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Wednesday, June 01, 2005

Hyflux @ 3.88 ( Water / Singapore ) 6 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Amazingly frothy valuation of 40X PE and 10X P/NTA
2.CEO in profit-taking mood

One of the stocks where nothing is wrong with the company but something is wrong with its share price. I could fall flat on my face predicting that there is not much upside potential on the price but great downside risk. It has been one of the all-time great gainers in recent years; it could yet retrace the upward steps that it took.

First a look at the merits of the company. It is probably the biggest pure water play in Singapore, with about $90 million revenue in FY04. It enjoys consistent net profit margins of 20-30%, and annual returns on equity of above 20% since the turn of the millenium, even through the recession years of 2001-03. It has landed plum projects in the Middle East and China. It has blue-chip institutional investors, such as 2G Capital, state-linked Temasek and even an Arab strategic investor Isthimar recently.

The last point might explain why it is valued at 40 times trailing earnings multiple, an astonishingly frothy valuation that is more than double of any other listed water engineering company in Singapore. It is the confluence of two buying themes, the Temasek-linked theme and the Middle-East theme. Yet all this, as a qualitative assessment, has likely been priced into the stock. Note also that net tangible asset backing is less than one-tenth of the share price, at about 36 cents per share. Employing Graham-speak, there is little margin of safety. Note also that the recent sale of shares to Isthimar was via placement of personal shares from CEO Olivia Lum, suggesting she is in profit-taking mode. Not a good sign.

Stock prices are no different from other phenomena: they revert to the mean over the long term. It is quite likely that that reversion could happen sooner rather than later. Typically for such strong companies the price tends to stagnate before correcting slowly; not a sharp plunge as for weak concept stocks.

(1) The latest analyst report from Westcomb
(2) The announcement of share sale to Isthimar on 8 Oct 2004. Note that the vendor shares are from Olivia Lum.




Anonymous Anonymous said...

You're damn lousy.
Hyflux has gone to the stratosphere since you warned!
If you're an analyst, you would have been doubt!

7/21/2005 8:07 PM  
Anonymous Anonymous said...

To the previous anonymous,

on hindsight, look at hyflux's price now and you will noe tt our blogger here does make sense.

8/05/2005 8:33 PM  
Blogger DanielXX said...

Hi to the 2nd anonymous,

I'll be the first to say that I am still wrong on this one currently. You see, Hyflux recently underwent a one for two bonus issue, so if today's price of $3.56 is adjusted to pre-bonus it's actually $5.34.

Ha guess your impression of me is diminished.

8/05/2005 8:59 PM  
Anonymous Anonymous said...

Hi Daniel,

2nd anonymous here.

It's okie, I guess all of us are learning as we go along. In any case, I believe in fundamentals. Given the prevalent bullish market sentiments, unless there are new developments to Hyflux which make the market so optimistic abt the company, otherwise signs are there that it may be overvalued? (I am not sure myself, but analyst forecasts from JP, GK and DBS set TP near $4)

8/07/2005 4:18 PM  
Blogger Stargate said...

Detractors who went it to buy must be really feeling the pain now. Of course, adjusted-wise, the stock is still trading at a premium since your warning but those who bought at the stop -ouch!

8/11/2005 1:41 PM  
Anonymous Anonymous said...

The stock is going(or already has gone) into a tailspin. Bottomless pit. Catch falling knife, NOT!

Not vested and not intending to, till it hits penny status.


Manual date stamp: 19/11/05

11/19/2005 10:48 AM  

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