• Core loss of S$20.3m in 1Q
• Catalysts to emerge in 2H
• Take profit and re-enter at S$0.80 or better

Weaker start to FY15

Hyflux Ltd made a weaker-than-expected start to FY15, even though the first quarter is seasonally softer. Revenue tumbled 32% YoY to S$60.4m, mainly due to lower EPC activities; this as Hyflux has largely completed its Tuaspring project and will likely start on the Qurayyat Desalination (QIWP) project from 2Q onwards.

Reported net profit slipped 85% to S$5.6m, mainly due to the divestment of its JV and associate with Marmon Water LLC group in 1Q14; but it was lifted by a divestment gain of S$15.8m. Otherwise, we estimate that the company would have suffered a core net loss of around S$20.3m, versus a core net loss of S$6.7m in 1Q14.

Another reason for the wider net core loss is likely due to the large 110% jump in share of associate loss of US$7.9m; this reflecting lower-than-expected plant utilization rates compared to designed capacity.

Guiding for increased operational activities in 2H15

Going forward, company expects to see increased operational activities in the second half; this as a result of 1) ramp up in Magtaa Desalination Plant, Algeria; 2) commissioning of Tuaspring Power Plant, Singapore; and 3) fullscale development of QIWP, Oman. Management adds that the group is still actively pursuing opportunities for municipal and industrial water projects in the Middle East, Africa, Asia and the Americas. At the same time, it continues to explore potential divestment opportunities in line with its asset-light strategy.

Patience needed for now

And until these activities kick in, we suspect that the group could face another pretty lackluster quarter ahead. But to be fair, the company’s revenue tends to be quite lumpy, given the project-based nature of its business. However, we note that the stock price has recovered nearly 20% since we upgraded our call to Hold in early Mar, and the share price has hit our DCFbased fair value of S$0.96 on 30 Apr. Although we are maintaining our HOLD rating and S$0.96 fair value, investors may consider booking some profit and re-entering at S$0.80 or better between now and 2H15.

Source: OCBC Research - 15 May 2015