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Would Peter Lynch Buy Hyflux?

HyfluxPeter Lynch likes simple-to-understand companies. He has a penchant for businesses that can be easy enough to describe using a crayon. So here is a crayon’s tip perspective of Hyflux (SGX: 600).

Hyflux takes dirty water, filters it and delivers potable water to its users. The S$980m company’s products range from something that can be as small a jug, which would fit onto a domestic kitchen worktop, to a custom-built desalination plant suitable for a large city.

Lynch likes fast-growing companies. Hyflux in its early days would certainly fit the bill. Between 1997 and 2007, revenues at the water-filtration company jumped from around $4m to $192m. That is a 48-fold increase in ten years. That would also equate to an annualised increase of around 48% a year.

However, growth appears to have stagnated between 2008 and 2013.

The slowdown in growth has filtered down to the bottom line, which is showing signs of fatigue. In 2008, Net Income was S$59m. In 2013, Net Income came in at S$44m. Meanwhile, the company is still valued at almost 30 times earnings based on its share price of S$1.20 and estimated earnings per share of 4 cents.

Peter Lynch also likes to see lots of cash on the balance sheet. That is not something that Hyflux has an abundance of. In 2013, it had around $247m in readies. But it also had debts of S$1,274m, which would mean it had a net debt position of S$1,027m.

In its favour, Hyflux has been paying dividends. Last year it paid out S$0.02, which is down from S$0.03 the previous year.

Worryingly, though, the payout ratio has crept up slowly over the years. In 2008, it was an affordable 17%. By 2010, the payout ratio had increased to 40%. Last year it was 114%, which would mean that it is paid out more than it earned.

Hyflux was a great growth stock when it first floated onto the Singapore market after the turn of the Millennium. It might even have been on Peter Lynch’s radar at the time. Between 2001 and 2005 the shares climbed from around $0.10 to over $2.50.

But even Lynch would have to admit that, perhaps, the best days of Hyflux’s growth might be behind it now.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.