HWT – DBS

No pick up in utilisation rates yet

At a Glance

• 3Q09 distributable cash of S$3.5m in line with expectations – equates to 1.16Scts in DPU
• 2H09 DPU guidance maintained at 2.86Sccts – can be met with partial waiver from sponsor, Hyflux
• However, utilisation rate stays flat at 45%; management indicates muted demand growth over next 2-3 quarters
• Maintain HOLD in the absence of catalysts, TP S$0.65.

Comment on Results
With the addition of a new plant at the end of June’09, average treatment volumes picked up 10.2% from 234,000 cu m/day in 2Q09 to 258,000 cu m/day in 3Q09. This translated to a 10% q-oq rise in tariff receipts – from S$6.9m in 2Q09 to S$7.6m in 3Q09.

Operating costs were again well controlled, and net operating income was 17% higher q-o-q at S$3.2m. However, this did not translate to a growth in distributable income  which stayed largely flat at S$3.5m for the quarter, implying a DPU of 1.16Scts for 3Q09. Higher interest expenses and the absence of interest rate swap gains resulted in this flat q-o-q performance.

Outlook & Recommendation
As we have highlighted before, DPU payout for 2H09 is protected by the Sponsor’s waiver, whereby Hyflux will subordinate its share of distribution entitlement to the extent required to ensure that 2H09 DPU projection of 2.86Scts is achieved. We estimate Hyflux may have to waive about 45-50% of its entitlements in 2H09.

However, we believe FY10 DPU may take a dip, in the absence of any such waiver. Going forward, management indicated that growth in demand for water treatment would be muted over the next 2-3 quarters, as new industries are not likely to be established in the industrial parks (where HWT operates) in the near-term, following the global slowdown. Acquisitions will be the key growth driver, but we do not foresee any action before 2H-FY10. Thus – in the absence of any positive near-term catalysts – we continue to maintain our HOLD call on the stock, TP unchanged at S$0.65.