Hyflux has bounced off lows but is still trading near trough valuations at 11x FY09PE. We believe current risk-reward ratio looks attractive, given 1) excellent near term earnings visibility backed by S$1b of order backlog; 2) potential catalyst of new order wins driven by China’s recent RMB4 trillion stimulus package and 3) continued emphasis on environmental protection globally. The credit situation is no doubt difficult but Hyflux maintains better credit profile than peers owing to a distinguished track record; S$300m of multicurrency debt issue and an ongoing divestiture to Hyflux Water Trust. Hence, we maintain BUY on Hyflux with a revised TP of S$2.13.

Record FY08/09 profits within reach. Despite macro-economic uncertainties resulting in a slowdown of orderflows for the entire water sector, Hyflux will continue to expand revenue and profits in FY09, on the back of its S$1b+ orderbook and proposed divestiture gains. We expect headline net profit of S$60m in FY08 and S$77m in FY09. Existing projects continue to be well funded and are on schedule, according to our latest check with management.

Order news flow would be added catalyst. Hyflux is in talks with Chinese municipals and constantly on the lookout for more desalination projects in Algeria. However, projects are taking longer to finalize as company tries to pick the best projects given current landscape of scarce funding and higher costs. Management is confident of growing orderbook; we believe our new wins estimates of S$300m each for FY09/10 is reasonable compared to S$420m in FY07 and S$820m in FY08.

Revised target price to reflect earlier divestment gains. Further to recent announcement of completed divestiture to HWT, we bring forward recognition of divestment gain to FY08, thereby reducing our FY09 net profit forecast by 11%. Consequently, our SOTP-based target price is revised to S$2.13.