Epure International - Buy: 32% Net Profit Growth in 1Q09

Target price raised to S$0.60 — FY09-11 FD EPS forecasts increased 5-6% to reflect lower tax rate and good order books. Target P/E raised to 11x (0.5 S.D. below historical avg on improved B/S and likelihood of rising order books but declining industrial demand). Epure generated Rmb54m operating cash in 1Q09, from Rmb10m outflow in 1Q08, thanks to working capital improvement. At end-Mar 09, it had Rmb776m net cash, representing ~30% of mkt cap.

EPC order books — About Rmb1bn at end-08 (07: ~Rmb300m; 9M08: ~Rmb 1bn). We expect EPC orders to rise further, as mgt guides for good municipal demand. 1Q total rev grew 8% on the back of equipment sales from Hi-Standard, acquired in 2H08. GM dropped 2.4ppt y/y but improved 5.9ppt q/q to 35%, compared with guidance of 30%. Operating margin reduced 1.7ppt y/y to 32% due to amortization of patents from acquisition of Hi-Standard and related office expenses. Thanks to tax credit, NP jumped 32% y/y to Rmb41m.

Cash to support expansion to BOT — To develop a recurring and stable rev. stream over the long term, Epure acquired its 4 th BOT project in May, located in Gansu Province, through forming a 15-85% JV with parent. Total project investment is Rmb129m. Based on a 30% equity portion, Epure, relying on internal resources, will have to invest ~Rmb5.85m.

Stock up 98% YTD — Mgt expects competition in EPC segment to remain keen. Financial tsunami has weakened demand from industrial segment. Stocks trades at 5.6x 12-mth EV/EBITDA. At our new TP of S$0.60 (from S$0.30), the stock would trade at ~6x FY10E EV/EBITDA, vs. avg. of 11x.

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