The Straits Times / The Business Times News on Hyflux

Hyflux Q1 profit up 7% to $9.6m

Earnings rise comes as revenue surges39% to $33.7m

WATER-TREATMENT specialist Hyflux's net profit rose 7 per cent year-on-year to $9.6 million for its first quarter ended March 31, 2006. This came on the back of a 39 per cent rise in revenue to $33.7 million.

'Key contributors are industrial sales, boosted by strong demand from the bio-technology sector, full impact of contributions from SingSpring and a strong pipeline of both industrial and municipal projects in China,' said group CEO and president Olivia Lum.

Ms Lum: Firm's lower operating margin was due to lesser share of high-margin design projects

FY2005's Q1 included a fair value gain on financial instruments (unrealised) of $5.5 million, against $0.1 million in FY2006's Q1. Excluding fair value gains, profit after tax attributable to shareholders jumped 175 per cent to $9.4 million from $3.4 million, said Hyflux. Basic earnings per share slipped to 1.86 cents from 1.89 cents because of a larger share base.

Hyflux's industrial sales soared 217 per cent to $18.4 million, mainly due to demand from the bio-technology sector, the company said. Municipal sales fell 18 per cent to $15.1 million, mainly due to lower revenue from the Middle East, after the group divested its equity in a subsidiary there.

In terms of geography, Hyflux grew contributions from China to 56 per cent of total revenue earned in the quarter, up from 22 per cent last year. The proportionate contribution from the Middle East declined to 31 per cent from 76 per cent last year, while contribution from Singapore grew to 13 per cent from 2 per cent last year. Hyflux saw a seawater desalination plant turn fully operational in December 2005, allowing the company to recognise the full impact of SingSpring's 20-year contract to supply treated water to the PUB.

Going forward, the company hopes to develop more Build-Operate-Transfer and Transfer-Operate-Transfer projects in China, India, the Middle East and North Africa. By doing so, it will help build up its long-term recurring revenue income stream.

It also expects to benefit from rising water tariff prices in China.

Ms Lum said the company's lower operating margin - which UBS analyst Jaj Singh pointed out slipped to 30 per cent in Q106 from 38 per cent in Q105 - was due to the smaller share of high-margin design projects in the Middle East. Mr Singh said Hyflux's results were 'satisfactory' and 'nothing exciting'.

Meanwhile, Dong Jiewen of Phillip Securities Research said in a note that Hyflux's current margin 'may not be sustainable'. He said 'there is low visibility in the cost structure and municipal projects have not started to contribute a significant portion of revenue, except the SingSpring project'. Mr Dong believes the company's valuation is 'stretched', and maintained a 'sell' call with fair value under review. Hyflux's share price dipped 4 cents to close at $2.69 yesterday.