• 2Q NPAT tumbles 90% YoY
• Margin pressures to remain
• 2H16 outlook likely weak

More EPC revenue recognition in 2Q16

Hyflux posted another strong 174% YoY surge in revenue to S$260.0m, also up nearly 5% QoQ, boosted by EPC revenue from the TuasOne Waste-to-Energy (WTE) project and the Qurayyat Independent Project (QIWP). However, due to the revenue mix, we note that gross margin has dipped to just 28% in 2Q16, from 75% in 2Q15; but marginally better than the 24% seen in 1Q16.

And because of the lower margin, NPAT tumbled 90% YoY and 64% QoQ to S$2.6m. And after adjusting for perpetual securities dividend, it would have posted a net loss of 1.6 S cent per share, versus an EPS of 1.7 S cent in 2Q15. Hyflux declared an interim dividend of 0.2 S cent, down from 0.7 S cent paid out in 1H15.

Outlook remains cautious; weaker profitability

Despite stronger project revenue and profit contributions from its EPC activities, Hyflux continues to expect weak financial performance from its Tuaspring power plant in 2H16, citing still weak electricity prices and higher amortisation and financing costs of the Tuaspring power plant that could have an adverse nearterm impact on profitability.

Although the group is currently sitting on a sizable order book of S$3.1b (S$1.3b from EPC, S$1.9b from O&M), management remains cautious about its business outlook, given the sustained low oil price environment and economic uncertainties arising from Brexit. In addition, current appetite for project financing in the MENA region has also waned.

Green shoots on consumer front

And on the consumer front, Hyflux expects to commence production of ELO drinking water in Singapore in 3Q16; besides retailing the oxygenrich water in Singapore, it also has plans to export the bottled water in China, Malaysia and Indonesia soon. Concurrently, the group will be launching its first commercial water therapy facility in central Singapore; but it does not expect any significant earnings contribution from this segment in 2016.

Ceasing coverage

Due to the still muted medium-term prospects as well as a reshuffling of internal resources, we are ceasing coverage on the company.

Source: OCBC Research - 5 Aug 2016