Brokers' Take

Hyflux Ltd, April 14 close: $3.62

15 April 2005
The Business Times

UOB Kay Hian

HYFLUX sold a 50 per cent stake in its Singapore desalination plant, SingSpring to Temasek at a consideration of $30 million. After the sale, SingSpring will become a 50 per cent owned JV. Proportional account treatment will be applied to this new JV.

Short-term earnings to be boosted: The divestment will generate $20 million investment gain for Hyflux, of which $10 million is an unrealised gain from the marked-to-market revaluation of its remaining 50 per cent stake in SingSpring. After the divestment, SingSpring will be a 50 per cent owned JV. Consequently Hyflux will be able to recognise 50 per cent of construction work for the desalination plant as revenue, which is estimated to be $35 million with an estimated PBT (profit before tax) margin of 20 per cent. Consequently, we upgrade our FY05 earnings forecast by 58.9 per cent to $70 million. However, we cut our FY06 and FY07 earnings forecast by 6 and 6.5 per cent to $40.2 million and $37.6 million due to reduced earnings contribution from SingSpring.

Financial risk remains high: The cash received from the deal and the 50 per cent deconsolidation of SingSpring will undoubtedly improve Hyflux's balance sheet. Our model indicates that after the divestment, the net gearing will remain high at 0.8x at end FY05, although lower compared with our previous forecast of 1.2x.

Little impact on firm value: The divestment has no surprises for us as it is largely a substitution of its originally planned securitisation which failed to materialise in FY04. Earnings update is at the cost of the lower future earnings. In our $70 million FY04 net profit, $28 million is a capital gain. If we deduct the capital gain, Hyflux is trading at 29.4x FY05 core earnings and 30.7x FY06 earnings, which is way above local comparables. Maintain SELL for expensive valuation. SELL