Hyflux: Resurgent 2Q09 results

Resurgent 2Q09 results. Hyflux Ltd posted its 2Q09 results last night, where revenue jumped 24.4% YoY to S$134.5m, while net profit climbed 14.7% to S$25.9m. The better performance was due to the progressive completion of higher-valued projects, especially from the MENA region, with continued active project execution driving improved gross profit margins. More importantly on a sequential basis, revenue shot up 52.4%, while earnings surged >400%, but this comes as no surprise as we had already noted the seasonality factor in our 1Q09 report (also see Exhibit 1). And for 1H09, revenue climbed 12.7% to S$222.7m, meeting 36.4% of our FY09 forecast, while net profit rose 9.6% to S$31.0m, or 50.4% of full-year estimate.

Municipal business continues to drive growth. On a segmental basis, we note that growth continues to be driven by its municipal business, which jumped 34.5% YoY and 54.6% QoQ to S$116.6m in 2Q09, aided by progressive EPC recognition of the Tlemcen and Magtaa projects in Algeria. While industrial business fell 17.4% YoY to S$17.6m, it was up 41.9% QoQ, where there have been signs of a business recovery in China. Going forward, management notes that municipal sector's fundamentals remained strong and expects the MENA and China markets to remain key contributors to its revenue.

Key MENA and China markets. Its current order book stands at S$1646m as at end-Jun, up further from the S$1480m at end-Dec (see Exhibit 2);more importantly, Hyflux pointed out the increase came mainly from its Operations & Maintenance segment, which surged 1.1% to S$694m following the completion of several China plants - this would translate into stable income over the next 20-25 years. While its S$952m EPC orders will progressively be recognized over the next two years, we expect this "shortfall" will be replenished by its two potential contracts in Libya - we had earlier estimated that the project value of the two projects should easily exceed S$1b (to as much as S$1.5b) but the actual deals may take up to 1.5 years to conclude. Hyflux is also looking at new markets like India but for the moment, it prefers to remain more of a technology provider.

Raising fair value to S$2.96. Due to the better-than-expected recovery in gross margins, we have bumped up our FY09 net profit estimates by 17.9% (FY10 by 17.5%), while keeping our revenue estimates unchanged. This in turn raises our fair value from S$2.52 to S$2.96, still based on 20x blended FY09/FY10 EPS. Maintain BUY

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