Hyflux - Transitional quarter (DBSV)

BUY S$1.41 STI : 2,810.04

Price Target : 12-Month S$ 1.78 (Prev S$ 2.07)

Reason for Report : Earnings and TP revision

Potential Catalyst: Contract wins, stronger than expected execution of orderbook

DBSV vs Consensus: Lower because of conservative sales and new win assumptions

• 3Q11 significantly below expectations; sales shortfall due to transition to Tuaspring from large scale MENA projects

• Revenue to improve in 4Q but contract flows may still be slow; cut FY11/12F earnings by 15-35%

• TP lowered to S$1.78; maintain Buy in view of decent upside and positive long term prospects

Weak quarter reflects transition from MENA to Tuaspring. Sales of S$87.7m (-36% y-o-y) and headline net profit of S$12.6m (- 34% yoy) were below our estimates of S$129m and S$18m respectively. Excluding S$5m exchange gain, S$13.2m of disposal gain and S$3.3m in fair value loss on derivative financial instruments, Hyflux would have incurred an operating loss of S$2.1m, as Tuaspring is still in the early stage of ramping up and could not fill the gap left by large scale MENA projects. We have pushed out some recognition of Tuaspring to FY12. 9M11 earnings accounted for 56% of previous earnings

Improvement expected in FY12 – orderbook still intact, Tuaspring unlikely to defer. The poor showing was disappointing but we expect earnings momentum to rebound as the ramp up of Tuaspring accelerates into FY12. Current EPC orderbook stands at a firm S$1.1bn to cover 1.4x FY12F sales. We understand Hyflux is scouting for new opportunities in China, India, SEA, Latin America and Australia but we do not expect new contracts soon as management is more selective on capital intensive projects given the tight credit environment. Our FY12 new win assumption is only S$500m, compared to S$980m of actual contracts secured YTD in FY11.

Cut FY11/12F earnings by 35%/15%, TP lowered to S$1.78. as we pushed out some sales from FY11 to FY12 and dropped gross margin by 4-5ppts. Hence, our SOTP-based TP is lowered to S$1.78. Notwithstanding the EPS and TP revisions, current share price still offers 25% to our TP. Maintain BUY.