United Envirotech

United Envirotech (UNEV) Reported a very strong set of 2QFY15 results which were above estimates, with net profit jumping 144.9% to $18.0m, taking 1HFY15 net profit to $40.8m (+203.2%). Revenue doubled to $105.4m, as revenue from the recurring water treatment business segment grew 63.2% to$25.3m and revenue from Engineering, Procurement, and Construction (EPC) contracts jumped 104.7% to $74.7m. Top-line also saw the addition of $5.4m of membrane sale to outside clients arising from the acquisition of Memstar in Apr ’14. In line with the increases in revenue, material purchased, consumables used and subcontractors’ fees increased 108.3% to $60.2m, while bottom-line was weighed by a rise in employee expenses (+65.1% to $4.9m), other operating expenses (+28.4% to $11.2m) and finance costs (+101.1% to $7.8m). Going forward, the group aims to harness its strength as a fully-integrated water solutions provider and focus on acquiring new water assets and engineering projects. Meanwhile, the new membrane manufacturing arm, Memstar, is seeing stronger demand in countries such as China and US. UNEV will actively seeking for strategic partners to form JVs to secure more projects in future. While the new JV will benefit from a constant source of engineering projects, there would also be a strong demand for the supply of membranes to these projects, boosting membrane sales for the group. Overall, Maybank-KE is upgrading UNEV to Buy from Hold with a TP of $1.73 (prev $1.52). The house is now more positive on UENV based on the following two reasons: 1) Previously concerns about the sustainability of UENV’s order win momentum given that it is a relatively asset light company has been mitigated. The recent partnership with Chengdu Xingrong shows a good example of new growth model for UENV. By leveraging on its SOE partners’ strong local presence, UENV can gain exposure to much bigger markets, and more importantly such business model is replicable. 2) Discussions with potential buyer can bring in a powerful strategic investor, which could further enhance UENV’s project sourcing capability. At the current price, UNEV trades at 30.8x FY15E P/E.