Hyflux: Clearer visibility, stronger funding

We have upgraded our price target to S$3.50, as we raised FY09/10 earnings forecast to account for higher margin. The recent hike in water tariffs in China's main cities, and an improving investment climate, has also resulted in a higher valuation for Hyflux's BOT portfolio. We maintain our BUY call on Hyflux with 22% upside to TP. We believe recent developments have raised the company to a whole new level, as outlined below.

Firstly, earnings visibility is clearer than ever. This is underpinned by a firm orderbook of S$952m to be realized over the next 18 months. This is excluding the potential S$1.1bn worth of projects from Libya pending finalization and financial close. When these are officially awarded by early 2010, earnings visibility will extend to 2013. In the meantime, Hyflux is actively bidding for jobs in new markets such as India and more countries in the Middle East including Tunisia and Morocco. As such, we expect Hyflux to impress the market with yet more contracts from new locations.

Secondly, Hyflux's financial backing has grown stronger especially after its collaboration with the Japan Bank for International Co-operation (※JBIC§). Funding is not only critical for project executions; the ability to monetize completed projects is imperative for further growth. As more plants are being completed in China, we believe Hyflux would have a critical mass of water plants by next year, ready for divestment. It also helps that HWT with a lower cost of capital following the market recovery is in a better position to acquire yield accretive projects. Divestments will provide an instant lift to earnings in 2010.

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