800 SUPER: Upgrade to buy with $1.42 target price

Excerpts from Phillip Securities' report

Analyst: Richard Leow, CFTe, FRM

Photo: Company ♦ 2Q S$39.39mn revenue in line with our forecast of S$39.53mn  ♦ 2Q S$3.63mn net income missed our forecast of S$4.25mn by 15%  ♦ 1H S$78.84mn revenue met 48.7% of our full year forecast of S$162.0mn  ♦ 1H $8.145mn net income met 44.6% of our full year forecast of S$18.25mn  ♦ Introduced maiden interim dividend of 1.0 cent  800 Super Share price:  $1.09 Target:  $1.42 We are bullish on the stock because of the pipeline of projects. While the projects require capex, we view it positively that the company is reinvesting capital into new projects. We argue that investing in projects with a higher return than the cost of capital creates value for shareholders.

Treatment and disposal of sludge contract not contributing yet; details in next quarter
800 Super made an announcement on 27 October 2016, in relation to the contract from the Public Utilities Board. While the announcement stated that the contract starts from 7 November 2016, we understand from management that the project has not contributed yet. We understand that construction of the facility will only commence in 2Q CY18.

Details on capital expenditure and the project timeline to be announced in the next quarter. However, we do expect the company to be taking on more debt to fund the construction cost of the facility. We have yet to include the contribution from this project into our forecasts. Hence, this is a source of further upside to our valuation of the stock.

Introduced maiden interim dividend of 1.0 cent; kept our payout ratio forecast intact
We believe this will be welcomed by investors and trading liquidity of the stock may improve going forward. In view of the interim dividend, there will be a one-off higher cash out flow in FY17. We continue to assume a full year dividend based on 30% payout ratio.

However, our FY17F/FY18F dividend forecast of 2.75/3.00 cents is now lower than our previous forecast, as we have adjusted our FY17F/FY18F net profit forecast lower by 9.7%/10.5%, in view of our over-estimation for 2Q FY17.

Upgrade to "Buy" rating with higher target price of S$1.42 (previous: S$0.92)
The significantly higher target price is due to change in valuation method from relative valuation to intrinsic discounted cash flow (DCF) and the rationale is explained overleaf.

Our target price gives an FY17F forward P/E multiple of 15.4x, which is slightly higher than the Straits Times Index (STI) implied P/E multiple of 14.4x (Source: Bloomberg).

Full report here.