Hyflux @ 3.88 ( Water / Singapore ) 6 comments
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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.