What Are The Implications For Hyflux Ltd’s Investors After The Company’s Latest Project Win?

Yesterday, Hyflux Ltd (SGX: 600) announced that a consortium it’s in had been named the preferred bidder by Singapore’s National Environment Agency (NEA) for the development of a waste-to-energy (WTE) plant in Tuas, Singapore.

The deal is under a Design-Build-Own-Operate scheme and will see the consortium – consisting of Hyflux and Mitsubishi Heavy Industries – providing waste treatment services exclusively to NEA for a period of 25 years.

Here’s what you need to know about the S$750 million deal and how it affects Hyflux.

The project

The project is expected to be completed by 2019 and is awarded under the Design-Build-Own-Operate scheme as I had already mentioned.

As the name suggests, this means that the winning bidder will get to design the plant, build it, own the project, as well as run the plant for an agreed time period.

The new WTE plant will be the sixth such facility in Singapore and will be capable of processing 3,600 tonnes of waste per day and generating 120 MW of energy. For perspective, Singapore’s four WTE plants (the first plant had been shut down in 2009) had burnt through 7,870 tonnes of waste per day in 2014.

The NEA had established the project to meet growing waste disposal demand which is expected to materialise with Singapore’s economic and population growth.

Ownership structure

Hyflux will hold a 75% stake in the project while Mitsubishi Heavy Industries will own the remaining 25%. In terms of management of the project, Hyflux will be in charge of the engineering, procurement, and construction works while Mitsubishi Heavy Industries will be providing the technological know-how.

The risks involved

To bring the project to life, Hyflux may need to raise additional capital given that it has cash resources of ‘only’ S$284 million on its balance sheet as of 30 June 2015.

If that really is the case, Hyflux’s balance sheet may weaken and that’s a risk investors have to note. As of 30 June 2015, Hyflux has a total debt to equity ratio of 88% with around S$1.2 billion in total borrowings.

Foolish Summary

The new S$750 million WTE project awarded by the NEA can benefit Hyflux by providing the company with recurring income for decades.

But, there are some short-term risks for the company as it’s likely that it would have to take on more borrowings to finance the project. Given Hyflux’s already-strained balance sheet, investors would have to keep a close watch on the project’s progress.

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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 does not own shares in any companies mentioned above.