Attractive valuations keep China Jinjiang at 'add' despite earnings miss

Attractive valuations keep China Jinjiang at 'add' despite earnings miss

By: 
Samantha Chiew
08/03/18, 11:24 am

SINGAPORE (Mar 8): CIMB is reiterating its “add” recommendation on China Jinjiang Environment Holdings (CJE) with a lower target price of 85 cents.

This came after the group reported a 10.5% rise in 4Q17 earnings to RMB 204.7 million ($43 million) from a year ago, bringing FY17 earnings to 0.6% higher at RMB 201.2 million, which was short of the research house’s forecast by 12%.

The miss was due to low waste-to-energy (WTE) gross margin from high coal prices, higher than expected finance costs and lower than expected quantity of waste processed.

See: China Jinjiang's 4Q earnings up 10.5% to $43 mil on higher sales

In a Wednesday report, analyst Keith Li expects waste processed to drop 0.3% y-o-y in FY18 from the potential closure of Zibo and Kunming plants due to the government’s policies and the disposal of 70% interest in Hothot and Zibo projects.

“We expect CJE’s WTE capacity to drop 9.5% y-o-y to 25,580 tonnes/day by end-18F, due to plant closures and divestments,” says Li.

However, the analyst expects 7,250 tonnes per day new capacity to come onstream, including the completion of technical upgrades for eight existing plants and new projects expected to commence operations this year.

Furthermore, the group is currently seeking government approvals for another three WTE projects, which is likely to contribute to Li’s FY20 capacity addition forecast of 9.200 tonners per day.

Hence, the group is likely to have high capex needs over the next few years.

The analyst forecasts the group’s total operating cash inflows in FY18-20 to be only RMB 5.5 billion, which implies the need to source for more funds or continue with divestments.

“We expect CJE’s dividend payout will be cut from 50% in FY17 to 30% in FY18F-20F and net gearing to rise from 61% at end-17 to a high of 95% by end-20F,” says Li.

In addition, the analyst is cutting FY18-19 EPS, as he expects the disposal of projects, the slow progress in new project construction, and the temporary closure of some facilities for technical upgrades to lead to lower volumes of waste processed.

Overall, the analyst believes that the stock remains attractive at 5.2 times FY18 earnings

As at 11.18am, shares in CJE are trading 1 cent higher at 60 cents or 0.7 times FY18 book with a dividend yield of 5.67%.

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