• 1Q revenue +311%
• Outlook still cautious
• But worst likely over

Stronger revenue recognition in 1Q16

Hyflux posted a strong 311% YoY surge in revenue to S$248.3m in 1Q16, buoyed largely by the Tuaspring WTE (waste-to-energy) project as well as the Qurayyat Independent Water Project in Oman; Singapore contributed 70% of revenue and MENA contributed 25%.

However, we note that despite the 48% jump in gross profit to S$58.7m, gross margin slipped to just 24% in 1Q16 versus 66% in 1Q15. Reported net profit came in 30% higher at S$7.3m; but pre-tax profit slipped 24% to S$5.6m, as Hyflux posted a tax credit of S$2.3m in the quarter.

And after adjusting for dividends for perpetual securities, the company posted a net loss of 0.64 S cent per share in 1Q16, but narrower than the loss of 0.83 S cent for 1Q15.

Outlook remains cautious; Tuaspring power plant may see losses

Citing short-term challenges arising from depressed oil prices and slower economic growth, Hyflux remains cautious on the market; management also highlights the possibility of the Tuaspring co-gen power plant incurring losses if the current challenging market landscape of low electricity prices continue.

Nevertheless, management believes that its current order book (last updated with S$853m of EPC projects at end 2015) should continue to support activities; this will also be replenished by the recent award of the US$500m contract to build an integrated water and power project in Egypt.

On the Tuaspring co-gen plant, management reveals that it is already looking at various measures to mitigate the expected losses, including participating in the futures market to hedge some deliverables.

Revising FV to S$0.57

Although 1Q16 revenue and net profit met 50% and 45% of our FY16 estimates, respectively, we are only bumping up revenue forecast by 12%, as we believe that the WTE plant was frontloaded. On the other hand, we are cutting our earnings forecast by 22% to account for lower gross margins as well as potential losses at the power plant. Still, as we adjust our DCF-model, our fair value improves from S$0.50 to S$0.57. Maintain HOLD.

Source: OCBC Research - 13 May 2016