United Envirotech Potential for Contract Wins

Within expectations. 2Q08 net profit of S$3.1m, up from a S$2.3m loss a year ago, was
in line with our estimate, as a stronger-than expected margin recovery and lower-than expected taxation offset slower-than-expected revenue recognition
Sales jumped 185% yoy to S$12m in 2Q08, underpinned by: 1) the recognition of major
engineering contracts secured over the past nine months; 2) a S$2.4m contribution from
its new Malaysian subsidiary; and 3) greater contributions from two TOT projects as more
wastewater was treated.

GP margins expanded to 53% from 11% a year ago, as most of UENV’s ongoing
turnkey projects during the quarter were in the design stage, where raw material
consumption and sub-contracting costs were lower than in the fabrication/installation
stage. Come 2H08, we expect gross margins to decline to 40-45% as some projects
enter the fabrication/installation stages.

Outstanding order book reduced to S$26m from S$42m in Mar 07, as UENV has not
bagged any significant contracts since. We expect revenue from four major engineering
contracts, worth Rmb210m, to be recognised over 2H08-1H09. Management says it is
negotiating for several water treatment and reclamation projects in China and South-East
Asia. We reckon that new contracts are likely in the coming quarter, as petrochemical
companies typically award contracts in the fourth quarter of the calendar year. Any
contract wins should provide a strong boost to UENV’s order book and earnings visibility.

Raised FY08 EPS forecast by 13% to account for higher gross margins in 1H08. Our
FY08 revenue is 78% backed by secured contracts and recurrent income. On the other
hand, we have lowered our FY09-10 EPS estimates by 7-15% to assume lower revenue
recognition on a smaller order book, and more conservative contract-win assumptions of
S$27m-36m, vs. S$29m-44m previously. Accordingly, our target price has been shaved
to S$0.45 from S$0.46, still based on 11x earnings as we roll forward our valuation basis
to CY09. Maintain Outperform for potential contract wins in the near term.