Accounting Analysis Hyflux's accounting policies conform to the latest Singapore Financial Reporting Standards (FRS) and its

accounting reflects its underlying business reality reasonably. However, a potential red flag arises due to several estimations made by managerial discretion. Managers capitalize development expenditure1 according to technological and economical feasibility and estimates future cash flows and discount rate to calculate present value and impairment of assets.1 These allow possible opportunities for earnings manipulation. In addition, there were several nonrecurring gains/losses from FY06 - FY10. For example, government grant issued under Jobs Credit Scheme2 and one time gain on sale of subsidiary2 and PP&E2. These amounts are reclassified and adjusted to determine normalised returns. Financial Analysis Comparative analysis - Using normalised figures, we have compared Hyflux to its closest peers, mainly Hankore Environment Tech Group and Asia Environment Holdings. Hyflux's superior performance, relative to its peers, is shown in its ROE, NOM, asset turnover and financial leverage. On average, ROE, NOM and asset turnover are higher by 11.5%, 5% and 37.3% respectively. Its financial leverage is also lowest among its peers at 2.67 in FY10. However, the comparison has to be taken with discretion. Market capitalizations of Hankore (378 million)3 and Asia Environment (363 million) are lower than Hyflux (1,127 million) and their similarity in the nature of their businesses is 50%.4 Therefore, we focus more on Hyflux's time-series analysis. Time-Series Analysis - Looking at its operating management, there is a sharp dip in NOM of 6.4% in year FY08. This is due to Hyflux's first and world largest seawater desalination project worth US$500 million in Algeria and construction projects in China of RMB945 million5. Hyflux has over incurred its expenses due to its unfamiliarity to such colossal construction project. Revenue has increased by 187% but Operating & Financing Expenses rose significantly by 196% over the previous year, resulting in the decrease in NOM. Means end reversion occurs in FY09 and FY10 as effective cost management is learnt and implemented whilst generating higher sales6. Raw materials and consumables used and subcontractors' costs were contracted by 20% in FY09. For its investment management, an increase in asset turnover of 104% is found in FY08. The large increase was due to under procurement of PP&E that is not in tandem with its construction projects. Asset Turnover declined in FY09 as capital expenditure on PP&E rose significantly by 104% which is in accordance to Hyflux's expansion plans. Disregarding the anomalies found in FY08, we believe Hyflux's NOM and Asset turnover to be fairly stable fluctuating around 15 - 16% and 0.5x respectively. For its financial management, Hyflux has been acquiring more debt into its capital structure since FY06 with generally increasing spread. A decline in Debt to equity ratio to 2.679 in FY10 following a general increase to 2.737 in FY09 was caused by a large increase in equity of S$137.3 million7. Operating cash flows (OCF) was S$49.5 million in FY10 following three years of large and positive figures. Fluctuations in OCF is not uncommon, since the recognition of

construction revenue does not exactly match the amount billed to customers in each period.8 Hyflux Annual Report 2010 note 5 intangible assets. Hyflux Annual Report 2010 note 25 Profit before Income Tax 3 Capital IQ 4 Hyflux Analyst Report by StockMarks 23 August 2011.
1 2 5 6

Hyflux Annual Report 2008 Hyflux Annual Report 2009

7 7 Shares were issued under the Employee Stock Option Scheme and the Warrant Subscription agreement with Istithmar World PJSC. 8 FRS 11