Brokers' Take

NEUTRAL - UBS Investment Research

Hyflux
Aug 11 close: $2.06
UBS Investment Research, Aug 10

Q2 NET profit of $3 million was significantly lower than in the past three quarters, which averaged $10 million. This was primarily due to a significant increase in the cost of raw and consumable materials. Management indicated that it was 'lumpy' due to the fluctuation in projects.

The CEO expects second-half performance to be much better with the completion of several projects. However, because of the weak Q2, we lower our 2006 and 2007 EPS estimates 17 per cent and 7 per cent, from $0.09 to $0.07 and from $0.12 to $0.11 respectively, and our price target from $2.70 to $2.30.

While the order book declined from $465 million in December 2005 to the current $382 million, we are not too concerned as demand for water and waste water services continues to be strong in Asia. Hyflux's main challenge, we think, is the execution of these projects and maintaining profitability.

Our price target of $2.30 is derived by the DCF (discounted cash flow) method. The stock is trading at 19.8x 2007 estimated earnings versus 14.3x market PE.

NEUTRAL