Below expectations. We believe 3Q12 results were below market expectations, though in-line with ours. Revenue growth of 77% was negated by poorer margins, which resulted in a higher reported net profit of just 15%. This is also similar to the 9M12 figures which showed a 70% revenue growth and 17% bottomline growth.

Lower margins at Tuas SingSpring desalination plant. Most of Hyflux’s current revenue is derived from this ongoing SGD1.05b project (estimated 70%). Project execution here remains on track, which accounted for the 70% revenue growth for 9M12. However, the margins here are not comparable to previous MENA projects, which probably accounts for earnings falling below street estimates this year so far.

China remains challenging. We believe the environment in China remains challenging for Hyflux, as reflected by a lack of new contract wins, as well as the lower sales (down 32% for 9M12) from industrial segment. Earlier divestment plans for its BOT plans also remain on hold, probably reflecting utilization not being optimal yet.

Potential contract wins to boost dwindling orderbook. We estimate current EPC orderbook at SGD550m, mostly made up of the Tuas SingSpring desalination plant which is expected to complete in 3Q2012. Financial close for the Dahej project in India is expected over the next few quarters, which should replenish about USD420m to the orderbook. Other than this, one of the major project Hyflux is gunning for is in Oman (estimated USD250m-USD400m), which could be announced as early as this month. The Hyflux-Mitsui consortium is one of two remaining bidders and management remains confident.

Gearing position should be comfortable. Net gearing increased to 55% this quarter, mainly on financing for its Tuas SingSpring project. However, most of its SGD940m in loans are long-term in nature; hence this gearing position should be comfortable.

Not the right time yet; Maintain SELL. We keep our estimates mostly unchanged. Despite the positive long-term outlook, valuations are too rich at the moment, without the certainty of a strong orderbook and we maintain SELL with a TP of $1.10.

Source: Maybank Kim Eng Research - 02 Nov 2012