HWT – DBS

Growth story under the scanner

Story: Growth seems to be at a premium now, with access to funds drying up. As credit markets tighten up worldwide, Hyflux Water Trust (“HWT”) may find the going getting tougher to finance its potential acquisitions.

Point: HWT has been negotiating the debt funding required to finance the acquisition of the first tranche of nine assets from sponsor Hyflux but credit conditions have deteriorated since the initial announcement and spreads have widened to a level, which may render the acquisition
of certain assets unviable. As a result, HWT may choose to acquire only a part of the portfolio on offer, if the terms of financing are more favourable in that case. Thus, there is considerable uncertainty in the timing and quantum of the acquisition-driven growth story for HWT.

Relevance: As such, we see possible further downside to the share price, as current spread of HWT’s dividend yield over 3m USD LIBOR at 4.9% is lower than YTD peak of 6.2%. Moreover, compared to other SGX-listed business trusts, including closest peer CitySpring, HWT is trading at a much lower yield. Thus, we reduce our target price for HWT to S$0.53, based on blended valuation methodology – DDM and dividend yield valuation – to better reflect the importance of target yield for investors in this asset class, especially in the absence of a credible growth story amidst current credit market uncertainties. In addition, we cut our FY08 and FY09 DPU estimates by 3% and 13%, respectively, to factor in possible lower utilisation in existing assets and downgrade our recommendation on the counter to HOLD.