SIIC Environment

Kim Eng on 9 Jul 2014

• Placing out 1b new shares at SGD0.158 apiece, at a reasonable 7.6% discount to pre-suspension price.
• An unexpected move given lowly-geared balance sheet; building up its war chest for future acquisitions.
• Maintain BUY. TP lowered to SGD0.20 from SGD0.22, after incorporating an enlarged share base.

Raising SGD158m cash by placing out 1b new shares
SIIC announced a share placement of 1b new shares, issued at SGD0.158 apiece, priced at a reasonable 7.6% discount to its pre-trading halt price of SGD0.171. These new shares represent 11.6% of its current share base. With SGD158m cash in hand, SIIC’s FY14E net gearing ratio is expected to improve to 18.0% from 49.3%.

Building up its war chest for more acquisitions ahead
While fund raising is a necessary evil as SIIC embarks on an acquisition path, this share placement came as a surprise to us considering its comparatively more lowly-geared balance sheet. We had earlier expected SIIC to raise debt instead. In our view, SIIC could be building up its war chest for future acquisitions. Part of the proceeds could be used to finance the recent acquisition of Longjiang Environmental Protection Group costing CNY405m.

Given its 1m ton/day capacity increase target, more acquisitions could be on the cards. Without this, the EPS dilution could be as much as 11%.

We maintain our BUY rating on SIIC. This share placement, albeit dilutive, will strengthen SIIC’s balance sheet, providing it the ammunition for future acquisitions. We lower our TP to SGD0.20 (previously SGD0.22), after adjusting for an 11% increase in share base, pegged to an unchanged 30x FY15E P/E.