Hyflux

CIMB Research on 23 Feb 2012

FY2011 core net profit of S$46 million was 30 per cent ahead of our estimate. Despite the gains from the sale of PPE and some effects of the lower tax rate, this set of results came off as good.

Contributions from Hyflux's Tuas II desalination project made up for the lost ground in Q4 2011. FY2011 earnings are a reflection of the near completion of major projects in Mena, impact of Arab Spring and lower divestment activities. The group's work on the S$88 million expansion of six plants in China has added some cheer. The group is also active in bidding for various projects in the Mena region.

Results were good, but we now focus on the sustainability of the share price. We find it hard to remain bullish as volatile earnings and major capex could add to selling pressure; at least until major positive catalysts emerge. Share price has outpaced market. Downgrade to 'trading sell' from 'neutral'. We would turn more positive if we see substantial order wins.

TRADING SELL

Hyflux

OCBC on 23 Feb 2012


Hyflux Ltd posted a much better-than-expected FY11 showing, with revenue of S$482.0m coming 10% and 3% above our and consensus forecast respectively; net profit of S$53.0m was also 7% and 11% above. Hyflux also declared a final dividend of S$0.021, bringing the full-year payout to S$0.0277, down from the S$0.0417 in FY10. Going forward, we expect Hyflux to focus more on Asia, especially Singapore, as the short-term outlook for MENA remains uncertain. In view of the better-than-expected results, we are modestly bumping up our FY12 estimates by 1.4-6.0%. We also raise our fair value from S$1.28 to S$1.55, based on 18x FY12F EPS (versus 15x previously). But given the limited upside, we maintain our HOLD rating.

Better-than-expected FY11 showing
Hyflux Ltd posted a much better-than-expected FY11 showing. Although revenue fell 15% to S$482.0m, following the completion of the mega projects in Algeria, it was still 10% above both our forecast and 3% above consensus. Net profit, down 40% at S$53.0m, was again 7% better than our estimate and also 11% above consensus. But if we strip off the exceptional items, the clean net profit would have been almost spot on our estimate. Hyflux also declared a final dividend of S$0.021, bringing the full-year payout to S$0.0277, down from the S$0.0417 in FY10.

MENA near-term outlook remains soft
According to management, FY11 results reflect the transition of earnings from MENA to Asia, following the completion of its two desalination projects in Algeria. Going forward, Hyflux continues to expect the short-term outlook for the region to remain uncertain although it does see pockets of opportunities. On the other hand, it believes that Asia will continue to be the key region of its growth over the next years. In China, Hyflux is undertaking the expansion and enhancement works at six waste-water treatment plants with an estimated project value of S$88m.

Main focus on Tuaspring
But over the next few quarters, its focus will be on Tuaspring – the 318.5k m3/day desalination plant. Assuming that 90% of the project will be recognized over the next six quarters, Hyflux should be able to book EPC revenue of some S$112m per quarter; we note that 4Q11 revenue came up to almost S$196m. And based on a conservative 10% net margin, quarterly earnings should be around S$12m. Hence at the very least, Tuaspring should account for S$448m of revenue and S$48m of net profit this year.

Raising fair value to S$1.55
In view of the better-than-expected results, we are modestly bumping up our FY12 estimates by 1.4-6.0%. We also raise our fair value from S$1.28 to S$1.55, based on 18x FY12F EPS (versus 15x previously). But given the limited upside, we maintain our HOLD rating. 

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.