HWT – DBS

Decent set of results

Story: Excluding an unrealized forex gain of S$1.76m (owing to the appreciation of RMB against SGD), 3Q08 results were largely in line with our expectations, with distributable cash generation of 1.33 Scents –accounting for 48% of 2H08 projected DPU. Management remains confident of meeting the 4.88 Scents DPU payout target for FY09 (after waiver by sponsor Hyflux).

Point: 3Q08 revenues declined 17% q-o-q to S$13.9m, owing to lower construction revenue of S$10m compared to S$13.3m in 2Q08, as fewer project milestones were reached. The Beichen and Zunhua projects have been delayed and will now be completed in 4Q08 and 1H09, respectively. Tariff receipts grew 23% q-o-q to S$4.7m, though volumes grew by only 1% and utilization rates actually fell to 59% from 63% in 2Q as new plants came into play. Thus, much of the growth in tariff receipts can be attributed to tariff revisions negotiated at existing plants. Operating costs were again well managed, and operating margins held up at 60%, compared to 58% in 1H08 and higher than our initial FY08 projection of 45%. Cash balances at the end of the period stood at S$37.5m, down S$13m over the period owing to payment for construction costs and 1H08 dividend payout of S$4.45m.

Relevance: We revise our DPU forecasts for FY08 and FY09 up by 4.5% and 13%, respectively to account for the better visibility in sustenance of margins. The proposed first phase of asset acquisition from Hyflux will bolster the DPU from FY10 onwards. Maintain BUY, at a revised target price of S$0.62, based on our blended valuation methodology. Key risks include delays in future acquisitions if the credit markets remain tight, and a slower ramp up in utilization rates in industrial areas in the wake of a perceived slowdown in export oriented industries in China.