Brokers' Take

Hyflux, Oct 11 close : $1.98

12 October 2004
The Business Times

DBS Vickers Research

HYFLUX has signed a letter of intent with Istithmar making the Dubai government-backed investment agency its second largest shareholder with an initial 10 per cent stake and warrants for another 10 per cent in the next three to five years.

Hyflux will form a 49-51 joint venture with Istithmar to design, build, operate and own water utility projects in the Middle East.

We estimate Hyflux could recognise US$140 million of engineering, procurement and construction (EPC) revenues for FY05-07 from the US$400 million worth of projects identified.

The proposed securitisation is progressing well with Hyflux now likely to retain a 40 per cent minority stake. Management has also indicated that SingSpring could be completed by June 2005, six months ahead of schedule. This will increase our confidence in Hyflux's ability to deliver large-scale projects.

Further upside is expected. We expect an increase in consumer product sales and the securing of new projects in Thailand and China in the near future. Separately, we believe Hyflux will reduce its stake to a minority holding in both Tianjin and Liaoning desalination projects. This will enable it to recognise EPC revenues upfront and reduce funding needs.

Margins will inevitably narrow as Hyflux takes on more large-scale municipal projects but this will be mitigated by increased economies of scale. Although Hyflux's share price rose 11 per cent to S$1.82 after the Istithmar announcement, we see further upside over the next 12 months.
We have increased our FY04 and 05 net profit forecasts. Maintain 'buy' with a new target price of S$2.21 based on 18 times FY05 PE. Rating: BUY

Compiled by KENNETH LIM