HWT – DBSV

Volumes show no signs of picking up

At a Glance

• Generates distributable cash flow of 1.16Scts per unit – down 19% q-o-q – lower than estimates

• Weak water treatment demand at industrial parks compounded by seasonal and one-off factors

• Cut FY10-11 DPU estimates by 6-13%.

• Maintain HOLD, TP revised down slightly to S$0.68

Comment on Results

Downside risks prevailed. Water treatment volumes were weak in 1Q10, falling 12% q-o-q, owing to seasonal weakness caused by the CNY holiday period, a temporary closure at one plant, as well as the lack of any noticeable pick up in activity at the industrial parks despite the broadly improving economic conditions.

Water tariff receipts of S$6.9m (up 3% q-o-q) were somewhat boosted by the minimum offtake payments for the closed plant, but core operating margin dipped further to 35% vs. 37% in 4Q09. Interest expenses were lower in 1Q10 owing to the lower prevailing SOR benchmark, but could increase, going forward. The Trustee Manager is currently negotiating a refinancing agreement for the existing US$66m credit facility (expiring in February 2011), which would carry a higher interest spread.

Outlook & Recommendation

No waivers from Sponsor any more. The DPU subordination period ended in FY09, and as such we expect FY10 DPU to fall significantly short of the 5.42Scts paid out in FY09. Given the continued weakness in volume demand, and the absence of any kickers for the rest of FY09, we cut our FY09-10 DPU estimates by 6-13% respectively to 4.7-5.4Scts. This implies a FY10 DPU yield of 7% at current prices, which we view as fair. Maintain HOLD. Our DDMbased TP (WACC 9.5%) is revised down slightly to S$0.68 to reflect the lower DPU estimates.

Management ruled out any acquisitions over the next 6 months. The strategy now is to acquire completed plants only when they reach a certain level of operating maturity. Expansion works at four plants are ongoing, and should complete in FY11. Till then, treatment volumes and cash flows should remain largely flattish.