Hyflux (DBSVickers)

BUY S$2.00

STI : 3,189.85

Price Target : 12-Month S$ 2.47

Fire at Magtaa warehouse no material financial impact - damages claimable, FY11 earnings pushed back to FY12

Event :

Hyflux announced that a fire broke out on 28 July 2011 at its warehouse at the Magtaa project site. The Project is now more than 80% completed. Building erected and equipment already installed at the construction site are not affected but equipment in the warehouse would have to be repurchased, particularly RO membrane. As a result, the project completion is expected to be delayed till May 2012 instead of August 2011. According to preliminary estimates, all related costs and damages arising from this incident are around U$50m.

Our take :

There could possibly be kneejerk reaction to share price with this news but we do not expect material financial impact because 1) the project is covered by a comprehensive construction all risks insurance policy with internationally reputable insurers, so we believe the project company (which is 47%-owned by Hyflux) would be able to make the claims. Moreover, the project company would be applying for force majeure so that would also free Hyflux's obligation on project delay. At this juncture, our check with management indicated that they will not be making any provision for this incident. Earnings wise, we had expected Hyflux to complete the Magtaa project by this year, but this development would now push back 13% of earnings to FY12 instead. That, however, would not impact TP as we roll over to FY12 earnings in deriving our TP.

Operation wise, business momentum remains on track: 1) Tuas 2 desal project would commence construction in 4Q11, in line with our expectation. 2) We understand Hyflux continues to pursue new projects in China, SEA and India as the MENA region takes a breather. While we have not factored in anymore contract wins for the rest of this year, we believe chances are high for small contract wins out of China.

Hyflux is due to report results on 4 Aug, we expect net profit of S$27m on sales of S$150m.

No change to Buy recommendation and TP of S$2.47.