In transition mode
HYF is not short of ambition and we particularly like its forward-looking strategy, which is sound and could bear fruit, albeit not immediately. However, we are cautious given a possible earnings slowdown in the early part of 2014 from project start-ups.
FY14 will test HYF‟s resolve in winning new orders. Our SOP-based target price is raised slightly to S$1.20 given WACC adjustments. Under our revised rating structure, our call is changed from Neutral to Hold. We believe a higher project win rate is needed for HYF‟s share price to re-rate.
The ability to secure projects in light of increased EPC activities in Asia, particularly in China and India, will be key to 2014 revenue growth. However, we are cautious given the accompanying higher staff costs and raw material expenses, coupled with other additional overheads. Positive surprises could come from progress in new projects in the MENA region. Our fear is that the competitive bidding environment could lead to margin-damaging outcomes for any potential winners.
Spotlight on balance sheet
2014 will also be a year where HYF‟s balance sheet management comes into play as the group seeks to build on its portfolio of water projects around the world. HYF‟s net gearing stood at 1.1x at the end of the last reporting period (3Q13) versus 0.6x a year ago. However, that included project financing for Tuaspring. We believe that HYF has the ability to tap the capital market for funding to pursue sound projects.
Lack of conviction for now
We think that the recurring earnings from operations and maintenance have not reached its full potential at this stage. That said, management is very focussed on tendering for various large projects in the Middle East and Africa. We firmly believe that winning just one mega project will act as an immediate re-rating catalyst for HYF‟s share price. HYF‟s current valuation appears fair compared to its major Asian peers.
Publish date: 29/11/13