Privatisation offer on the table

• Hyflux and Mitsui joined hands, seek delisting of HWT through exit offer priced at S$0.78, 17% premium to 30-day VWAP of S$0.67

• We advise unitholders to accept the offer as capital gain would otherwise be limited, owing to HWT’s inability to source DPU-accretive growth

• Exit offer valuation looks attractive, unitholders will still receive 1H10 DPU payout of ~2.3Scts

Hyflux finds new partner to propel growth. Hyflux today announced – as part of the “Galaxy JV” formed with Mitsui & Co to pursue growth in China’s water sector – the intention to make an exit offer and acquire 100% of the shares of Hyflux Water Trust, and delist it thereafter. Hyflux already owns c.31% of the Trust and will own 50% after delisting, with Mitsui owning the other 50%. Hyflux will fund the acquisition by the sale of 50% interest in another 4 completed plants to Mitsui. The delisting is conditional upon 75% shareholders approval at EGM and is expected to complete by end-2010.

Capital raising vehicle not efficient enough. We believe this is in the best interests of Hyflux, as the Trust had proved to be ineffective as a capital recycling vehicle, especially after the financial crisis rendered funding difficult for the Trust without an adequate scale of operations. Also, the Trust was increasingly looking at a pipeline of projects from Hyflux with long gestation periods, which would not be DPU-accretive for the Trust’s investors. Thus, organic growth options for the Trust remained limited, capping share price performance, investor interests and liquidity.

Exit offer looks attractive though. The exit offer price of S$0.78 is at par with the IPO price, and offers about 14% upside over current price. We view the pricing as fair, given that is at the higher end of dividend yield trading band of 6%. We thus, advise investors to accept the offer. Unitholders will still receive 1H10 DPU payout of around 2.3Scts when HWT releases 2010 results next week.

Hyflux and Mitsui to take Hyflux Water Trust private

Offer, at 78 S’pore cents a unit in cash, values the trust at about S$235m

HYFLUX Limited and Mitsui & Co of Japan are pairing up to take Hyflux Water Trust private at 78 Singapore cents a unit in cash – the same price as when it listed in November 2007. The offer values the trust at about S$235 million.

If the delisting goes through, the trust’s assets – some 18 water treatment plants in China – will be folded into a new joint venture company called Galaxy Newspring, which will also invest in and develop water plants in China. Galaxy will be equally owned by Hyflux and Mitsui, the Japanese trading giant.

Galaxy is also buying four water treatment plants in China from Hyflux with a combined capacity of 165 million litres a day for US$53.1 million. Hyflux will book a S$6 million gain from the transaction.

The tie-up and the proposed delisting marks a change in the way Hyflux operates in its capital-intensive line of business.

Hyflux Water Trust was originally set up as a way for parent-sponsor Hyflux to quickly recycle capital from completed water treatment plants, freeing up its balance sheet for new projects.

But HWT has found it tough-going since its inception, with depressed unit prices driving up yields and new fund raising more difficult than expected amid the global recession.

The four water treatment plants to be purchased by Galaxy were rejected by HWT because they were not yield accretive, Hyflux said. The trust has returned 11.54 cents a unit in distribution since 2008, a return of about 5 per cent, Hyflux said. Based on its listing price of 78 cents, the trust’s yield was 6.4 per cent in 2008 and 6.9 per cent in 2009, but its units have traded under 70 cents for most of the past two years, which has driven its yield up.

The financial crisis of the past two years has also made it tough for the trust to raise funds to take completed plants off the books of its parent-sponsor, lengthening the borrowing process and reducing speed to market, chief executive officer Olivia Lum told analysts and reporters yesterday.

Only last December Hyflux inked a similar deal with Japanese engineering company JGC Corp. The two set up a 50-50 joint venture which bought Hyflux’s flagship 100,000 cubic metre-a-day desalination plant in Tianjin, netting Hyflux a S$12 million divestment gain.

The collaborations with its Japanese partners are seen as a better and quicker way to take on and divest projects and would also provide greater assurance of project financing, analysts say.

From 2006 to 2008, the company rapidly signed contracts for new wastewater plants in China at a rate of three or four a quarter and had 39 in the country by March 2008. Deals there have slowed since as access to financing in China and concerns over whether the trust could take on additional assets have hampered new deals and the company hopes the new system of joint ventures will allow it to take on more and bigger projects.

In North Africa, Hyflux has seen strong new orders from Algeria and the company has hopes of a billion-dollar contract to build desalination plants in Libya.

Trading in Hyflux was halted yesterday for the announcement, with both companies rushing to close a deal before Mitsui announces its results today. Hyflux, which will report half-year results this Thursday, owns just under 32 per cent of the water trust and has undertaken to vote in favour of the deal at a shareholders’ meeting to be called.

The price offered is a 14 per cent premium over HWT’s last traded price on Friday of 68.5 cents, and a 16.6 per cent premium over its volume weighted average price over the past six months.