• 1H core loss at S$30.6m
• Outlook remains challenging
• DCF FV of S$0.75

Challenging 2Q14

Hyflux Ltd faced another challenging quarter, as 2Q14 revenue only came in around S$80.6m, down 42% YoY and also 9% QoQ, which management attributed to "timing of project commencement". But this did not come as a surprise to us, given the longerthan-expected delays in trying to achieve financial close of its Dahej project in India. While reported net profit jumped 247% YoY (+62% QoQ) to S$61.4m, it was mainly due to divestment gain of nearly S$83m from the sale of its HIC building. Otherwise, Hyflux would have posted a core operating loss of S$23m. For 1H14, revenue shrunk 36% to S$169.0m, meeting just 28% of our FY14 forecast, while reported net profit surged nearly 4x to S$99.3m; core operating loss would have come in around S$30.6m. Nevertheless, Hyflux declared an interim dividend of S$0.007/share, unchanged from 1H13.

Guiding for slow FY14

Besides the usual slow outlook guidance, management also warns that the delay in the connection of its Tuaspring power plant to the national power grid will continue to have "operating cost implications" over the next few quarters. Last but not least, Hyflux adds that the momentum of municipal projects being made available for tender has been slower than anticipated in the past year.

Still keen on MENA

Nevertheless, Hyflux remains keen to actively pursue opportunities for large-scale projects in MENA, Asia and even Latin America. Management highlights that it has sufficient capital to do this, especially after the recent divestment of non-core assets (like HIC) and issuance of perpetual securities in Jan and Jul this year. Hyflux intends to use the proceeds to finance its infrastructure projects, acquire new technology and investments in R&D, and expand/automate its membrane manufacturing operations.

Maintain SELL

We are slashing our FY14 revenue by 30% and we also expect a core operating loss of S$52.8m (versus profit of S$57.5m previously). Additionally, we are switching to a 3-stage DCF valuation (8.2% required return), deriving a fair value of S$0.75. Maintain SELL.

Source: OCBC Research - 8 Aug 2014