Hyflux - No rights issue and share placements

The recent spate of rights issues and share placement deals has prompted some market talk of Hyflux being the next in line, given the relatively high gearing ratio of the Group. However, in our recent discussion, management has stated categorically that there will be no such development in the near future as they do not see the need for it.

We agree with management that despite a net gearing ratio of 0.8x currently, there is no cause for concern. Even with a $300m Medium Term Note programme in place since June 2008, the Group has only drawn down $23m so far in the previous two months at the bankers’ request. The rates were at 4-5%, which we believe is favourable.

The share price of Hyflux Water Trust has risen 47% year-to-date to $0.52 currently. With the implied dividend yield moderating to a more realistic 10.7%, the trust is now in a better position to absorb yield accretive BOT projects from Hyflux. This continues to be important to Hyflux’s capital recycling strategy.

Following the cessation of its Middle East joint venture with its Dubai partner, Istithmar in 2006, the latter has been selling down its 9.7% stake in Hyflux. Management believes Istithmar has exited completely, following some private placement deals recently. We believe this removes a major share price overhang. In its place, Japan Gas Corporation, whom similarly has a presence in Algeria, now owns 2-3% of Hyflux.

We have rolled forward our SOTP valuation to FY10, lifting our target price to $2.63 in the process. Valuation for its international peers such as Veolia has improved substantially since our initiation report in April. Despite its smaller, we continue to believe Hyflux should be traded at a premium with its better growth potential and lower cost base.

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