HWT – DBS

More wind in the sails?

Story: We recently visited some of Hyflux Water Trust’s (“HWT”) water and wastewater assets in China, including one of the 9 plants offered by sponsor Hyflux to HWT for acquisition as part of the ROFOAR pipeline.

Point: We came back reassured about the Trust’s ability to manage its assets and the inherent growth potential of its existing portfolio. HWT leverages on the experience and track record of parent Hyflux for all aspects of day-to-day operations and administration. Being located out of large industrial parks still in the early stages of development, HWT has a distinct advantage as it allows them to be a part of the industrial growth story being actively promoted by the local governments. Along with this potential of organic expansion, Hyflux has offered HWT a portfolio of 9 assets with a combined capacity of 290,000 cu m/day (representing about 65% of existing capacity) for potential acquisition, at an offer price of S$180m. HWT currently has zero gearing and debt financing should not be a problem, with an US$60m line already in place. Though the offer price looks to be on the higher side at first glance, at 1.6x P/BV (as against valuation of IPO portfolio at 1.3x P/BV), we believe that the acquisition should be yield-accretive from FY11 onwards. HWT would be taking its decision on the offer by 4Q08.

Relevance: We have revised our assumptions for water tariffs and utilisation rates for some of the plants in the existing portfolio based on information gathered off-theground. Hence, our DPU forecasts for FY08 and FY09 consequently stand reduced by 6% and 3% respectively. However, our DDM-backed target price remains unchanged at S$0.90 and we continue to maintain BUY on the stock. Current dividend yield is attractive at 7.0% for FY08 and 8.3% for FY09. Expect a re-rating if and when HWT decides to acquire the Hyflux assets on offer.