Excerpts from analysts' report
CIMB analysts: NGOH Yi Sin, Roy CHEN and Keith LI
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Decent 2QFY15, core net profit up 12.4% yoy
CEWL reported 93% increase in 2QFY15 revenue on the back of higher construction income from expansion and upgrading of several projects, which accounted for 39% of total revenue (vs. 20% in 2QFY14). As construction activities generally have lower margins, gross profit margin dipped to 44% vs 67% in 2QFY14. On a yoy comparison, other income jumped by 986% from HK$1.2m to HK$13.1m (more government grant and FX gains), while admin expenses of HK$45.2m were higher by 308% to account for the enlarged group after HanKore’s RTO.
Net gearing improved to 10.2%, ample leverage potential
Proceeds of share issuance led to lower net gearing of 10.2% this quarter, vs. 21.0% in 1QFY15. As this is one of the lowest among peers, CEWL has significant room to leverage up for better ROE. We saw a 72% yoy rise in 2QFY15 financing costs as a result of more expensive borrowings on a consolidated basis after the RTO. We expect financing costs to come down as HanKore’s S$50m 7.5% fixed-rate MTN has been fully redeemed on 1 Aug 15, while IFC has extended a US$140m 10-year loan to CEWL on 29 Jul 15.
2015: a year of consolidation
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CEWL has been focused on internal consolidation for the most of 1H15 and CEI (parent company of CEWL) has also completed the group’s restructuring in May 15. CEWL continues to seek opportunities for larger market share, as well as expanding into industrial wastewater treatment (WWT) through technological improvement. We project the slow acquisition pace in FY15 to pick up in FY16 onwards. The project pipeline for 2H15 remains strong, with three projects under construction.
VAT rebate lowered to 70%
The State Administration of Taxation in China recently issued a reduction in VAT rebate from 100% to 70% (based on 17% standard VAT rate); applicable to all wastewater and solid waste operators effective 1 July 2015. While this is likely to reduce CEWL’s 2H15 net profit by 5.3%, the company has started negotiating for higher water tariffs to mitigate this impact. As the administration procedures for the VAT rebates are still unclear and the impact of a lower rebate is likely to be short term, we keep our forecasts for tax rates unchanged for the time being.
