDBS Vickers analyst: Tan Ai Teng (left)

Steady flow

» Profit boosted by much higher interest income, but core profit is slightly below our estimate at S$51m

» 9M14 EPC revenue beat estimate, but Treatment revenue fell short

» Dynamic industry outlook to continue to support performance; also seeking growth from acquisitions

» Maintain BUY, TP S$0.22


Highlights
9M14 core profit is 70% of full year forecast

 3Q14 net profit grew 75% y-o-y to RM67m although revenue only grew 10% to RMB306m. Stripping out forex gain and one-off disposal gain, core profit was Rmb51m, a shade lower than our Rmb54m estimate. Gross margin fell to 26% from 33% in 2Q13 and 27% in 2Q14, mainly due to lower construction margins for some projects in the quarter.

dbs_forecasts11.14Source: Company, DBS Bank, Bloomberg Finance L.P.However, net margin improved to 22% from 14% in 3Q13 and 17% in 2Q14 due to much higher interest income (Rmb38m) as a result of late repayment of trade receivables.

Overall, 9M14 profit grew 31% y-o-y to RMB171m, accounting for 72% of our FY14 estimate. 9M14 EPC revenue beat estimate, but Treatment fell short

 YTD EPC revenue of Rmb370m (+62% y-o-y) is close to our full year forecast of Rmb386m despite the proposed sale of the business.

However, Treatment revenue of Rmb568m (+14% y-o-y) is only 56% of our full year forecast, implying lower treatment volume or utilisation rate.

Healthy balance sheet

 Net gearing ratio eased to 0.4x from 0.6x in 2Q14 and 1.2x in 3Q13.

Outlook
Tweaked FY14F/15F earnings

 SIIC is poised to continue to register positive growth on the back of strong industry dynamics. However, we trimmed FY14F/15F earnings by one percent after pacing out revenue recognition and raising interest income. Maintain BUY rating and S$0.22 TP.

Valuation

We used the sum-of-the-parts method to value SIIC, to capture the different earnings characteristics of the two businesses. Our target price is based on 12x PE for Construction, and 10-Year Discounted Cash Flow valuation for Water Treatment assuming 8% Weighted Average Cost of Capital, zero terminal growth, and flat tariff rates throughout the concession period.

Risks 
Accounts receivable risks 

 Highly sensitive to fluctuations in accounts receivables.  

Rising interest rate 
 Rising borrowing costs would be a risk since 60-65% of project investment costs are debt-funded.   

Project delay 
 Delays in development of projects.  

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