Hyflux - Searching for growth in Libya

Hyflux’s fast-growing gearing had been a market concern, which may counter future growth ahead. Net debt-to-equity rose 28pp q-q to 82% in 1Q09, approaching our expected 113% for end-FY09. However, management reiterated that: 1) it can repay trade payables by cash from EPC revenue generated by the Algerian projects on percentage of completion, 2) Algeria has no restriction in capital repatriation, so liquidity is not a concern despite aggressive capex, and 3) the Middle East projects, the main growth driver going forward, are less capital intensive than China’s projects.

While building the world’s largest membrane-based desalination plant in Algeria, Hyflux entered into a MOU to build two desalination plants in Libya, in Tripoli and Benghazi. The plants would cost S$1bn, with a combined capacity of 900k m3, and planned to be financed by an 80:20 debt-to-equity ratio. The signing of these projects would substantially lift the orderbook and operational income from current levels.

China’s water market is still at a development stage and existing capacity is far behind the government’s target as per the Eleventh Five-Year Plan. Management indicated Hyflux’s revenue contribution from the Middle East and North Africa would continue to expand beyond its current proportion of 40% in FY08, due to the upcoming Tlemcen and Magtaa projects in Algeria, but it believes Hyflux remains a major beneficiary of China’s growing water market. Given that Hyflux has already shown a successful record of penetrating into the Chinese water market (China accounts for 54% of total revenue in FY08), with its proprietary membrane technology as a competitive edge, growth in China can be a potential surprise on the upside, in our view.

The orderbook looks healthy (S$1.15bn in end-FY08). Hyflux would focus its attention in delivering projects already in the pipeline, which would continue to deliver strong growth in FY09-10F.

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