FY08 was a record year for Hyflux in terms of operating performance and orderbook growth. This year, the challenging climate and limited funding will inevitably suppress orderbook growth. But, we believe Hyflux can still make another record in FY09 if they can manage costs and execute well on the S$1b worth of projects in their existing portfolio. Maintain Buy, TP S$1.96.

4Q08 results broadly in line. Sales of S$179m exceeded our forecast of S$108m due to stronger municipal, partially offset by lower industrial sales. But, operating margin was lower at 13.4% compared to our 17% forecast because of higher selling costs. Coupled with a S$6.9m provision for trade and receivables for industrial customers, net profit of S$13.4m (-42% y-o-y) almost matched our S$14.2m projection. Gearing remained relatively flat at 0.54x. The company proposed a doubling in dividend to 3.43 Scts, translating to 2% yield.

Earnings visibility secured. Notwithstanding the challenging environment, Hyflux has reasonable revenue and profit visibility for the next two years, underpinned by S$1b of order backlog. Of which, 50% is expected to be recognized in FY09. In view of the abundant opportunities in Northern China and Algeria, management remains confident of growing net orderbook by 20% annually. We have assumed new EPC wins of S$270m in FY09 (FY08: S$819m) and S$27m of this to be realized this year.

FY09 earnings trimmed by 7%, to account for lower margin assumption. Consequently, our SOTP-based target price is revised to S$1.96, translating to 18% upside. Maintain Buy.