• Core net loss of S$7.2m
• More delay in Dahej project closing
• Contract wins more likely in FY15

Poor start to FY14

Hyflux Ltd made a poor start to FY14, with revenue tumbling 29% YoY to S$88.3m, meeting just 14% of our full-year forecast, as it booked lower engineering, procurement and construction activities; this is way under expectation as its first quarter revenue would typically make up ~18-20%. While Hyflux was able to turn in a net profit of S$37.9m (versus S$8.0m in 1Q13), this came mainly from one-off gains of S$54.1m from the divestment of its JV with Marmon Water LLC Group. Excluding this and other one-off items, including a S$10.7m impairment of trade receivables (also booked a similar S$10.0m impairment in 4Q13), Hyflux would have booked a core net loss of S$7.2m (versus a core net profit of S$7.5m in 1Q13).

Rest of FY14 to remain slow

During its 4Q13 analyst call, Hyflux guided for a slower 1H14 showing, citing the delayed financial close of the Dahej project in India to 1H14. But it seems that the financial close of that project may take even longer and management has pushed back the timeline to by end of this year. And even though Hyflux previously guided that its recurring O&M business could generate as much as S$20m of EBITDA in 2014, we have yet to see much of that in the 1Q14 numbers. Nevertheless, Hyflux does have some S$1.9b worth of Operations & Maintenance (O&M) contracts as of end 2013; also has S$732m of EPC contracts less what it has recognized in 1Q14.

Still bidding for contracts; looking to recycle capital

As before, Hyflux continues to be upbeat about its prospects over the rest of the year, and will be actively bidding for large-scale water treatment and desalination projects in MENA (Saudi Arabia, Oman, Nigeria), India and Singapore. In addition, Hyflux is actively looking to recycle capital, either by offloading non-core technology (like the Marmon JV) and projects.

Maintain SELL with lower S$0.83 fair value

Even though we push back the contract wins to FY15, we note that the risk of delays to financial close remains. As such, we maintain our SELL rating with a lower S$0.83 fair value, still based on 20x blended FY14/FY15F EPS.

Source: OCBC Research - 9 May 2014