OCBC Investment Research 2015-07-03: Hyflux - Forms investment company with TUS-Holdings. Maintain HOLD with S$0.96

Hyflux: Forms investment company with TUS-Holdings 

  • Divestment gain of S$42m in 2Q15 
  • Longer-term prospects in China look better 
  • 3Q15 should see pick-up in activities 

Forms strategic investment company collaboration in China 

  • Hyflux Ltd – through its wholly-owned subsidiary Hyflux Capital (Singapore) Pte Ltd – has entered into a shareholders’ agreement with Tuspark Technology Services Investment Ltd to set up an investment holding company (investco). 
  • Hyflux Capital will have a 25% shareholding interest in the investco, which intends to hold strategic investments in water projects in China. 
  • Divestment of water assets to investco Separately, another wholly-owned subsidiary of Hyflux – Spring China Utility Ltd – has entered into a S&P agreement with the investco to eventually divest its entire equity interests in five water plants in China, with a total designed capacity of 265m litres/day. The aggregate consideration for the deal, payable in cash, is around RMB890m (~S$195m), determined on an arm’s length basis. 
  • We understand that the consideration is payable in tranches, subject to fulfillment of certain conditions, including regulatory approval among others. 

Likely to book S$42m profit in 2Q15 

  • According to Hyflux, the book value of these assets (including associated costs) is about S$153m; and as Hyflux would account for the transaction in 2Q15, we can expect to see a onetime gain of S$42m. 
  • We also believe that Hyflux would need to pay out around S$49m for its share of the transaction, although this is likely to be in tranches. 

Maintain HOLD with S$0.96 

  • Besides the one-time gain, we think that the cooperation with Tuspark bodes well for Hyflux, and should go some way in addressing the company’s seemingly lack of progress made in China over the past few years. 
  • Still, other nearterm catalysts look a bit lacking for now, although we expect activities to pick up from 3Q15 onwards, driven by full-scale development of the Qurayyat Desalination plant. 
  • As such, we opt to maintain our forecasts unchanged, and we keep our HOLD rating and S$0.96 fair value on the stock. 

(Carey Wong)

Source: http://www.ocbcresearch.com/