Brokers' Take

Hyflux Ltd, April 14 close: $3.62

15 April 2005
The Business Times

GK Goh Research

EARNINGS upgrade: Together with the $8 million capital gain from the divestment of its HQ building a month ago, Hyflux's total capital gains of $28 million have surpassed its FY04 net profit of $26.8 million. We have raised our EPS forecast by 27 per cent for FY05, to factor in the $20 million capital gain and $2 million net profit contribution from the remaining EPC contract with SingSpring. However, we have also deferred some of our assumed contributions from the Middle East contract to FY06, which has led to a 14 per cent upgrade of our FY06 EPS forecast. Stripping out the capital gains, y-o-y growth in FY05 net profit from operations should be 64 per cent.

Price target lifted to $3.90 ($2.60 adjusted for the 1-for-2 bonus issue proposed by the group). This is based on our target 20x P/E for FY05-06, which also gives a PEG of 1.0x.

Potential future gains from further unlocking of asset values: Hyflux could further pare its stake in SingSpring to 30 per cent (the minimum mandatory shareholding) after the plant is in operation. This could bring in more capital gains, albeit much smaller. Hyflux will be adopting a similar model for its BOT projects, including those in China, that is, selling down its stakes to local partners to reduce its risk exposure and redeploying funds. There is also the possibility of the creation of business trusts, as vehicles for asset divestment.

Continued positive newsflow will underpin its share price; upgrade to BUY. While the SingSpring divestment did not come as a surprise, the quantum of the capital gain was at the high end of expectations. More importantly, we are impressed by Hyflux's ability to manage its growth, at the same time producing continuous capital gains to boost its earnings. With its eyes on new markets like India and Algeria, Hyflux is set to be a global player, driving robust profits for the next few years. BUY