OUTPERFORM Maintained
S$2.09 Target: S$2.76
Singapore International Water Week 2011
Hyflux: actionable stock idea from SIWW. We came away from the Singapore International Water Week (SIWW) 2011 excited. This year’s theme is “Sustainable Water Solutions for a Changing Urban Environment”, reinforcing the message from keynote speaker PM Lee about water self-sufficiency being Singapore’s strategic priority. More actionable is our bullish view on Hyflux. As a co-located event of SIWW, PUB and Hyflux marked the ground-breaking for Singapore’s second and largest water desalination project. Suffice to say that Hyflux stood out from the array of international companies participating in this year’s event. Our earnings estimates and target price of S$2.76 are intact, based on sum-of-the-parts valuation. We anticipate re-rating catalysts for Hyflux from fresh order wins and opportunities arising from its JV platform in China.
The news
SIWW is the global platform for water solutions that brings together policymakers, industry leaders, experts and practitioners to address the challenges of the water world, showcase technologies, discover opportunities and celebrate achievements.
Ground-breaking of Tuas seawater desalination plant. The national water agency, PUB, and Hyflux marked the ground-breaking for Singapore’s second and largest water desalination project, a co-located event of SIWW 2011. The ground-breaking ceremony took place at the Suntec International Convention and Exhibition Hall.
Comments
Prime Minister Lee Hsien Loong, who had delivered the inaugural Water Conversation earlier in the week, spoke about self-sufficiency as a strategic priority of the nation. Currently, NEWater meets 30% of Singapore's water needs. With ramped-up capacity, it will meet 50% of Singapore’s water demand by 2060. Desalinated water, with added capacity from the new TuaSpring Desalination Plant, is expected to supply 30% of the country’s water needs by 2060, up from the current 10%.
Operationally ready in 2013. The ground-breaking took place three months from the day PUB and Hyflux’s wholly-owned subsidiary, TuaSpring Pte Ltd, signed their water purchase agreement to supply PUB with 70m gallons of desalinated water a day for 25 years from 2013 to 2038. The plant will be constructed under Design, Build, Own and Operate (DBOO) and is expected to commence operations in 2013.
The plant will feature the world’s second-largest ultrafiltration pre-treatment membrane facility, incorporating Hyflux’s proprietary Kristal® ultrafiltration membranes. Following pre-treatment, salt water will undergo a 2-pass reverse osmosis treatment process to remove the salt from the water, leaving fresh pure water. This water then undergoes a post-treatment process for re-mineralisation before being delivered to PUB for distribution to households and industries in Singapore.
High-value contract. Hyflux has a desalination project portfolio of 936,000 m3/day globally before this project. Recall that the value of this project is S$890m (EPC portion S$750m). The water will be supplied to PUB at a first-year price of S$0.45 per m3, based on warranted capacity of 318,500 m3 per day. Hyflux will also be constructing a 411MW combined cycle gas turbine power plant to supply electricity to the desalination plant. Excess power will be sold to the power grid.
Clever funding options. From the many conversations we have had with clients and investors since the announcement of the TuaSpring Desalination Plant, we gathered that while most are excited about this project, many seem unsure how Hyflux would go about financing the S$890m plant, plus its ancillary 400-megawatt power plant.
Hyflux had raised S$400m through Class A Preference Shares in April. The bulk of the money will fund this project. With the preference shares already issued (non-dilutive), we suspect the rest of the equity portion could be raised from divestment income and internal cash flows.
Earlier this week, the group said it had secured a S$150m financial package for the desalination plant. The package was arranged by DBS Bank Ltd, Mizuho Corporate Bank, Ltd and Sumitomo Mitsui Banking Corporation. Hyflux also mentioned that it is on track to securing financing for the power plant that will be installed on site.
World's cheapest desalinated water. Notably, the Tuas II desalination plant is Hyflux’s second-largest ultra-filtration membrane installation project after its Magtaa desalination plant in Algeria (world’s largest membrane-based desalination plant). The new Tuas plant will be located on the same site as Hyflux’s existing SingSpring desalination plant. Hyflux would be able to leverage such proximity to deliver higher operating efficiencies.
As the group aims to incorporate technology which will 'revolutionise' the energy efficiency of its desalination process, to further lower water tariffs, management is confident that this desalination plant will also produce the world's cheapest desalinated water at 45cts per m3 when completed. We believe the eventual success of the desalination project (not to mention the track record of the Magtaa desalination plant) could open more doors for Hyflux in the international arena.
It’s not all about Singapore. Thanks to its flexibility, the group managed to secure S$850m worth of projects (both in China and Singapore) in 1Q11, with the biggest (S$750m) being the Tuas II desalination plant. It is now looking at how to mobilise more resources to China to boost its order book of S$2.25bn (S$1.25bn EPC, S$959m O&M). The biggest tailwind for Hyflux in China remains the country’s relentless efforts to tackle its water-security issues.
Valuation and recommendation
We are keeping our earnings estimates and target price of S$2.76, still based on sumof-the-parts valuation. With prospects of further margin improvements and order-book momentum (particularly in China and O&M segment), we remain upbeat. We anticipate re-rating catalysts from fresh order wins and opportunities arising from its JV platform in China.
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