The Straits Times / The Business Times News on Hyflux

Can Hyflux pull it off this time?

By Matthew Phan
May 15, 2007
The Business Times

JUDGING from its share price, Hyflux has had a rocky past year. The stock's price has swung up and down several times: up on news of new contracts, down on disappointing results, up again as investors regain confidence.

Last Tuesday's news that the membrane specialist is putting nearly $20 million into an oil recycling joint venture in Saudi Arabia might bring some stability. Together with recently announced contract wins in Algeria, it hints that Hyflux is making concrete progress in the Middle East, as well as its new venture in used oil.

Market observers will remember that Hyflux has enthused over the region before. In late 2004, Istithmar, a Dubai-based investment holding firm linked with the United Arab Emirates government, formed a joint venture with Hyflux and, through warrants, took a stake in the firm.

With Istithmar's backing, talk was of some US$400 million worth of potential orders. Hyflux did bag a couple of multimillion-dollar water treatment contracts - in the first half of 2005, the Middle East accounted for nearly half of Hyflux's revenues. The firm's stock price soared, doubling to hit nearly $4.

But the venture dissolved over a year later, when Hyflux said in March 2006 it was selling back its stake in the joint venture. No reason was offered for its demise; Hyflux said only it would allow the firm to independently pursue projects in the region. One analyst estimated only a quarter of the promised orders actually materialised.

It is hard not to notice an analogous situation today. SEDCO, or the Saudi Economic Development Company, Hyflux's partner in the used oil venture, is taking an equal 41.5 per cent stake in the Lube Oil Re-refining Co. According to its CEO, Shuaib Ahmed, the joint venture is 'the beginning of a larger partnership' in used oil recycling that will 'pursue other similar businesses in other territories'.

Still, the Saudi deal is significant because it is the only concrete sign so far that Hyflux's venture into used oil recycling, started almost a year ago, is going anywhere.

Major step

The journey started in June 2006, when the firm said it would invest $70 million in a membrane-based oil recovery plant and was taking a majority stake in SK Oilchem Management, an oil-collecting and processing firm in Singapore. At every results briefing thereafter, Hyflux shared promising details on the used oil recycling market, noting that it was pursuing projects in various locations in China and India.

Today, Hyflux has committed about $100 million towards oil recycling plants. Besides Singapore and Saudi Arabia, it has two projects in China and one in India. Note, though, that if the $100 million includes the $70 million Singapore plant and the $20 million in Saudi Arabia, the other projects could at this stage be minuscule. Hyflux has also noted that the Singapore project is of very small scale, due to limited space.

As such, the Saudi venture represents the only major step to-date towards the broader market. Was that a hint of 'I-told-you-so' when Olivia Lum recalled at the signing ceremony how she told analysts last year the used oil business would turn out to be a growth pillar?

Further, SEDCO, despite its name, is a 100 per cent family-owned investment firm that grew out of a small trading and construction business started in 1976, according to its website. In contrast, Istithmar was formed in 2003 to manage the investments of firms like Dubai Ports and Nakheel Corp - the promised US$400 million orders were to be for infrastructure at some of Nakheel's real estate developments.

While SEDCO's profile might mean there are no immediate projects lined up to be serviced, it could mean the venture with Hyflux is more competitively organised and incentivised to compete for projects in the market.

Yes, it's still early days for used oil. And while Hyflux's management has since the start of the year delivered on other promised milestones, such as the structuring of a business trust and secured water treatment projects in Algeria, investors will be waiting to see their bottomline effect when Hyflux's posts first-quarter results today.

For now, the market has reacted positively, with buyers pushing the firm's share price up to $2.91 on the Wednesday after the announcement, the highest it had been all year.