Is This Knife Still Falling?



Used to be a market darling in the early 2000s, Hyflux Ltd (SGX: 600) has taken a hit from the global financial crisis and the sovereign crisis surrounding the Arab Spring in 2011. The stock has gone into a free fall ever since.


Company Background

Hyflux was founded in 1989 as Hydrochem (S) Pte Ltd, a small water treatment company with a start-up capital of S$20,000 and 3 staff. Today, the Group has grown to be one of the largest water solutions companies and desalination plant supplier with a total asset size of S$2.78 billion. Its key markets include South East Asia, China, India and the Middle East and North Africa (MENA) region. Revenues grew from S$131 million in FY2005 to S$532 million in FY2013.


The Group provides solutions in seawater desalination, water recycling, wastewater treatment and potable water treatment. Its water solutions business covers the entire water value chain spectrum from R&D, project origination, component manufacturing, process engineering to the operations & maintenance (O&M) of water treatment plants.


Some of its successful projects can be found below:

  • Tuaspring Desalination Plant (318,500 m3/day) in Tuas, Singapore, which is Singapore’s second and largest seawater desalination plant.
  • SingSpring Desalination Plant (136,380 m3/day), in Tuas, Singapore, which is Singapore’s first seawater desalination plant
  • China’s largest seawater reverse osmosis (SWRO)desalination plant (100,000 m3/day) in Dagang district, Tianjin province
  • Souk Tleta Desalination Plant (200,000 m3/day), in Tlemcen, Algeria


Changing its Business Model…

After the global financial crisis which broke out during 2008-2009, Hyflux’s business model took a structural shift from generating Engineering Procurement & Construction (EPC) revenue which tends to be more lumpy to revenues generated based on Operations & Maintainance (O&M) which is expected to provide a more stable and recurring revenue. In 2008, order book for EPC stood at 77.4% of total order book size; in 2013, the order book for O&M has increased to 72.5% of total order book size.


Still a Tough Fight…

Despite its shift in business models, the Group was unable to mitigate the unexpected sovereign risks surrounding the Arab Spring in 2011. The crisis brought about a loss of contracts in the MENA region which has adversely impacted Hyflux’s profitability. In FY2011, profits after taxes declined 40% to S$55.7 million from a year ago. Hyflux was forced to refocus its geographical markets from MENA to Asia but the Group continued to experience a decline in profitability as ROE decreased from 20.5% in FY2009 to 4.1% in FY2013. Moreover, with the firm generating negative free cash after FY2009, Hyflux began on a debt raising spree in order to fund its capital expenditures. Total borrowings increased from S$830 million in FY2011 to S$1.56 billion (adjusted for capital securities) in 3Q2014. This puts its net debt/equity at around 1.1x.


Value in Action

Hyflux used to be the market favourite until it got hit by the political outbreak in MENA. However, can this falling knife still recover?


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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

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