Hyflux

Hyflux

Global leader in sustainable solutions, focusing on the areas of water and energy

A specialist in water treatment and among the top global desalination plant providers, Hyflux is distinctive in its ability to address the challenges at every point of the entire water value chain. In the area of energy, the company has expanded from energy generation and retail to include waste-to-energy, providing clean and renewable energy.

 Singapore’s first water recycling  plant and two SWRO desalination plants, and some of the world’s largest SWRO desalination plants in Algeria, China, Oman,  Saudi Arabia and Singapore. The Group is also developing Asia’s  first Integrated Water and Power Project and Singapore’s largest  waste-to-energy plant.

Founded in Singapore in 1989, Hyflux today employs about 2,500 staff worldwide. Headquartered and listed in Singapore, the Group has operations and projects spanning across the Asia Pacific, the Middle East, Africa and the Americas.

Key Projects from Annual Report
i) Qurayyat Independent Water Project (IWP) in the Sultanate of Oman

ii) Hyflux’s 411 MW combined cycle gas turbine power plant co-located with Tuaspring Desalination

iii) Plant has been connected to the national power grid since August 2015

iv) signed a 25-year waste-to-energy (WTE) services agreement with Singapore’s National Environment Agency (NEA) to provide 3,600 tonnes per day of incineration capacity from the country’s sixth and largest WTE plant, TuasOne WTE project, which will be developed on a design-build-own-operate model in September 2015

v) In the Middle East, we signed a 20-year water purchase agreement with Oman Power and Water Procurement Company SAOC to supply desalinated water from the 200,000 m3/day capacity Qurayyat IWP which Hyflux will design, build, own and operate in the Sultanate of Oman

vi) secured two projects in the Kingdom of Saudi Arabia (KSA) – the first to supply a containerised desalination solution to KSA and the second to design, manufacture and supply a seawater reverse osmosis and sulphate removal facilities package to Khurais, Saudi Arabia.

vii)  Hyflux was awarded a letter of intent by the General Authority for the Suez Canal Economic Zone to construct the Ain Sokhna Integrated Water and Power Project.

viii)  asset light strategy and to recycle capital for new investments, we unlocked value and divested our entire stake in five water and wastewater treatment plants in China to  Tus Water Group Limited, a new joint venture with Tuspark TSI, of which we own 25% stake

Retail Diversification
i) 50% stake in PT Oasis, which has the second largest market share of the bottled water and gallon water market in Indonesia

ii) consumer water technology company, Kaqun Europe Zrt (Kaqun Europe) in November 2015
iii) Kaqun Europe for a product line based on highly oxygenated water with exclusive rights to manufacture, sell and distribute under the brand name ELO in Asia Pacific, the Middle East and Africa, through a newly established entity called ELO Water in which we own a 70% stake


2016 Updates
1) Commencement  of  new  projects  in  Saudi  Arabia  and  Egypt  pending finalisation of contracting arrangements

2) Record revenue of S$987 million in 2016 but net profit hard hit by weak Singapore electricity market

3) Collaboration with Changi General Hospital on ELO Water clinical trials

4) higher revenue was mainly contributed by the TuasOne Waste-to-Energy (WTE) project and Qurayyat Independent Water Project (IWP). Profits from higher engineering, procurement and construction (EPC) activities for these two projects were largely wiped out by weaker than expected electricity prices in Singapore

5) Memorandum of Understanding with Saudi Arabia  state-owned  Saline  Water  Conversion  Corporation  to  deliver  three  seawater reverse osmosis desalination plants valued at US$180 million in the Kingdom of Saudi Arabia

6) Developing the Ain Sokhna IWPP in Egypt on a build operate and transfer (BOT) or build operate and own (BOO) structure in place of the EPC contract announced earlier. The Group has identified partners to develop this project and will continue  to  discuss  the  investment  terms  with  SCZone.  Construction  of  both  these projects will commence upon finalisation of contracting arrangements

7) asset light strategy, the Group will be seeking partial divestment of the Tuaspring plant subject to the relevant regulatory approvals with the support of the Singapore Economic Development Board and the Singapore Land Authority

8) flagship ELO Lab in central Singapore in the third quarter of 2017.

9) Group signed an agreement with Changi General Hospital to conduct two clinical trials to establish the effectiveness of ELO Water and ELO Gel on diabetes control and diabetic foot ulcer patients

10) expand the ELO line of products and extend the ELO business overseas within the coming year.








Business Outlook
Hyflux has a strong advantage as a market leader in water treatment, desalination and NeWater. It should have significant pricing power in its proprietary knowledge. One of the key risks is whether it can protect its proprietary knowledge and prevent its engineers and trade secrets from being poached by rival competitors. (think Samsung Apple =>Oppo) Hyflux’s proprietary Kristal® ultrafiltration (UF)

Hyflux has been working on growing predictable and recurring income to counter against the “lumpy” recognition of our engineering, procurement and construction (EPC) activities which are mainly project driven. The cash flow of the company is not healthy at all.

Company might be overleveraged and hit hard by increase in interest rates.

Automation of Hyflux Manufacturing Plant to increase Productivity

Financial Outlook
Hyflux has a Beta of 1.16 and using adjusted Beta, CAPM require rate of return is 13.459%. It is at an aggressive growth stage and has strong record of management as well as track record of doing well in the industry.

In general, Net profit of the company is quite consistent, however there is a sharp decrease in Net profit in Fy2016. There is a sharp increase in Total revenue, but also corresponding sharp increase in cost of revenue and operating expenses, extraordinary Items and Adjustments.
Record revenue of S$987 million in 2016 due to higher EPC activities but net profit hit hard by weak Singapore electricity market

The cash flow of the company is not healthy at all. From FY 2012 to2016, Cash flow from operating and Investing activity is negative. Cash flow from financing is generally positive and net change in cash is generally negative.

From balance sheet perspective, Hyflux has a sharp increase in current asset in Fy2016 as well as Total receivables and long term assets.
Fy2016, it has incurred sharp increase in Payables and Accrued Expenses, Total Long Term Debt
Fy2015 Sharp increase in Other Current Liabilities. All figures in FY2015 were restated to include S$11.2 million adjustment to the provisional fair value initially recorded for the acquisition of a joint venture, Tianjin Dagang, upon completion of an independent fair value assessment in FY2016
 FY2014 to FY2016 were also adjusted for the effects of perpetual capital securities
Generally, Its total liability has been increasing and may be overleveraged.  Plans to Sell Tianjin Dagang to gain cash flow.

This company is focused on a growth stage and has significant retained earnings, although 2016 is a bad year and retained earnings significantly declined. ROA and ROE EPS and DPS is decreasing steadily over the years and 2016 is a particularly bad year for Hyflux. It is not doing so well compared to its competitors.

Macroeconomic Outlook

39% of business in concentrated on Middle East and North Africa, 35% in Singapore,20% in China, 3% at rest of world.

Janet Yellen increase in interest rates might hit the company hard. After increase in December and March, Wall Street is hyperventilating on the hikes and profitability of banks since December, now they are poaching on fear and there might be a major correction based on economic data released

6 April 2017 - The minutes signalled that most of the policymakers also wanted to start reining in their policy of reinvesting in Treasury bills and mortgage-backed securities later this year, earlier than expected.

Singapore interest rates has been increasing and fluctuating consistently. HyFlux might be hit hard by over leveraging and cash flow problems.

Weak electricity prices will affect the profitability of the company. However, with major economies picking up, I predict that it will normalise, especially when US (major consumer of energy) recovers.

Buy / Sell Decision - Events Trading, Company Outlook, Capital Gain
I choose Hyflux because I think water treatment is the future. Newater, water membrane technology is going to be essential in the future. This company has a strong operating history and not some novice, and is a market leader with strong track record and knowledge in this area. I am making a huge bet based on fundamentals alone. Water scarcity hits Malaysia, Singapore, Saudi Arabia, and this proprietary knowledge in membranes will be revolutionary. Market capitalisation of Hyflux 492.78 million. In my humble opinion,  I believe this proprietary knowledge, its market leader status, and its assets alone are worth more than this. From Philips Capital caa 8 April 2017, Book value per share and Price per Book Value suggests price is severely undervalued, due to poor earnings, lack of liquidity and high indebtedness.

P/BV (latest interim)     0.29
BVPS (latest interim) (SGD)     1.9454
EPS TTM (SGD)     -0.0751

From a long run earnings perspective, Singapore had 30% in water prices. This money goes to Hyflux for the next 25 years, which 3.9 Million people are going to pay 30% more to contribute for my share value.

From energy perspective, plant has been connected to the national power grid since August 2015. It is a major boom for the company, but due to hit in energy prices, 2016 is a very bad year for Hyflux.

Hyflux is managing is liquidity issues by divesting its fixed assets and lowering its exposure to China.Its over-leverage and cash flows issues are quite worrisome, but with so much managing rights contracts as well as fixed assets under its balance sheet, I project that once it goes through these tight years, it should regain its intrinsic value in 3 to 5 years time. I am heavily leveraging on capital gain and the improvement in future prospects. Over expansion and over leverage might cost the company in the short term however and I am taking a calculated risk.

Hyflux has an unusually cosy relationships with Singapore EDB, NEA as well as Temesek holdings. In the event of deepening liquidity issues, it should be able to secure financing via TH or sale of its fixed assets. It might taper on its expansion plans and focus on asset light (manage depreciation costs).

Hyflux is diversifying on Retail (Elo Water) and Clinical areas (Changi General Hospital) to smooth en out its project based irregular cash flows. It might be over-expanding in the short run on projects that has no guarantee on success. However, IMHO it is not diversifying unnecessarily but working within its circle of competence.

Short term technicals suggests that it will Fall, Long term technicals suggest it will hold. Only 2 analysts cover Hyflux, One stating to hold the other to sell. Their opinion is not worth considering. I have a strong preference to choosing this unnoticed stock and invest in it (Peter Lynch). Since I plan to hold Hyflux for the long term, I agrees with the buying decision. I placed a bid on 0.565 (lower than market Price, based on its resistance lines) with a 30 day GTD order. It was completed on the day itself and stock is sufficiently liquid.

I took an excessively detailed and calculated coverage for this penny stock as it is non-blue chip and unnoticed. It is also highly prone to cyclical over winds, and most of my opinion is derived from Peter Lynch - One up on wall street. I mainly derived the cash flows from increase in water prices, and NeWater production to this company. Going forward, I will continue this practice to blog about any company before buying its shares.

Financial ratios

Operating profit margin

Valuation models

Price / book value - 1.9454 (Philips) 

Price earnings - industry is highly cyclical in nature, might not be reliable, 2016 huge surge in earnings but wiped out by lowered energy prices - NA

Dividend discount model - 

Fcfe model - consistently negative change in free cash flow, NA

Price sales ratio - 

Question to ask at 28 Apr 2017 AGM

(Think like a sceptic) 
1) Any plans in place to manage your liquidity issues with regards to cash flow?
2) Any plans to secure your proprietary information and prevent poaching from competitors?
3) Any details on your asset light strategy?

4) What are the components of book value

5) what proportion of sales is expected to come from each segment? Elo water. Energy. Wastewater management