More lumpy results in 4Q11. United Envirotech Ltd (UEL) posted more lumpy results in 4QFY11, with revenue falling 34.5% YoY to an estimated S$19.8m this followed the completion of the Guangzhou Jingxi plant, Asia's largest underground MBR (membrane bio-reactor) wastewater treatment facility in 2QFY11. Although UEL managed to secure more engineering work in 4QFY11, resulting in a 55% QoQ jump in revenue, we note that these jobs typically come with much lower margins, thus dragging its gross margin to just 20.8%, down from 59.9% in 3QFY11 (36.5% in 4QFY10). As a result, its net profit fell by 63.0% YoY and 59.6% QoQ to S$1.6m but if we strip out exceptional items (negative goodwill), we estimate that UEL may have booked a slight S$0.4m loss.

For the full year, UEL clocked in revenue of S$78.0m, up 12.8%, which was about 7.6% above our estimate but due to the weaker profit margins, its reported net profit of S$16.0m, missing our FY11 forecast by 10.8%. Nonetheless, management has decided to maintain a final dividend of S$0.003 per share, unchanged from last year although it declared a special dividend of S$0.002/share in FY10.

Outlook still modestly optimistic. Although the group is currently sitting on an order book of S$20-30m worth of engineering projects that it will recognize in FY12, UEL maintains a modestly optimistic outlook, citing the growing demand for membrane-based water and waste-water treatment services, especially in China this mainly due to the stricter discharge limits imposed by the Chinese government and the chronic water shortage in various parts of the PRC. One reason for its confidence in securing orders is due to its competitive edge in the market, as its Membrane Bioreactor (MBR) technology can treat wastewater of a greater complexity to meet the stricter discharge limits and also to reclaim the treated wastewater for reuse more effectively and efficiently. We understand that the 100k m3/day underground Guangzhou Jingxi MBR plant (which we recently visited in Apr) has attracted a lot of interest from various other cities in China and the group is already in talks with several parties.

Paring fair value to S$0.53. Still, in light of the lumpy 4QFY11 results and poorer-than-expected margins, we pare our FY12 revenue estimate by 5.5% and earnings by 20.1%. As a result, our DCF-based fair value also eases from S$0.65 to S$0.53. But given the still positive prospects, we maintain our BUY rating.(Carey Wong)

(UEL), one of the leading membrane-based waste-water treatment companies listed on the SGX, currently operates five water treatment plants in China with a total design capacity of some 385k m3/day it is also in the process of constructing another two plants with a total design capacity of 130k m3/ day, which should start contributing to its recurring treatment revenue from Apr 2011. Recently, the group also increased its equity stake in two water plants - Nasha (previously 40%) and Liaoyang (75%) - to 100%. On the engineering side, we estimate that the group is currently sitting on an order book of S$120m, which it will deliver and recognize within 2011. And the group is not resting on its laurels as it is currently hunting for more EPC contracts as well as looking for existing TOT (Transfer-Operate-Transfer) plants (usually able to generate revenue immediately) to add to its investment portfolio.Maintain BUY
Previous Rating: BUY

Current Price: S$0.40
Fair Value: S$0.65 

By KALPANA RASHIWALA

United Envirotech Ltd (UEL) on Tuesday said it has bagged a Transfer-Operate-Transfer (TOT) project from the Tangshan-Nanpu Economic Development Zone Management Committee in China's Hebei province to acquire, upgrade and operate the centralised wastewater treatment and recycling plant for the development zone.

The project involves the acquisition of an existing 80,000 cubic metres per day wastewater treatment plant and a 40,000 cubic metres per day wastewater recycling plant, upgrading of the plant and operating it for a 30-year concession period.

The total investment for the project is estimated at 280 million yuan (about S$55 million).

UEL will form a 50:50 joint venture wit Singapore Exchange listed Memstar Technology, which makes high-performance hollow fibre membranes, to undertake the project.