Hyflux

Kim Eng on 4 May 2012

1Q12 results were significantly below expectations. Even though 1st quarter numbers are not necessarily the best barometer for full-year performance, being seasonally weaker, we believe the numbers will disappoint the market, with reported net profit flat at SGD7.7m versus consensus expectations of 56% yoy growth for FY2012.

Revenue there, but margin declined. Revenue grew 60% yoy to $139m, which was in line with ongoing project recognition for the SGD890m Tuaspring desalination project, but margins were lower than expected. Gross margin declined from 51% to 38% while net margin declined from 8% to 7%. Staff cost grew 54% yoy as the rising wage cost in Singapore was cited as the key factor.

MENA is difficult to replace. This set of results support our earlier view that the loss of MENA projects will be difficult to replace, given that they likely have better EPC margins and project IRRs as well as attractive financing terms. Financing cost also increased 22% yoy even while balance sheet debt quantum remained similar. This is not withstanding the fact that the SGD400m 6% preference share issue in May last year will be used to fund Singapore/ China projects. This represents an additional outflow of SGD24m in dividend a year which does not flow to ordinary shareholders.

Progress on Indian front. In March this year, Hyflux announced that it was in partnership with Hitachi and Itochu to develop a 336,000 m3/day desalination plant in Gujarat, India. Latest update is for Hyflux to provide EPC services amounting to USD420m out of total project cost of USD600m. Financial close is estimated by end 2012/early 2013. Project cost for the Tuas SingSpring plant is revised to SGD1.05b due to changes in specifications, but we do not expect major changes in returns overall.

Maintain SELL. We downgrade our FY12-FY14 earnings estimate again this quarter by 10-15% on lower margin assumptions, expecting to see more earnings weakness over the next few quarters. We believe valuations are too rich; earnings may not hit 2010 levels within the next 2-3 years, even without taking into account preference share dividend outflow for ordinary shareholders.