Brokers' Take

Hyflux Ltd, May 13 close: $3.68

14 May 2005
The Business Times

DBS Vickers Research, May 13

HYFLUX'S 1Q05 sales grew 100 per cent y-o-y to $24 million and net profits 219 per cent to $9 million. However, excluding fair value gain of $5.5 million, 1Q05 core profit is only $3.5 million and 8 per cent of our FY05 forecast of $45 million. This is mainly due to lower EPC profits from Middle East.

Nevertheless, we remain positive on Hyflux's operating environment and expect it to continue winning significant contracts. Given the limited upside, we maintain our 'hold' recommendation with target price revised to $3.86 on 20 times FY06 core earnings.

Hyflux set up a 49-51 EPC joint venture with Istithmar as Dubai law does not allow a foreign entity to own majority stake in an EPC entity. As such, Hyflux's share of EPC profits is halved even though it can recognise 100 per cent of the EPC revenue from the Middle East projects.

Hyflux also has to take out 49 per cent of its EPC profits (reflected as unrealised gain of $2.5 million) and recognise it over the projects' operating lifespan as it has a 49 per cent equity stake in them. The high operating margins in the Middle East could partly offset the impact of the lower profit share.

Management indicated results in subsequent quarters should improve, especially with new orders from China's petrochemical sector and from the Middle East.

Hyflux is also likely to book a capital gain of $28 million from the sale of its building and divestment of SingSpring to Temasek in 2Q05.

We have fine-tuned our revenue and earning forecasts to reflect Hyflux's new arrangement in Middle East. Given the strong demand for water treatment facilities, we estimate Hyflux to win about $150 million and $450 million of new orders for delivery in FY05 and FY06 respectively. However, Hyflux's execution risks will also increase as it expands globally. HOLD