Published June 26, 2009

Hyflux shares soar on Libya project news

It will build and own a 49% share in two plants in Tripoli and Benghazi

By CHEW XIANG

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SHARES of Hyflux surged as much as 18 cents or almost 9 per cent yesterday after the company announced that it will build two water desalination plants in Libya.

It's a deal: Olivia Lum, Hyflux Group CEO, president and managing director (left) with Abubaker Awidat, Libya's Undersecretary of the General People's Committee for Public Utilities at the signing of a memorandum of agreement between both parties

The stock closed trading at $2.24, up 16 cents or 7.7 per cent with 6.8 million shares changing hands for the day.

Hyflux did not say how much the projects are worth, saying that negotiations on technical and financial details are still ongoing, but analysts put the value at as much as $1.5 billion.

OCBC analyst Carey Wong said that the project value of the two jobs 'should easily exceed $1 billion (to as much as $1.5 billion) and would bump up Hyflux's order book for the next three years'.

Hyflux, now building the world's largest membrane desalination plant in Magtaa, Algeria, will own a 49 per cent share in the two plants in Tripoli and Benghazi, neighbouring Libya's two largest cities. Total capacity of the two plants is at least 900,000 cubic metres a day, almost double the Magtaa plant's 500,000 cubic metres. According to preliminary agreements, 80 per cent of the projects will be funded by debt.

Analysts put the value of the two desalination projects at as much as $1.5b.

DBS Vickers analyst Tan Ai Teng said that the funding structure was clearly favourable to Hyflux as project financing should not be difficult to secure given that its partner is a state-owed entity. As well, the equity portion, estimated at about $100 million, could be funded by a deposit paid for the engineering, procurement and construction (EPC) work for the plants, which will be fully undertaken by Hyflux.

CIMB analyst Gary Ng said that assuming financial close is achieved in FY2010, 'the two Libyan plants are estimated to be fully completed in FY2014, thereby adding a progressive earnings stream for the next few years'. He estimated that the deals could add $1.3 billion to the company's existing order book, 'based on a typical EPC model of US$1,000 for every cubic metre/day'.

Analysts, however, stayed cautious in updating their earnings projections as the actual agreements have yet to be signed. JP Morgan's Chan Ying-Jian said: 'We have not included the earnings and valuation contributions from these projects so we expect upside risk to our price target.'

Key risks are likely to be hiccups in the negotiation process that will end up in the annulment of the agreement as well as possible turbulence in Libyan politics, said DBS Vickers' Ms Tan. The terms of the final deal could also turn out significantly inferior compared to initial expectations, she said. She nevertheless upgraded the stock to 'buy' from 'hold', with a new one-year target price of $2.82, up from $2.05.

Mr Chan, who maintained his call and price target, said: 'We stay cautious on potential geo-political risk factors, as the market may award a risk premium on these projects until management proves itself on the execution front.'