Hyflux Water: First Test of Strategy

Hyflux Water Trust is now facing the first test of their business strategy. For those who don’t know, Hyflux Water Trust is a spinoff of Hyflux — the parent company is a developer of water treatment technologies and a builder of water treatment plants; the Trust was spun off to own and operate those plants under what are generally long term contracts with governments.

The Trust launched with a modest yield of 6-7% and little to no debt, and their only other real asset is a “right of first refusal/right to match” agreement with Hyflux that gives them the right to buy additional water plants for their portfolio. The subtext has been that Hyflux wants the Trust to buy these facilities as they are brought online, since the companies continue to have a close relationship, but there is no particular guarantee that the Trust will end up buying all the facilities on which it has that right to offer first and match other offers.

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There are two subtexts with Hyflux recently that have been interesting:

First, their biggest project is probably not eligible for the Trust’s purchase because it’s not wholly owned by Hyflux — that’s the Algerian desalination plant which will be only 51% owned by Hyflux. This may have been a surprise to a few folks, and part of the reason for a recent decline in the stock.

And second, this sector is really heating up — there are new Trusts and investment funds being started for Asian water infrastructure now, though Hyflux led the way as far as creating a vehicle for individual investors. That means a couple things to me: both that the prices for Hyflux’s plants might get bid up if other funds wish to bid on them, which might dampen Hyflux Water’s expected returns; and second, on the flip side, that there is going to be a continuously growing market for these assets and, therefore, the plants that are already owned by Hyflux Water will, in theory, become more valuable.

If I were to guess, I’d say that Hyflux Water Trust will end up buying all of the facilities offered by Hyflux, which would just about double the number of plants in their portfolio; and I’d say that the chances of increasing yields are pretty good because of the fact that they’re likely to use debt ...

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