Outlook murky for Hyflux despite Galaxy joint venture

As it had underperformed the broader market last year, plunging 48% versus the STI’s 17% slide.

According to OCBC, Hyuflux expects to get a whopping US$41.2m from the JV. It also estimates that Hyflux would probably record a gain and cash proceeds of US$16.9m in 2012.

Here’s more from OCBC:

Another divestment to Galaxy JV. Hyflux Ltd recently announced that it has injected two of its waste-water treatment plants – Shandong Xiajin Water Treatment Plant and Chongqing Hexin District Wastewater Treatment Plant – into Galaxy NewSpring Pte Ltd. Recall that Galaxy is a 50-50 JV formed between Hyflux and Japan’s Mitsui & Co in Aug 2010 to invest, develop, construct, operate and maintain water plants in China. Other than the initial spate of asset injections then, there has not been any new development until now; hence we opine that
the latest injection could herald more of such moves in 2012.

Expects to get US$41.2m from the move. Hyflux Ltd recently announced that it has injected two of its waste-water treatment plants – Shandong Xiajin Water Treatment Plant and Chongqing Hexin District Wastewater Treatment Plant – into Galaxy NewSpring Pte Ltd. Recall that Galaxy is a 50-50 JV formed between Hyflux and Japan’s Mitsui & Co in Aug 2010 to invest, develop, construct, operate and maintain water plants in China. Other than the initial spate of asset injections then, there has not been any new development until now; hence we opine that the latest injection could herald more of such moves in 2012.

According to management, the aggregate payable by Galaxy under the sale and purchase agreement is US$41.2m, payable in tranches upon the fulfillment of certain conditions set out in the SPA. Based on the NTA of ~US$25.2m, we estimate that Hyflux would probably record a gain and cash proceeds of US$16.9m in 2012. We believe that the cash inflow would come in most handy, given that the access to credit could remain tight in the months ahead due to the ongoing debt crisis in Europe.

Recent sell-down likely overdone but outlook remains murky. Since we downgraded our rating to HOLD in Nov 2011, Hyflux has underperformed the broader market last year, falling 48% versus the STI’s 17% slide; the sell-down was exacerbated by its weaker-than-expected 3Q11 results as well as the increasingly uncertain prospects in China’s waste-water industry. However, with yesterday’s 10% rebound, we note that the share price has since exceeded our unchanged fair value of S$1.28. But without any significant catalyst in the medium term, we see no reason to revise our estimates. As such, we continue to maintain HOLD on the stock; and we would be buyers closer to S$1.15 or lower.