• We maintain our BUY call on Malayan Banking (Maybank) with an unchanged FV of RM10.70/share. This is based on an ROE of 11.0%, leading to an unchanged FY19 P/BV of 1.5x. We make no changes to our estimates.

• Recall, Maybank’s exposure to Hyflux group totalled RM1.95bil (S$658.6mil) which comprised S$602.4mil to Tuaspring’s integrated water and power plant (IWPP) and S$56.2mil to TuasOne’s waste-to-energy plant (TuasOne).

• The group’s exposure to Tuaspring comprised 83% in the form of a term loan for the development of its IWPP and 17% in the form of a standby letter of credit and marked-tomarket derivatives for interest rate and commodity hedging. Meanwhile, its exposure to TuasOne comprised 83% term loan for the waste water-to-energy plant project with the remaining marked-to-market derivatives for interest rate hedging. The group’s exposure to Hyflux is fully secured against project assets. Based on the 2QFY18 results briefing, we understand that the Tuasping plant has a book value of S$1.3bil. The group’s exposure to Tuaspring is less than 50% of the book value.

• Hyflux Group announced that it has entered into a restructuring agreement with SMI Investments Pte Ltd (SMI). SMI, a white knight, is a consortium formed between Salim Group and Medco Group. Salim Group is experienced in system integration, optimization of water treatment, waste management as well as in power generation. Meanwhile, Medco Group has a strong track record in energy, renewables, utilities and gas businesses across Southeast Asia. Both Salim Group and Medco Group are seen to be reputable parties with the necessary expertise that could provide leverage to Hyflux to continue its project.

• Under the restructuring agreement, SMI will take up 60.0% of the enlarged share capital of Hyflux Ltd for S$400mil. New shares will be issued to SMI. In addition, SMI will provide a loan of S$130mil to Hyflux (shareholder’s loan).

• As part of the restructuring, SMI will also grant an interim working capital of S$30mil to the Hyflux (working capital rescue financing). This funding is only temporary prior to the completion of the SMI’s 60.0% investment, and we understand that it is required to be repaid subsequently.

• The restructuring will require approvals of Singapore’s Public Utilities Board, the National Environment Agency and the Energy Market Authority for the issuance of new shares that will result in the change of control of Hyflux Ltd. Approvals from the Singaporean government and regulatory authorities may be also be required for the completion of the investments by SMI.

• Proceeds from the investment of S$400mil and shareholder’s loans will be utilized to settle Hyflux group’s unsecured debts, preference shares, perpetual securities, contingent debts and trade debts as well as support its working capital needs. We view the above development as positive as the settlement of any unsecured debts will provide relief to Hyflux in its financial cost. Together with the support of working capital requirements by its new shareholder to continue with its project, we expect this to improve Hyflux’s cash flows ahead. As at the end of 1QFY18, Hyflux reported total liabilities of S$2.61bil with loans and borrowings of S$1.54bil in total.

• With the investment from SMI, Hyflux will not be required to dispose of its key assets at a substantial discount to the plant’s book value as reported by the media earlier. This should remove any overhanging concerns on the proceeds from sale of plants coming in below Maybank’s exposure.

• Maybank has already made a prudential collective provisioning of RM315.1mil (S$106.3mil) for Tuaspring and TuasOne in 2QFY18 despite its exposure to Hyflux Group being fully secured. Potentially, the improvement to the cash flows of Hyflux ahead could see a write-back of this provisions.

Source: AmInvest Research - 19 Oct 2018