Broker's take: DBS downgrades Citic Envirotech to 'hold' following earnings slump

DBS Equity Research has downgraded its recommendation on Citic Envirotech with a target price of S$0.34 after the environmental engineering services company posted a bottom-line slump for the second quarter and the first half of FY2019.

As at 10.26am, shares in Citic Envirotech were trading down 0.5 Singapore cent or 1.6 per cent at 30 cents on 2.9 million shares traded.

After market close on Wednesday, Citic Envirotech reported a 66 per cent drop in net profit to S$14.7 million for the quarter ended June from S$43.3 million a year ago. Second-quarter revenue shrank 30.3 per cent to S$202.8 million, mainly attributed to a 30 per cent decrease in the engineering business and a 44.7 per cent decrease in membrane system sales.

For the six months ended June 30, net profit was S$17.8 million, a 78.5 per cent decline from S$82.7 million in the previous year, mainly due to a change in recognition of construction revenue and delay in certain large-scale projects since the latter half of FY2018. Revenue halved to about S$275 million from S$550.2 million a year ago.

On Citic Envirotech's performance for the first half of FY2019, DBS analyst Patricia Yeung noted that the research house's "biggest concern on Citic Envirotech is execution risk as slow project execution has been the main reason for earnings disappointment".

"Citic Envirotech's valuation is rather stretched given the low single-digit earnings growth in FY2019," she added.

While the provider of environmental engineering services notched quarter-on-quarter improvements in the construction and membrane solution segments for Q2, Ms Yeung said that it is "uncertain if the improvement can be sustained".

That said, there is upside for Citic Envirotech, provided momentum in construction progress in the second quarter can be sustained, which could see earnings for the second half of FY2019 rebound from a low base.

"Coupled with more project wins, Citic Envirotech's share price could react positively," Ms Yeung said.

Ms Yeung noted that a key risk to her call is that "construction progress is the major swing factor for earnings growth.