Hyflux made two separate announcements yesterday. In the first announcement, Hyflux said that its 25% associate company had been awarded a concession to supply 30,000 tonnes per day of drinking water to Lushan county in Henan Province, for a period of 29 years from 2005. Hyflux's wholly owned subsidiary Hyflux NewSpring Construction Engineering (Shanghai) will be involved in the EPC work estimated at a value of S$11.3m. In the most optimistic scenario, assuming that Hyflux NewSpring is the only company undertaking the EPC work and is able to capture a net margin of 20%, the EPC contract will have less than S$1.7m impact on Hyflux's bottom line, while the concession will most likely contribute around S$0.3m of net profit to Hyflux's bottom line since FY07. Compared with Hyflux's net profit of S$46.5m in FY05 and its projected growth of 30% CAGR until 2008, the impact of the contract announced on Hyflux's bottom line in FY06 will be at most 3.6% of Hyflux's FY05 net profit, and the recurring net profit of S$0.3m from the associate company since FY07 is not considered material at all.
In the second announcement, Hyflux announced that SinoSpring, its 50% owned JV with RB (Labuan) had reached substantial agreement on a proposed "investment" by International Finance Corporation ("IFC"), the commercial lending arm of the World Bank. The proposed "investment" is for IFC to take a preferred equity interest in SinoSpring of up to US$20m. Hyflux will retain its 50% equity stake in SinoSpring after IFC's proposed "investment". Our take on this development is that the "investment", if it is an investment in the equity stake of the JV, will likely alleviate the financial burden on the JV to fund the 8 projects currently in execution, and may help the JV to get the financing for future projects. However, we would rather view this "investment" as a loan to Hyflux's JV, since according to the announcement IFC will just take a "preferred equity interest", which is not a direct equity interest in SinoSpring. We are not able to reach the management for clarifications on the details of the "investment". At the last closing price of S$2.70, the stock is estimated to be trading at 30.8x FY06 P/E, 26.4x FY07 P/E, and around 6x FY06 P/BV. We maintain our view that the stock is overvalued. SELL with fair value tentatively unchanged at S$2.24. (Jiewen Deng)
Best Regards,
Jiewen Deng
Investment analyst
Phillip Securities Research Pte Ltd
