HWT – DBS

Acquisition terms inspire confidence

Story: Hyflux Water Trust (“HWT”) has agreed to purchase 5 water/wastewater treatment plants from sponsor Hyflux, for a total consideration of S$88m. The acquisition is expected to be financed by an outstanding revolving loan facility of US$66m.

Point: This is the first phase of acquisitions under the ROFOAR portfolio offered by Hyflux in end-June and will be conducted in two tranches, depending on the expected date of commencement of operations of the individual plants. The 5 plants have a combined capacity of treating 160,000 cu m of water/day and represent a 36% increase over current portfolio capacity of 445,000 cu m/day. The purchase price of S$88m represents a P/BV of roughly 1.4x, as against IPO valuation of 1.3x P/BV. The premium is justifiable given that all the plants will be fully functional at the time of acquisition, compared to the IPO portfolio where only 7 of the 13 plants were operational. HWT will also ink agreements with sponsor Hyflux to eliminate interest rate risk and risk of lower-than-expected utilisation rates, in order to ensure positive DPU accretion. With this acquisition in place, we conservatively enhance our DPU forecasts by 8%, 20% and 30% over the next 3 years, based on assumptions of 50% capacity utilization in the first year – ramping up to 100% by the 4th year – and fixed rate interest payments of 5% per annum.

Relevance: Following our downgrade last month, share price has plunged 32% – underperforming the broad market index, which fell 17% over the same period – and is now trading at 14% FY09 yield. Based on the higher valuation on expanded asset base and a target dividend yield of ~10% for this asset class, we revise our target price upwards to S$0.61. We expect the market to react favourably to HWT’s positive acquisition intent on favourable terms and the relatively secure yield accretive growth story and upgrade the counter to BUY.