Hyflux

Kim Eng on 23 Feb 2012


Hyflux (HYF SP) – No respite on the horizon
Previous day closing price: $1.58
Recommendation –Sell (maintained)
Target price – $1.25 (raised)


In line with expectations, but helped by one-off gains. Although Hyflux’s FY11 headline numbers were in line with market consensus, the bottomline was cushioned by a $11.9m one-off gain on the sale of PPE.
46% decline in recurring profit. Revenue declined by 15% YoY while reported net profit slid by 37% YoY to $55.7m. Adjusting for exceptional items, recurring net profit contracted by 46% to $43.5m. This included an estimated $7-8m gain from the divestment of two plants in December last year.


Affected by Middle East uncertainties. With the cancellation of its Libyan projects due to the Arab Spring unrest, there was a revenue gap in FY11 following the completion of its Algerian desalination plants. The $890m Tuas Singspring plant only picked up pace in 4Q11. This caused the decline in FY11 revenue. Management remains optimistic about prospects in the Middle East and North Africa (MENA) region, but we do not expect concrete developments on this front for the foreseeable future in the wake of rising tensions over Iran’s nuclear programme.


Divestments of Chinese BOT projects in 2012. This may be a bright spot. Management expects to divest a further six plants (out of 24 existing projects) where utilisation rate is above the 80-90% mark. Execution of other BOT projects in China, however, still remains a concern, with Hyflux recognising only an estimated S$80m municipal EPC revenue out of an orderbook of S$180m as of the end of last year.
Strong position, but external environment still not conducive to growth. Hyflux now has a strong balance sheet and is technologically relevant to provide solutions for long-term global water demand. However, with MENA projects on hold, we believe there is a dearth of sizeable and profitable projects at the moment to significantly replenish its orderbook (EPC orderbook: $900m currently).


Maintain Sell. We downgrade our FY12F-13F earnings estimates by 15-20% on lower contract win assumptions. Subtracting preference dividends (estimated at $24m a year) better reflects the underlying earnings to ordinary shareholders. Our SOTP-based target price is $1.25. We believe current valuations are stretched given the earnings outlook and ROE profile, where we see a possible structural decline.