Missing the mark
▊ Hyflux’s 4Q13 results were derailed by a power plant delay that hit its recurring earnings and main earnings driver, given the lack of new project wins. Its FY13 core net profit missed both consensus and our expectations by coming in at only 81% of our full-year forecast. We lower our FY14-15 EPS by 15-25% on higher cost and lower order-win assumptions, and introduce our FY16 numbers. Our SOP-based target price is also lower to reflect fewer order wins, though this is partially offset by higher market multiples for its water portfolios. We downgrade our call from Hold to Reduce as we believe a higher project win rate is needed to sustain its earnings growth, while the slower 1H14 guided by management is also not helping the investment case.
HYF's FY13 PATMI (-28% yoy) was a negative one. Municipal sources continued to be the main income contributor, making up 93% of total revenue. Overall, HYF’s FY13 gross margin of 50% was reasonably strong due to project completions and the accompanying cost decreases. HYF’s current order book of S$2.67bn is large but it lacks a sizeable EPC portion that can be income generative in the short term. One of the main reasons for the group missing its guidance on recurring revenue was the power plant delay in the Tuaspring project.
Recurring income not living up to potential yet
HYF’s net gearing grew to 1.15x at end-FY13 as a result of increased financing for continued investment in water plants. However, we think that the recurring earnings from operations and maintenance from such investments are reaching their full potential at this stage. That said, management is highly focused on tendering for various large projects in the Middle East and Africa.
Downgrade to Reduce
While we believe that winning just one mega project will act as an immediate rerating catalyst for HYF’s shares, this is unlikely in the near term. The dividend cut and weaker guidance for 1H14 are not helping HYF’s investment case. The stock’s current valuation appears fair compared to its major Asian peers, but it lack catalysts that are present in those other names. As such, we downgrade our rating from Hold to Reduce.
Publish date: 21/02/14