The Straits Times / The Business Times News on Hyflux

Hyflux posts 86% plunge in Q3 profit to $1.88m

WATER treatment specialist Hyflux delivered disappointing third-quarter results yesterday, with an 86 per cent slump in net profit to $1.88 million, and warned of a 'marginally profitable' fourth quarter arising from business development and financing costs.

This resulted in the stock price, which had risen over 25 per cent to $2.74 since Hyflux announced its first-half results, diving 7.3 per cent yesterday to $2.54.

Third-quarter revenue fell 42 per cent to $29.44 million, attributed to lower sales from Singapore and the elimination of revenue at the group level due to accounting changes relating to Hyflux's larger stake in SinoSpring Utility, its Chinese venture.

CEO Olivia Lum said the 'short-term impact' was a 'timing issue'.

In the third quarter last year, Hyflux had divested 50 per cent of SingSpring, its seawater desalination plant, allowing it to recognise both a gain on divestment and 50 per cent of the remaining engineering, procurement and construction (EPC) revenues on the plant. As the plant was completed last year, this year's revenues from Singapore fell from 35 per cent of revenues in 9M05 to 19 per cent in 9M06, she said.

Further, Hyflux eliminated EPC revenues on projects at SinoSpring from its consolidated results, in accordance with Singapore's reporting standards, after it raised its stake from 50 per cent to 80 per cent on Nov 7.

Owning a majority stake in SinoSpring would give it the flexibility to return value to shareholders, said Ms Lum. Hyflux has mentioned using a business trust structure to unlock asset value and free up capital.

The order book is also healthy. 'As at 3QFY2006, the group's order book (excluding the projects in SinoSpring) stood at $454 million, representing a 198 per cent increase compared to 1HFY2006.'

The increase is chiefly due to a recent contract win in Algeria, which will see Hyflux build and operate for 25 years a desalination plant with a capacity of 200,000 cubic metres per day. It effectively owns just 10.2 per cent of the project, but will exclusively undertake the EPC portion of the project, estimated at US$205 million.

As such, the book comprises of $130 million worth of industrial and consumer projects and $324 million worth of municipal projects. It will be recognised over two years, with 40 per cent to be booked in 2007, said Ms Lum.

Meanwhile, via SinoSpring, Hyflux is delivering '13 projects in China worth $400 million which will generate 25 to 30 years of recurring revenue over about $160 million to $170 million to our group when operational'.

UOB Kay Hian's Chong Mean Phil reiterated his 'sell' call yesterday, reducing projected 2006 profit by 30 per cent to $21 million, or earnings per share of 4.1 cents, and leaving a target price of $1.60 unchanged.