Friday 11 January 2013

United Envirotech

OCBC on 10 Jan 2013

United Envirotech (UEL) intends to place out 98.5m new shares, or 20.6% of the existing share capital, to KKR China Water Investment Holdings at S$0.50 each for a cash consideration of S$49.3m. UEL intends to use 90% of the net proceeds for the acquisition or construction of water treatment plants and the rest for general working capital. Separately, UEL intends to purchase a 13.2% stake in Memstar Technology Ltd (MTL) for a total consideration of S$35m, via cash offer of S$26m and 18m new UEL shares. The issue of new shares to both KKR and MTL will result in some dilution for existing shareholders, but we believe that the outlook for UEL remains upbeat, as China will continue to focus on environmental issues. Maintain BUY with S$0.67 fair value.

Placement to KKR
United Envirotech Limited (UEL) intends to place out 98.5m new shares, or 20.6% of the existing share capital, to KKR China Water Investment Holdings at S$0.50 each for a cash consideration of S$49.3m. The issue price represents a discount of 2.7% to the average weighted price of S$0.514 traded on 7 Jan; it is a premium of 8.5% to the average closing price for the 30 trading days prior to 8 Jan. Upon completion of the deal, KKR will have a direct interest of 45.2% on a fully diluted basis (assuming full conversion of US$113.8m of convertible bonds into shares at S$0.45 each). 

Investment thesis still intact
UEL intends to use 90% of the net proceeds for the acquisition or construction of water treatment plants and the rest for general working capital. According to management, it has already identified several existing industrial waste-water projects in the coastal area around Shandong and Liaoning. Based on its usual 40/60 funding split, we estimate that UEL can finance up to S$125m worth of projects. 

Takes 13.2% in MTL 
Separately, UEL intends to purchase a 13.2% stake in Memstar Technology Ltd (MTL) for a total consideration of S$35m - 120m shares will come from Dr Ge Hailin for S$13m, satisfied by S$12m cash and 2m new UEL shares; 220m shares from Ms Pan Shuhong for S$14m cash and 16m new UEL shares. UEL believes the move will strengthen the strategic relationship between them, given that MTL is the key supplier of the company’s membranes. UEL also expects to see an increase in earnings as MTL will now become an associate. 

Outlook remains positive
The issue of new shares to both KKR and MTL will result in some dilution for existing shareholders, but we believe that the outlook for UEL remains upbeat, as China will continue to focus on environmental issues. Maintain BUY with S$0.67 fair value.

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