• Divesting non-core assets
• Key to recycle capital
• 19% downside to new S$1 FV

Divestments in progress

Hyflux Ltd just announced that it will be divesting its consumer JVs for a total of US$50.1m. Its subsidiary Hyflux Consumer Products (HCP) will sell its entire 50% stake in Hyflux Marmon Development (HMD) to Marmon Water (Singapore) (MWS) for US$43.4m (S$55.1m). For this divestment, Hyflux will book an excess of sale proceeds over net book value of S$53.9m, which it intends to use for strategic investments and working capital purposes. Separately, HCP will sell its entire 49% stake in Marmon Hyflux investments (MHI) to MWS for US$6.7m (S$8.5m).

Non-core to its strategy

HMD’s principal activities are R&D on water treatment technologies, with particular focus on combined membrane and media filtration, primarily (and successfully) used in consumer applications. According to management, these technologies are nonintegral to Hyflux’s realigned product focus and existing suite of consumer products. MHI is primarily involved in sales and marketing and HCP has been a passive investor in MHI. Going forward, Hyflux will continue to expand and develop integral membrane technology for applications across industries including industrial and municipal markets.

More firepower for its project tenders

We agree with management’s view that these operations are non-core to its strategy and we see the recycling of capital as key to its ability to fund its future projects. As of endDec 2013, Hyflux has a cash balance of S$244m. Recall that Hyflux is involved or tendering in a slew of waste-water treatment projects in MENA, India and Singapore – this with an estimated worth of US$8b.

Maintain SELL with new S$1.00 FV

Although Hyflux expects to realize S$54m gain from the divestment, we see it more as a one-off item. Instead, we are bumping up our FY14 estimates to allow for more contract wins this year, which will improve our fair value from S$0.84 to S$1.00. But as current valuations are still pricey, we maintain SELL.

Source: OCBC Research - 12 Mar 2014