DBSVickers Report - 04 April 2008

Hyflux Water Trust (Buy (Initiating Coverage); S$0.59; Bloomberg: HYFT SP)
Ready To Surf Up
Price Target : 12-Month S$ 0.78
BY: Singapore Research Team +65 6533 9688 and : Ai Teng Tan +65 6398 7967

Story: Hyflux Water Trust (“HWT”) is the first pure-play water trust to be listed in the region and should benefit from strong market fundamentals in the water infrastructure sector in China.

Point: The initial portfolio consists of water-related assets – water treatment plants, wastewater treatment plants and water recycling plants – capable of supplying a total capacity of 445,000 cu m / day in key industrial belts of high growth provinces in China. Growth potential in the initial years will stem from completing plants and escalating utilization rates of existing plants, which could lead to an 82% increase in annual tariff receipts over 2008-2010. Additionally, Hyflux has granted HWT the rights of first offer and refusal (“ROFOAR”) to a pipeline of assets with total design capacity of 760,000 cu m/ day, all ready to be injected into the trust in tranches every 12-18 months. HWT’s debt free position at IPO also leaves significant headroom for debt-sponsored acquisitions in the future.

Relevance: HWT is a defensive earnings play with predictable cash flows, promising a DPU yield of 7-9% for FY08 and FY09. At current valuation of 0.88x P/BV, HWT compares favourably with REITS and other infrastructure/ shipping trusts listed in Singapore, but with a much higher debt headroom to fund stronger growth potential. We believe the counter will outperform over time as HWT begins to deliver on it post-IPO acquisition schedule, just as market has favoured developer-backed REITs which have delivered on their acquisition promises. We initiate coverage on HWT with a BUY call at a DDM-backed Target Price of S$0.78 (WACC 10.0%).