- Although the CEI deal was more expensive than expected, we believe that the benefits CEI could bring remain underappreciated by the market, in our view.
- With the backing of a state-owned enterprise, we expect HanKore to embark on a more aggressive acquisition drive.
- Maintain BUY but with a lower TP of SGD1.23 (previously SGD1.70) after incorporating the merger structure.
HanKore’s share price has corrected by 25% since details of the reverse takeover by China Everbright International (CEI) was announced on 2 June. The market viewed the deal negatively on the back of a higher-than-expected transaction price, causing a larger-than-expected EPS dilution. This has the effect of inflating HanKore’s FY6/15E P/E multiple to 23.4x, exceeding that of its closest peer SIIC, which is priced at 22.1x FY15E.
Remain sanguine on the stock
We believe the benefits that CEI could bring, such as stronger project sourcing ability, lower cost of borrowing and stronger balance sheet remain underappreciated by the market. With the backing of CEI, we expect HanKore to embark on an acquisition drive to position itself as a key player in the wastewater treatment (WWT) industry. We are now looking at an annual acquisition of 1m ton/day WWT capacity in FY6/15E and FY6/16E vs our original forecast of 500k ton/day.
After incorporating the final details of the CEI deal, we expect HanKore’s FY6/15E EPS to contract by 28.9% (vs +8.1% previously) before rebounding to 35.6% in FY6/16E. Accordingly, we cut our TP to SGD1.23, still based on 30x FY6/15E P/E. We believe the current share price weakness presents a good buying opportunity.
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