• Earnings 15% below forecast
• Likely slow 1H14
• Switch out for now

Big miss in FY13

Hyflux Ltd reported a very disappointing set of FY13 results, with 4Q13 performance coming a lot weaker than expected (mainly due to timing issues). Full-year revenue slipped 18% to S$535.8m, or 19% below our forecast, while net profit tumbled 28% to S$44.0m, or 36% below our estimate. We note that of a S$11m impairment of both trade and financial receivables. Excluding that and S$3m exchange loss, net profit would be around S$58m, but still 15% below our forecast. Hyflux declared a final dividend of 1.6c/share, versus 2.5c last year.

Warns of slower 1H14

Again, due to timing issues (like the delayed financial close of the Dahej project in India to 1H14 versus 1Q14 previously), management expects a slower first half in 2014. Nevertheless, Hyflux notes that its order book stands at S$2.67b (as of end 2013), with S$732m worth of EPC contracts and S$1.9b of O&M contracts. In addition, Hyflux believes that its recurring O&M business should be able to generate S$20m of EBITDA in 2014 and eventually hit S$80m in 2016 before topping out around S$120m in 2020.

Actively bidding for contracts

Management remains upbeat about its prospects over the next 12 months, where it sees significant opportunities in its key markets with an estimated US$8b worth of projects made available for tender. Among these markets include MENA (Saudi Arabia, Oman, Nigeria etc), India and Singapore. However, we understand that Hyflux is not too keen on China, given that most project IRRs have fallen below 10% (in some cases around 8%).

Downgrade to SELL for now

Given the disappointing results and a slower FY14 start, we believe that investors may want to switch out of Hyflux first, hence we downgrade our rating from Hold to SELL. Our fair value also drops from S$1.23 to S$0.84, even as we push out our 20x valuation from FY14F to blended FY14/FY15F EPS.

Source: OCBC Research - 21 Feb 2014