OCBC Securities 2015-08-11: Hyflux: Not so good below the surface. Downgrade to SELL.

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HYFLUX LTD 600.SI

Not so good below the surface 

 Top-line bumped up by S$42.5m 

 Risk of more disappointments 

 Downgrade to SELL 

Another dismal quarter after adjustments 

• Hyflux Ltd reported yet another dismal quarter last Thursday; although reported revenue was up 18% YoY and 57% QoQ at S$94.8m, it was boosted by the inclusion of S$42.5m of “revenue” arising from the sale of five water treatment assets in China. 
• Excluding the likely one-off asset sale, we estimate that core revenue was actually down 35% YoY and 14% QoQ at S$52.3m. 
• Likewise, reported net profit fell 58% YoY (but +361% QoQ) at S$26.0m; adjusted net profit would have come in around negative S$16.5m. 
• Reported 1H15 revenue fell 8% to S$155.2m, while net profit tumbled 68% to S$31.6m; adjusted revenue was much lower at S$112.7m, meeting just 25% of our full-year forecast, while core net profit likely came in at – S$36.8m (versus of our forecast of S$21.4m for FY15). 
• Hyflux declared an interim dividend of 0.7 S cent/share, unchanged from last year. 

No change to outlook in 2H15 

• As before, company expects to see increased operational activities in the second half; this as a result of 
  1. ramp up in Magtaa Desalination Plant, Algeria; 
  2. commissioning of Tuaspring Power Plant, Singapore (expected to be operational in early 2016); and 
  3. full-scale development of QIWP, Oman (likely to be front-end loaded due to purchase of equipment). 
• Management adds that the group is still actively pursuing opportunities for municipal and industrial water projects in the Middle East, Africa, Asia and the Americas. 
• At the same time, it continues to explore potential divestment opportunities in line with its asset-light strategy. 
• Meanwhile, company’s order book stands at S$2939m, comprising of S$1010m of EPC projects (but includes Dahej project which is still no closer to achieving financial close) and S$1929m of O&M revenue (expected to be flow in over the next 20-30 years). 

FY15 likely to be a wash out 

• Given the dismal showing so far, we suspect that more disappointments could be in store for the rest of the year. 
• We are paring our FY15 revenue estimate by 18% and core earnings by 13% (FY16 by 18% and 22% respectively). 
• And to reflect rising interest rates, our DCF-based fair value also drops from S$0.96 to S$0.75; we also downgrade our call from Hold to SELL. 

Carey Wong | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-11

SELL Downgrade HOLD 0.75 Down 0.96