The Straits Times / The Business Times News on Hyflux

Analysts' downgrades trip Hyflux

SOMEONE must have put something in the water, or how else can one explain the dramatic slide in Hyflux's share price after it posted spectacular quarterly earnings.

The company reported on Thursday last week that second-quarter profits had more than doubled to $14 million but investors were unimpressed and bailed out.

The water treatment specialist's share price tumbled by as much as 14 per cent at one point during the week but regained some ground yesterday, recovering 14 cents to $3.20 on a volume of 8.2 million shares, and just making it to the top 20 actives list.

But the rebound still left the counter off 10 per cent for the week and down $184 million in its market value.

Hyflux's slide was largely due to analysts pouring cold water on the stock.

Some brokers said the selling pressure started on Friday last week after a report by CIMB-GK downgraded the stock to 'neutral' from 'outperform'.

CIMB-GK said that while it liked Hyflux because of its rapid growth, 'current valuations appear rich, given the risk of unproven execution'.

It warned: 'Should there be any delay in the award of contracts, disappointment in third-quarter core earnings could lead to share-price weakness.'

CIMB-GK also noted that the spectacular second-quarter profit was 'buoyed by a $8.5 million capital gain from the sale of Hyflux's building and a $3.1 million gain from the revaluation of its financial assets which has no cash-flow impact'.

Stripping out these gains, operational profits had fallen from $5.9 million to $2.4 million, it added.

On the same day, UOB Kay Hian noted that there was a 'drastic change in Hyflux's revenue mix'. Contributions from consumer products, for example, fell from $5.1 million to just $400,000 during the quarter, it noted.

The biggest problem facing Hyflux may be its ability to deliver on its growing order book, said UOB Kay Hian.

'The delays of certain projects such as the Tianjin desalination project and the Huludao desalination plant indicate that Hyflux could be facing execution problems, which we believe were caused by its limited financial resources,' it said.

Brokers felt investors might be disheartened by the steady whittling down by Temasek Holdings of its Hyflux stake.

The 2002 annual report listed Temasek unit Seletar Investments as having a 4.76 per cent stake. This was eroded to 2.86 per cent in 2003.

As of March this year, Seletar's Hyflux stake had fallen still further to just 0.89 per cent.