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Sanli Environment Outperforming The Competitive Water Engineering Industry

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With Hyflux debt restructuring woes still in the limelight for many stakeholders, many investors might be wondering if the water engineering procurement, and construction (EPC) industry is a downbeatern loss-making sector to avoid altogether.

However, before one puts a blanket conclusion about the possible long-term bleak prospects of the overall EPC industry, why not consider taking a look at a relatively small-sized homegrown listed EPC firm called Sanli Environment (SEL). Investors might just find some assurance considering that apart from Hyflux, there are not many local listed water EPC firms.

Brief Background

SEL was listed in June 2017 at an Initial Public Offering (IPO) price of $0.225, and on its maiden debut on the SGX Catalist Board, the stock opened at $0.40, which was almost double the IPO price. At the time of the listing in June 2017, the IPO issue garnered 52 million share subscriptions, and was 12.8 times subscribed. At the current price of $0.21, the total market capitalisation is $64.5 million.

The Group has been existence of more than ten years and has completed more than 1,000 projects in the field of water and waste management, according to the FY18 Annual Report.

SEL’s expertise is in the design, supply, delivery, installation, commissioning, maintenance, repair, and overhaul or mechanical and electrical (M&E) equipment, as well as process, instrumentation, and control systems in wastewater treatment plants, water reclamation plants, NEWater plants, waterworks, service reservoirs, pumping stations, and incineration plants.

SEL’s business is divided into two main business segments, namely the EPC segment which provides water and waste management solutions, and the operations and maintenance (O&M) segment which provide corrective and preventive maintenance services to ensure reliability and minimal disruptions to customers’ operations.

Key members of the Board of Directors

There are seven directors helming the Board which include the Non-Executive Chairman, and Independent Director, Mr. Ng Lip Chi, Lawrence, and the Chief Executive Officer (CEO), Mr. Sim Hock Heng. According to the FY18 Annual Report, Mr. Sim has more than twenty years of experience in the field of water and waste management, and used to work for Dayen Environmental, now known as Moya Holdings Asia, a local listed peer. Mr. Sim left Dayen as project manager in February 2005, and then co-founded SEL Environment in the following year in 2006.

Financial Performance

In 1H19, SEL recorded a 12.9 percent increase in total revenue at $34.7 million, and gross profit of $5.4 million. This represented a gross margin of 15.7 percent, similar to 15.8 percent achieved last year.

Net profit attributed to shareholders during 1H19 jumped by 168.8 percent year-on-year (YoY) to $1.8 million.

sanli1

Source: Company’s financials

A summary of the key income statement-related items is shown as follows:

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Source: Company’s financials

The Group’s net cash position as of 30 September 2018 stood at $5.7 million, and net cash from operating cash flows (OCF) was $1.5 million during 1H19, as compared to the negative OCF of $9.2 million in 1H18. The Group has total interest-bearing borrowings of $2.7 million comprising of short-term borrowings of $271,000 and long-term borrowings of $2.5 million.

How did the key financial ratios of SEL Environment turn out to be so far?

Summary of SEL Key Financial Ratios
  FY 2015 FY 2016 FY 2017 FY 2018 LTM Ending
  31/3/15 31/3/16 31/3/17 31/3/18 30/9/18
Return on Assets (ROA) 13.034% 18.274% 13.601% 7.853% 6.784%
Return on Capital (ROC) 21.923% 30.129% 24.059% 14.620% 10.587%
Return on Equity (ROE) 60.272% 66.464% 52.600% 18.285% 17.131%
Gross Margin (GM) 17.097% 19.642% 16.169% 14.378% 14.384%
EBITDA Margin (EM) 11.064% 13.270% 10.621% 7.360% 6.785%
Current Ratio 1.439 1.717 1.311 1.784 1.979

Source: SGX StockFacts, Company’s financials

While the Group’s major return ratios and margin ratios registered mild to sharp declines, the current ratio of the Group managed to buck the trend rising to two times as of 1H19.

In SEL’s 1H19 earnings outlook, the Group expects the overall business environment to remain challenging with keen competition. However, the Group intends to tap into its overall strengths of long track records in undertaking and waste management projects in Singapore, to secure more public and private contracts.

Debt Situation

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Source: SGX StockFacts, Company Financials

The above chart shows the historical trend of SEL’s total debt-to-total equity (D/E) ratio which appears to be trending downwards and as of the last twelve months (LTM) ending September 30, 2018, D/E ratio was 11.4 percent, which is far lower than the 78.4 percent in FY15.

Moreover, the interest coverage ratio as measured by the ratio of earnings before interest, taxes, depreciation and amortisation (EBITDA) to interest expense rose to 60.7 times as of LTM ending September 30, 2018. This nearly doubled from the 37.9 times interest coverage ratio of FY15.

Peer Comparison

Peers Price-to-Earnings (P/E) Ratio Dividend Yield (%) Price-To-Book Value (P/BV) Ratio Market Cap (S$millions) Total Revenues (S$’millions)
SEL 13.138 1.19% 2.163 64.480 79.580
Moya Holdings Asia 11.259 N/A 1.342 348.720 192.460
Darco Water Technologies 92.490 N/A 0.900 46.920 64.240
China Everbright Water 8.189 2.79% 0.684 950.000 829.500

Source: SGX StockFacts

Among SEL’s peers, we noted that SGX Mainboard-listed China Everbright Water (CEWL) has the most competitive relative valuation multiples given its overall total market capitalisation and total revenue earned. Moreover, CEWL’s overall twelve-month dividend yield at 2.8 percent is one of the highest among the selected peer group as shown by the chart above.

A relatively illiquid counter

At the current stock price of $0.21 and total market capitalisation of $64.5 million as, the stock’s three-month average trading volume is about 30,000 or 0.03 million shares, and the six-moth volume weighted adjusted price (VWAP) is about $0.199 as of February 22, 2019 according to SGX Stockfacts. These share statistics figures do point towards relatively illiquid stock trading conditions for the counter.

Moreover, the counter is not actively researched by any sell-side brokerage houses, which makes price discovery relatively difficult. However, if one is not comfortable investing in foreign counters or the so-called “China S-Chip” counters, then one might want to take a closer look at SEL.

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