Asia Environment Holdings: BOT flow is strengthening

FY08 profit exceeded our forecast as BOT revenue kicked in faster than expected in 4Q08. Going forward, rising BOT income, underpinned by higher utilization and commercial operations of more plants, would support earnings in FY09 as EPC revenue softens on slower orderbook growth. However, as BOT is capital intensive, funding will remain a challenge for AENV amid ongoing credit crunch. Upgrade to Hold as valuation is undemanding at 4.3x FY09 PER.

4Q08 surprised on the upside. Headline net profit of RMB19.7m was significantly higher than our RMB4m forecast. Key variances were higher than expected O&M takings, which boosted Q4 revenue to RMB119m (-7%y-o-y, 23% q-o-q) vs our RMB70m forecast. Gross margin was also substantially higher at 34%, compared to our expectation of 25% as cost containment was better than expected.

Secured funding to execute projects. Despite ongoing credit woes, AENV managed to secure new financing of RMB168m since Sep 08 from the Chinese local banks. Of this, c. RMB90m was secured after the fiscal year. Better yet, borrowing costs have remained stable as lower interbank rates more than offset slightly higher credit spread. With the higher borrowings, AENV closed the fiscal year with net gearing of 0.5x. Most importantly, the company now has resources to operate completing projects.

Upgrade to Hold. We have raised FY09 net earnings to RMB40m compared to previous forecast of RMB31m to account for stronger BOT contributions and a slightly higher gross margin assumption. Consequently, our TP was raised to $0.11, still peg to 6x FY09 PER.

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