• FY15 core ~8% below our forecast
• S$924m of EPC orders on hand
• Lower fair value of S$0.50

FY15 results slightly below expectation

Hyflux saw FY15 revenue jumping 39% to S$445.2m, buoyed mainly by the Qurayyat Independent Water Project (IWP) in Oman. But recall that the top-line included the sale of five waste-water plants in China for S$42.5m; excluding them, revenue would have come in around S$402.7m, or about 7% above our forecast. Reported net profit slipped 28% to S$41.3m, mainly due to the lack of divestment gains recorded in the previous year; but if we exclude other one-off items, core earnings would be around S$17.2m, which is about 8% below our estimate. Hyflux declared a final dividend of 1.5 cents, bringing the total payout to 1.75 cents.

Order book remains steady

As of end 2015, Hyflux had an order book of S$2883m, which is made up of S$853m of EPC (includes Qurayyat and TuasOne WTE projects but excludes Dahej Desalination project) and S$1959m of O&M (summation of future revenues from its portfolio of plants over 20-30 year concession periods). But the company highlights that it has won a project worth S$71m in Khurais, Saudi Arabia in Jan 2016, and construction is already underway.

But overall outlook still cautious

While Hyflux added that its co-gen power plant in Tuas has been connected to the grid and has started selling the excess, it notes that the energy market here remains "challenging" due to the current market landscape. And it also remains cautious in terms of the overall outlook, as the falling oil prices, slower Chinese growth as well as volatility and lower liquidity in the global markets could have a negative near-term impact. Nevertheless, Hyflux says it will continue to actively tender for municipal and industrial projects in MENA region as well as parts of Asia. It also intends to look for opportunities to monetise its water assets and recycle capital for new investments.

Upgrade to HOLD

Since our downgrade on 5 Nov after its weak 3Q15 results, the share price has tumbled 24%, which we believe should have captured most of the negative news. While we are paring our DCF based fair value further to SS$0.50, downside is likely limited from here. Hence we upgrade our call from Sell to HOLD.

Source: OCBC Research - 19 Feb 2016