- Initiate with HOLD. TP at SGD1.07, 25x FY16E P/E, comparable to closest peer, United Envirotech. For sector exposure, we recommend HanKore and SIIC.
- Long-term bullish on Hyflux’s membrane-based desalination. Medium-term earnings weakness.
- Catalysts are renewed order-win momentum and big-scale asset recycling.
We like Hyflux’s expertise in membrane-based desalination technology, which we believe is a solution to the global water shortage. However, medium-term earnings weakness could weigh on stock sentiment. Intense competition for EPC projects could crimp margins, reducing Hyflux’s margin for error. Furthermore, valuations are unattractive at 1.7x FY16E P/BV and 26.7x FY16E P/E, against sector averages of 1.6x FY16E P/BV and 20.7x FY16E P/E. We believe it is too early to buy.
Next catalysts
We believe big order wins are Hyflux’s most important catalysts. There are USD8b worth of projects that could be up for grabs in the next 12 months. Hyflux also has potential for further asset recycling, with its SGD1b portfolio of plants and concessions. Any large-scale asset recycling should be positive for its share price.
Risks
Upside risks include a strong order comeback in the Middle East and Africa. Downside risks include failure to clinch key projectssuch as the Changi NEWater plant and bigger-than-expected margin declines due to price wars, in which case, large contract wins may not sustain its re-rating.
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