Sanli Environmental has shown its niche expertise in a potentially big industry. Given the trajectory of contracts won, the company might be able to double its earnings in the coming two, or three years, says SAC Capital's Matthias Chan.
In his unrated note on Jan 24, Chan points out that Sanli Environmental 1E3 is the only engineering company involved in the engineering, procurement and construction (EPC) of the network of water pumping systems for the land reclamation project at Pulau Tekong.
The reclamation, as Chan notes, is via an alternative method of using polders, which is deemed a breakthrough and is setting the way for how Singapore will reclaim land in the future.
Specifically, the recently announced Long Island along mainland Singapore's East Coast is one such mega project where relevant engineering expertise is required.
Besides expanding available land, the Long Island project is also part of a $100 billion coastal protection plan to help Singapore ward off rising sea levels given ongoing global warming.
"Based on similar past projects, it is evident that very niche technical expertise is necessary to fulfil the criteria needed to execute the coastal protection plan.
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"From our observations, typically only three service providers vie for such projects including Sanli Environmental," says Chan.
In addition, the company stumbled on a “magnesium mine" while working on a water treatment project with PUB.
As Chan describes it, while doing so, Sanli discovered the benefits of magnesium hydroxide slurry to environmental protection, especially the effort to reduce sulfur emissions from ships.
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"Sanli is devoting resources to this new niche business engine and we will not be surprised if contracts are forthcoming," he adds.
According to Chan's estimates, just on the trajectory of contracts awarded for coastal protection and water/wastewater projects relative to Sanli’s FY23 revenue of around $100 million, its revenue and net profit can maybe double within 3 years.
Ignoring economies of scale and conservatively ascribing FY2023 net margin of 4% to the next few years, Sanli’s earnings for the coming FY2025 and FY2026 could be closer to $9 million, for an undemanding forward PE of 3x, says Chan.
Just on Jan 22, the environmental engineering company announced the contract wins which has brought its order book to some $335.9 million, to be fulfilled over the next three years.
Sanli Environmental shares changed hands at 11 cents as at 10.06 am, up 4.59%.
