The outlook is stable. We are expecting some near-term weakness in PATMI over the following two FYs. This is due to the higher depreciation expense from the WTE plant and sludge treatment facility when they are completed, but initially under-utilised during their respective ramp-up periods. However, cash flow from operations is expected to remain stable. Consequently, 4.0 cents dividend is sustainable going forward. We expect free cash flow in FY18e to be negative, due to capital expenditure for the sludge treatment facility. We see PATMI picking up in FY20e.
Key catalyst to look out for is the tender in 3Q 2017 for the Public Waste Collection (PWC) contract for the consolidated Bedok and Pasir Ris-Tampines sectors, where SembWaste and Veolia are the respective incumbents.
Upgrade to Buy from Accumulate; lower target price of S$1.53 (previously S$1.57)
We have adjusted our FY18e/FY19e earnings 17%/20% lower than previous, due to ramp-up period for the new projects. We also have a lower WACC of 6.6% (previously 7.0%). Our target price gives an implied FY18e forward P/E multiple of 16.9x. This compares against the Straits Times Index 12-month forward P/E multiple of 14.7x.