DBS Vickers downgraded water treatment firm Hyflux to hold from buy and cut its target price to $1.45 from $1.66, citing less-than-expected second quarter earnings due to weak margins for Singapore.
Shares of Hyflux were up 1.1% at $1.425, and have gained 18.3% so far this year, compared to the FT ST Mid Cap Index’s 18.9% rise.
Hyflux said its second quarter net profit rose 21% from a year earlier to $17.5 million, but DBS noted that gross margin shrank to 35% from 50%, due to higher staff and financing costs.
DBS noted that Hyflux’s management was optimistic about opportunities in the Middle East, especially in Algeria, Saudi Arabia, Oman, Qatar and Kuwait.
The Arab Spring caused a drought in water contracts over the last 2-3 years, resulting in pent-up demand, DBS said, adding it believes Hyflus was bidding for two major projects in Saudi Arabia and Oman.
However, the brokerage noted that margins for contracts in the Middle East may fall due to competition.
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