Tuesday 18 November 2014

United Envirotech

OCBC on 14 Nov 2014

CITIC Ltd and KKR & Co will form a consortium (CKM) to jointly offer S$1.65 cash/share to buy out all existing United Envirotech Ltd (UEL) shareholders; this valuing UEL at S$1.9b. While the bid has already received 51% acceptance from UEL's major shareholders, including KKR and CEO Dr Lin, the offer is conditional on getting regulatory approvals in China. We understand from management that this process could take some 4-6 months to complete. Furthermore, CKM intends to keep UEL listed on the SGX. We believe that the emergence of CITIC as its major shareholder is likely to have a positive impact on UEL in the medium to long run. The pre-conditional offer price of S$1.65 is about 15% above our fair value of S$1.43 (based on 24x FY15F EPS), which we believe looks attractive. But based on its current prospects, it may be slightly rich. For now, we are maintaining our HOLD rating on the stock and move our fair value up to S$1.65; but we believe that investors should be looking to take profit if the share price jumps sharply above the offer level.

Pre-conditional buy-out offer at S$1.65 
CITIC Ltd and KKR & Co will form a consortium (CKM) to jointly offer S$1.65 cash/share to buy out all existing United Envirotech Ltd (UEL) shareholders; this valuing UEL at S$1.9b. While the bid has already received 51% acceptance from UEL's major shareholders, including KKR and CEO Dr Lin, the offer is conditional on getting regulatory approvals in China. We understand from management that this process could take some 4-6 months to complete. Furthermore, CKM intends to keep UEL listed on the SGX. And after the deal is concluded, CKM could also obtain more shares via a private placement, with amounts ranging from S$50m to S$150m, which UEL can use to expand its water treatment business. 

Overall positive impact 
We believe that the emergence of CITIC as its major shareholder is likely to have a positive impact on UEL. For one, the SOE status of CITIC could help UEL open more doors and expand its reach into other regions of China. Secondly, CITIC could also give UEL a cheaper access to capital, riding on its credit rating in China. Last but not least, UEL could enjoy some very low hanging fruits in the form of ready waste-water treatment projects in related companies under the CITIC umbrella. For CITIC, we believe that the track record that Dr Lin and his team has established will allow it to have a viable and profitable water treatment business. 

Offer looks attractive but fairly rich based on current prospects
The pre-conditional offer price of S$1.65 is about 15% above our fair value of S$1.43 (based on 24x FY15F EPS), which we believe looks attractive. But based on its current prospects, it may be slightly rich, versus its peers, as it would mean that UEL would need to show a much stronger earnings growth (we are already projecting nearly 100% growth in FY15, 35% in FY16). For now, we are maintaining our HOLDrating on the stock and move our fair value up to S$1.65; but we believe that investors should be looking to take profit if the share price jumps sharply above the offer level.

No comments:

Post a Comment