HWT – BT

Distributions on track

Story: Hyfux Water Trust once again surprised us on the upside, with 2Q08 net earnings of S$2.2m (up 94% q-o-q) adding up to almost 52% of our existing FY08 forecast. Net payout to investors for HY08 stood at 2.17 S cents (after Hyflux waiver) as against projected DPU of 2.09 S cents as per IPO prospectus.

Point: The surprise in earnings was mainly a result of lower-than-expected operating expenses and lower trust expenses. HWT continues to excel as far as cost management is concerned and even bettered its1Q08 operating margins (68% in 2Q vs. 48% in 1Q), with operating expenses of only S$1.2m on tariff receipts of S$3.8m. Tariff receipts were up 19% q-o-q as utilisation rates jumped from 51% in 1Q08 to 63% in 2Q08 and two more plants were completed, bringing the design capacity of completed plants to 325,000 cu m/day. The Trust looks to be on track to meet its DPU guidance of 4.88 S cents (after waiver) for the year – given that the remaining three plants are expected to be completed before the end of the year and utilisation rates should move closer to 70%. Management is further negotiating organic expansion potential for four existing plants of about 155,000 cu m/day, which should see closure in 6-9 months.

Relevance: We have revised up our DPU forecast for FY08 by 7% to account for the better-than-expected margins achieved in 2Q08, while leaving our FY09 forecasts unchanged awaiting further visibility on the sustenance of margins. Our DDM-backed Target Price remains unchanged at S$0.90 and we continue to maintain BUY on the stock, while keeping a close watch on how the acquisition scenario unfolds as HWT deliberates on the first tranche of assets offered by sponsor, Hyflux. Current dividend yield is attractive at 7.5%-8.4% for FY08-09 and represents a good entry point, in our opinion.