Sanli Environmental Limited

Sanli Environmental Limited ("Sanli" or the "Company") is offering 52m new shares at $0.225 per share for its IPO, of which 49.5m will be via placement and the remaining 2.5m for the public. The Company will be listed on the Catalist with a market cap of around $60.4 million. The offer will close on 6 June at 12pm and starts trading on 8 June 2017.

Principal Business

The Company is an environmental engineering company in the field of water and waste management.  Water management refers to the treatment of raw and used water and Waste Management refers to the treatment of refuse in incineration plants.

The business can be divided into two main segments:

1. Engineering, Procurement and Construction ("EPC") - services include upgrading of existing water treatment plants, upgrading of pumping station capacities and replacement of aged equipment 
2. Operations and Maintenance - maintenance services to ensure reliability and minimal disruptions to customers' operations

The contracts for the business are usually between one to three years in duration. 

Financial Highlights

The revenue of the company has been growing impressively at a CAGR of 71% over the last 3 years from $19.4m in FY2014 to $57.2m in FY2016. The net profit grew to $5.9m in FY2016. 

Based on the pro forma net EPS of 2.07 Singapore cents and the enlarged share capital of 268.6m shares, the historical PER is around 10.9x. The EPS of 9m 2017 is also showing an improvement over the same period last year by around 5%. 

Assuming EPS grow by 5%, the EPS for FY2017 will be around 1.05 x 2.07 = 2.17 Singapore cents.

Use of proceeds

The Company intends to use the proceeds to undertake bigger projects, to expand its business premises as well as pursue opportunities outside of Singapore, in the South East Asia region

What i like about the Company

• Established management and track record. Sanli is in business for more than 10 years with an experienced team. Its business has been growing steadily over the last few years
• Attractive and growing sector. The waste management sector is an attractive sector and with increased focus on environmental issues, such technical expertise is scalable beyond Singapore, especially in this region. Singapore's strategic objective to become self-sufficiency in water would also bode well for the Company
• Integrated engineering solutions and services. The Company is able to provide a cost effective, "one stop" solution to customers. This will allow the business relationships to be more customised and less "commoditized"  
• Presence of Heliconia as pre-ipo investor. Heliconia is an wholly-owned unit of Temasek but independently run. The investments made by Heliconia, such as Jumbo and Kimly, have done well post IPO. Hopefully, this track record will continue
• Strong order book of S$105.8 million. More than 50% of the orders will be fulfilled in FY2018. This will provide some certainty to the profitability of the Sanli in the near term.
• SAC Capital track record has been good so far. Even the recent Aoxin Q&M IPO by SAC is trading above market
• Dividend policy of at least 20% of net profit. Assuming the EPS is 2.17, that will translate into a yield of around 2%

Some of my concerns

• Overly reliant on PUB. While PUB will be a good customer, it is quite hard to imagine a company being so overly dependent on one single customer. This will be a key risk for me
   
• Ability to scale business outside of Singapore. While the Singapore market is "stable", it will also be pretty limited. The ability to scale the business into ASEAN will be critical for the next phase
• Small cap company

Peer Valuation

As you can see from the table above, the market actually pays a premium for water companies. They are trading at multiple ranging from 11x-22x. Assuming an EPS of 2.17 and a conservative PE range of 12-15x, the fair value of Sanli will be between 26 to 32 cents. A more aggressive PE range of 16 to 20x will mean a price between 34 to 43 cents.

Mr IPO chilli rating

I like the fact that Company is reserving some shares for the public and endeavor to pay 20% of profits as dividend. The track record of recent IPOs as well as that of SAC Capital also bode well for the debut. The presence of Heliconia adds an added layer of comfort (enjoy while it last). I understand the demand for the placement shares is pretty strong as well. Overall it, it is a 3 chill rating for me. Hoot ah! 

Please note that Mr. IPO is vested through the placement tranche and the chilli ratings are super duper biased.