HWT – DBSV

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.