The structure of these projects is likely to be similar to Hyflux’s current Magtaa desalinationproject in Algeria. This allows Hyflux to undertake the entire EPC portion of the work and part of the O&M work subsequently without an over-exposure to equity risk, which is capped at 10% of total projected value. Our preliminary estimates suggest the EPC contracts could be worth a total of S$1.2b.
Libya, which is situated in Northern Africa, has the 2nd highest GDP in Africa, largely due to its 12th largest oil reserves in the world, and has financial reserves of US$59b. Hyflux’s presence in the country will be preceded by large multi-national companies such as Shell and Exxon Mobil. While we recognize there is still an element of political risk, we believe this is mitigated by the structure of the projects.
Prior to this, Hyflux has not announced any major contracts for the past 12 months, which we believe has led to sceptism about earnings sustainability for the Group. This agreement affirms our investment thesis that with the successful execution of its Algerian projects, Hyflux is becoming a major global player, with many potential opportunities.
We expect more details of the contracts to emerge in about three month’s time and the construction to start in the 2nd half of FY10. These contracts could add earnings visibility till FY14. We are likely to raise our FY11 once contract details are ironed out. In the meantime, we are keeping our target price of $2.63 based on SOTP.
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