HWT – DBS

Smooth sailing to start off with!

Story: Net operating income for 1Q08 came in at S$1.2m, compared to our projected loss of S$1m, and the difference can be largely attributed to change in accounting estimates for financial income ($0.9m) and lower operating costs (S$1.3m). Net profit for the period at S$1.1m, which includes a tax credit of S$0.3m, was even higher than HWT’s full year projection of S$0.8m as per IPO prospectus.

Point: Although tariff receipts of S$3.2m were somewhat lower than our projected S$4.2m, results surprised on the upside as operating costs were much lower than expected for the quarter. Maintenance expenses were lower because all except one of the eight operating plants are newly constructed. The average utilization rates of these plants have increased steadily to 51% in 1Q and is expected to ramp up over time. Operating and maintenance income of S$1.8m represents about 10% of FY08 forecast of S$18.4m but this is expected to increase more than proportionately through the course of the year with the ramp up in utilization of existing and completing plants. Finance income was much higher than projected at S$1m for the quarter and repayment of financial receivables lower than expected, as HWT changed its INT FRS 112-related accounting estimates. DPU after waiver of distributions in respect of Hyflux units was 0.87 cents and represents 42% of HWT’s 1H08 projected DPU of 1.91cts.

Relevance: Though the operating expenses are expected to normalize over the year, we believe there could be added upside arising from potential cost savings and tariff increases, and raise our FY08 and FY09 DPU forecasts to 4.7 cents and 5.4 cents, respectively. Taking into account the revised accounting estimates, which recognize more interest repayment than capital repayment on the financial assets, we have also revised up our revenue and net profit numbers. Maintain BUY at a revised DDM-backed TP of S$0.90 (Cost of Equity 11.4%).