• Another disappointing quarter
• Likely drought of new infrastructure projects
• Lower fair value to S$0.56

Not too upbeat 3Q15 results

Hyflux reported 3Q15 results and core earnings were again disappointing. Although revenue grew 32% YoY (+41% QoQ) to S$133.5m, buoyed by the Qurayyat Independent Water Project (IWP) in Oman (municipal was the main contributor, accounting for 82% of total revenue); gross margin dipped to 42.8% in the quarter, versus 75.1% in 2Q15 and 59.6% in 3Q14.

While Hyflux reported NPATMI of S$6.4m (-43% YoY, - 75.2% QoQ), this was boosted by a non-cash fair value re-measurement gain of S$12.3m – this relating to its Tianjin Dagang Desalination Plant in China. At the core operating level, we estimate that Hyflux would have turned in another loss of S$14.7m.

Near-term outlook is more cautious

Going forward, Hyflux continues to expect increased operational activities in fourth quarter; this as a result of 1) ramp up in Magtaa Desalination Plant, Algeria; 2) commissioning of Tuaspring Power Plant, Singapore (expected to be operational in early 2016); and 3) full-scale development of QIWP, Oman (likely to be frontend loaded due to purchase of equipment).

However, it warns that the depressed oil prices will have an impact on its near-term outlook, as many countries have scaled back on infrastructure projects. Nevertheless, Hyflux highlights that it has a strong order book and adds that it will continue to strengthen its capabilities in anticipation of longer-term growth opportunities.

Moving downstream into consumer water technology

In fact, Hyflux has just announced that it has signed an agreement to eventually acquire a 30% stake in Kaqun Europe - a consumer water technology company - for US$8m. Hyflux intends to integrate its proprietary technology together with Kaqun Europe for a product line that it has exclusive rights to manufacture, sell, market and distribute in Asia Pacific and MENA. However, we do not believe that it would be significant enough to move the needle for better profitability any time soon.

Downgrade to SELL

Given the poor showing YTD and the more muted near-term outlook, we downgrade our call from Hold to SELL; our DCF-based fair value also drops from S$0.73 to S$0.56.

Source: OCBC Research - 5 Nov 2015