• Core earnings in line; final DPS 2.1 Scts < 3.5 Scts in FY10
• S$931m EPC orderbook backs growth
• Positive outlook for new contracts; pursuing >S$700m of contracts in MENA and China
• Hyflux did well post our contrarian re-iteration in Jan. Valuation at -0.5SD is undemanding, providing more room for mean reversion. Maintain Buy and S$1.78 TP
FY11 core profit of S$46.3m (-56% y-o-y), in line with consensus’ S$47.7m. The decline reflected completion of the MENA projects (FY11: 24% of sales; FY10: 60%) and lower divestments. Excluding S$12m preference share dividend, earnings were S$41m against our estimate of S$43m. Adjusted net margin dropped to 9.6% from 18.6% last year because of higher interest costs, R&D impairment and depreciation charges. Net gearing was 0.18x.
Hyflux exited FY12 with S$931m EPC backlog. Of which, 70% is Tuaspring and 30% are mainly China projects including S$88m of contracts related to organic expansion to raise capacity by 100m3/day for plants within the Galaxy NewSpring portfolio. We are confident of Hyflux’s earnings rebounding this year. Even without new contract wins, 62% of our FY12F sales forecast is backed by existing contracts based on 42% completion for Tuaspring in FY12.
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Bidding pipeline looks promising although timing is uncertain. Apart from Oman (S$300-400m), our order win visibility is lifted by another S$500m of contracts in MENA where water contracts have been refloated since late 2011. Timing is a wildcard here as contracts could be delayed. In China, Hyflux sees robust desalination demand in the industrial segment and has secured some small projects YTD. Our FY12 new win forecast is S$500m, down from S$982m in 2011.
More room for mean reversion, maintain Buy. Despite surging 27% since early Jan, valuations have yet to reach historical mean. We believe steady growth and contract newsflow will drive stock price closer to mean and our SOTP objective of S$1.78. Hence, we keep Buy call.
Hard to be bullish
Results were good, but we now focus on the sustainability of the share price. We find it hard to remain bullish as volatile earnings and major capex could add to selling pressure; at least until major positive catalysts emerge. Share price has outpaced market. Downgrade to Trading Sell from Neutral. We would turn more positive if we see substantial order wins.
Fair value to S$1.55
Better-than-expected FY11 showing
Hyflux Ltd posted a much better-than-expected FY11 showing. Although revenue fell 15% to S$482.0m, following the completion of the mega projects in Algeria, it was still 10% above both our forecast and 3% above consensus. Net profit, down 40% at S$53.0m, was again 7% better than our estimate and also 11% above consensus. Hyflux also declared a final dividend of S$0.021, bringing the full-year payout to S$0.0277, down from the S$0.0417 in FY10.
According to management, FY11 results reflect the transition of earnings from MENA to Asia, following the completion of its two desalination projects in Algeria. Going forward, Hyflux continues to expect the short-term outlook for the region to remain uncertain although it does see pockets of opportunities. On the other hand, it believes that Asia will continue to be the key region of its growth over the next years. In China, Hyflux is undertaking the expansion and enhancement works at six waste-water treatment plants with an estimated project value of S$88m.
Main focus on Tuaspring
But over the next few quarters, its focus will be on Tuaspring – the 318.5k m3/day desalination plant. Assuming that 90% of the project will be recognized over the next six quarters, Hyflux should be able to book EPC revenue of some S$112m per quarter; we note that 4Q11 revenue came up to almost S$196m. And based on a conservative 10% net margin, quarterly earnings should be around S$12m. Hence at the very least, Tuaspring should account for S$448m of revenue and S$48m of net profit this year.
Raising fair value to S$1.55
In view of the better-than-expected results, we are modestly bumping up our FY12 estimates by 1.4-6.0%. We also raise our fair value from S$1.28 to S$1.55, based on 18x FY12F EPS (versus 15x previously). But given the limited upside, we maintain our HOLD rating.
52 Weeks Range 1.015 - 2.220
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