Brokers' Take

NEUTRAL - UBS Investment Research

Hyflux
Nov 17 close: $2.48
UBS Investment Research, Nov 16

ONLY $1.9 million in Q3. Earnings for Q3 came in at $1.9 million, significantly below our $10 million estimate. The difference was mainly due to the change in the accounting treatment for its China projects. It raised its stake in them from 50 per cent to 80 per cent and as a result it had to eliminate the EPC revenue. We revise our 2006 estimate from $0.07 to $0.03 and 2007 from $0.11 to $0.08.

Growth looks promising. While EPC revenue evaporates in the near term, it would however be offset by higher recurring income in the future. Hyflux said it intends to securitise these assets when appropriate as a way of unlocking value and we think the majority ownership makes it easier. The ability to recycle its capital should enable it to grow more aggressively.

Near-term earnings subdued. We expect near-term earnings to be subdued and volatile, but expect returns in the long term to be rewarding as the growth potential of the industry and Hyflux's ability to capture it remains strong. We are maintaining our 'neutral 2' rating given the near-term volatility.

Valuation: Price target $2.70. Our price target of $2.70 is derived from DCF method, using a WACC of 9 per cent and terminal growth rate of 4 per cent. The stock trades 24.1x 2007 earnings estimates versus the 15.8x of the market.

NEUTRAL

Compiled by UMA SHANKARI