This likely includes a mechanical, electrical and instrumentation control and automation portion of the Tuas Water Reclamation Plant contract won by the group in Jun 2020, he says.
"In addition, since the US-Iran conflict, oil prices have trended higher, resulting in cost increase across various industries. Sanli’s projects are mainly fixed cost in nature, with constrained ability to pass on cost escalations to its customers.
"However, the recent government measures to share the additional cost burden with suppliers involved in critical public projects could alleviate some of these cost pressure," he adds.
Even so, Tng warns that Sanli's FY2026 to FY2028 gross margin will still be under pressure. As such, he has reduced his gross margin assumptions by 0.6-1.1% pts, leading to a 15.8-27.9% reduction in his EPS forecasts.
See also: CGS International raises Ever Glory's target price to $1.13 on further mega project orders
Tng warns that there are concerns over profit margin arising from the higher cost environment since the US-Iran conflict.
There is also risk of liquidated damages from a dispute raised by an unnamed "major customer", with discussions to resolve this matter amicably could stretch into FY2027.
As a result, on this reduced earnings forecast and by applying a 16x earnings multiple, Tng has derived his new target price of 33 cents.
See also: UOBKH's Koh initiates coverage on UI Boustead REIT with $1.16 target price
Nonetheless, Tng is reiterating his "add" rating given its order book-driven EPS growth, which is still projected at 77% for FY2027 despite his earnings cuts.
Sanli Environmental shares dropped 3.41% to 20 cents as at 11.55am.
