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Can Hyflux’s New Latin American Venture Jump-start Its Growth?

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Two days ago, Hyflux (SGX: 600) announced that its chief executive Ms. Olivia Lum had just signed a memorandum of understanding (MOU) with Mexico’s main infrastructure bank, Banco Interacciones. This marks water management and treatment outfit Hyflux’s first step into the Latin American market.

Under the MOU, the two companies will be working together on an exclusive basis in sourcing early-stage and greenfield water-related infrastructure projects in Mexico. Hyflux will bring to the partnership a wealth of experience and technical know-how in water and environmental solutions while Interacciones will focus on using its local network to source for opportunities and provide financing solutions for Hyflux in Mexico.

Hyflux’s business has been under pressure for quite a while now with its net profit dropping from S$75 million in 2009 to only S$44 million last year. Its return on equity has also plunged from 20.5% in 2009 to 4.1% last year despite soaring debt-levels (generally speaking, companies can juice their returns on equity by taking on more debt).

The company currently still gets more than 90% of its sales from municipal projects with the rest coming from industrial projects. As of last year, Asia represents the main geographical source of revenue for Hyflux.

But, that might all change in the years ahead: Currently, the group does not have any revenue coming from Mexico and the new MOU might result in a significant area of new growth for Hyflux.

The group is looking at the possibility of obtaining 3 projects in the country this year and has cast its eyes on many more in the next five years. If this partnership with Banco Interacciones is successful, Mexico might end up being one of the largest markets for Hyflux.

That said, there are risks that come with the promise of growth. Besides execution-related risks (delayed projects, cost overruns, accidents etc.), Hyflux also has a highly-leveraged balance sheet.

From its first quarter results, Hyflux has a net gearing of 62% but a large portion of its equity (close to a quarter) is in the form of perpetual capital securities; such a security is more akin to debt and is different from the common shares of Hyflux. If the perpetual securities are stripped away from Hyflux’s equity, its net gearing would increase even more.

That’s something for investors to keep in mind for Hyflux if or when it has to borrow large amounts of capital to finance any new Mexican projects.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.