Category Archives: Hyflux

Solution-based water producing company.

Hyflux: Some financial lessons

The timeline on 25 April 2018 has already passed us for more than a month. By now, the holders of the preference share, entitled Hyflux 6% CPS, have resigned to the fact that the preference shares would not be redeemed. According to its prospectus, the coupon rate would be stepped up to 8% if the preference shares were not redeemed. This clause seemed to have relegated in importance as the primary concern of the preference shareholders was whether their capital was at risk. The market, in fact, has already reflected this in early 2018, when the preference share was trading at around 75 cents, giving a yield of about 8%.

And just about two years ago, when Hyflux issued another tranche of unsecured debts at 6% for retail and institutional investors. It was so heavily oversubscribed that the company decided to upsize its offer from $300m to $500m. That was also the time when many companies were making their utmost, and probably, the last-ditch effort at the lowest possible cost to get their hands into investors’ pocket amidst talks of impending rate hikes. Before Hyflux’s issue of its 2nd tranche of its perpetual bonds in the first half of 2016, four companies had already issued perpetual securities to investors at rate between 3.85 and 5.25 per cent. It was a situation of “strike while the iron is hot”. There was no lack of investors at that time.

By now, the truth has set in that investors are not likely get capital back without a deep haircut. While the top executives and the lawyers of the company and the banks are busy working on the re-structuring plans, the likely scenario for the unsecured creditors is that they are forced to become equity shareholders marked at a high conversion share price such that conversion is “out-of-money” against the share price before the suspension. The end result is the float in the system becomes overly large causing the already miserable share price to plunge even further.

What lessons do we draw from the Hyflux saga?

  • Water is essential but no all waters come from Hyflux

I remember asking a student why she bought Hyflux when at the time, the share price was about $1.00 to $1.20. The answer given to me was everyone needs water. True, everyone needs water but not all the waters that we consume come from Hyflux. In fact, most of our drinking waters do not come from Hyflux.

  • We are buying a business, not a star

In the same occasion, another lady told me that she had bought Hyflux at more than $2 (can’t remember the exact purchase price that she had tabled). Based on the price chart, she must have bought the shares around 2010. That was the time when the stock was trading at its historical high. In a situation when the share price was already trading at 50% of her purchase price, it was a situation of between the devil and the deep blue sea. She did not divulge why she bought the stocks, but I believe it was probably due to one of the two reasons. Either she thought that the product was essential, or because she idolized a lady chairman. After all, at that time, a lot of attention have been placed on female entrepreneurs, businesswomen and female politicians. The point here is that gender should not be seen as the determining factor to decide if a business is going to be successful. A postal man or woman could also still end up in hard times at one point or another.

  • Debt-laden companies usually end up miserably – There may be exceptions but they are rare and far in-between. Throughout my years in the stock market, I cannot find anything more true than this. The irony is heavy debts often breeds even heavier future debts causing the interest cover to get thinner in each passing year. A quick review showed that the interest cover for 2016 was around 0.08 and the net profit was negative for FY 2017. The operational cash flow has also been negative for the past few years. In fact, the continual negative cash flow is usually the leading indicator of the worst yet to come. Many fundamentally-deteriorating companies often face negative cash flow even though the P&L statement may still show positive net profit for a number of years. To enable the company to continue operation, it has to get into more debts and there would come to a breaking point that results in bond defaults and share price falling off the cliff. Actually, this observation is not new. There have been quite a number of precedents in the recent years.

There may be one or two more considerations. They are not necessary related to the above stock in particular. I believe investors could identify them as they become more experience in their investing journey. Happy investing!

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it. 

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

An essential product does not mean its company share price will continue grow

I met two persons, who told me that they had Hyflux shares. I met one of them some 4-5 years ago and the other 2-3 years ago. Both of them have held the stocks for some time. So I presume they have bought the shares 5-6 years and 3-4 years ago respectively. If I remember correctly, first one told me she bought the stock at $2.10 and the other bought at $1.02 per share. When I asked them why they bought the stocks, the common reply was “Everyone needs water.”

When I checked the price today, it is about $0.46 per share. Should they have kept the shares till today, the loss would be about 78% and 55% respectively. This goes to show that it is not necessary that the share price of companies producing essential products will continue to grow. Essentially, the stock price still depends very much on fundamental results like profitability, capital structure, management etc. When I look into the historical chart, the share price went up as high as $3.50 in year 2010. So, I believe when they bought the stocks, they must be thinking that stock was cheap compared to the price reached in 2010. After all, “everyone needs water” as they claimed. Perhaps they have been in it for a wrong reason. I agree that everyone needs water, but may I add that not all drinking water has to come from Hyflux.

Since then, I took note of Hyflux share price from time to time. It has already been falling gradually. In all these years, it has been quite deep in debts. They also had raised two perpetual bonds. The amount raised in the latest perpetual bond was $500m up-sized from the original planned amount of $300m. The total amount raised was higher than its market capitalization of about $362m based on today’s price at 46 cents. The heavy debt has taken a toll on the share price. Perhaps, the decent financial results released this week helped to break the continual fall in the share price, but still, it needs to resolve its debt issue before the stock price can climb convincingly again. So, the conclusion I have is that the two people who had bought the stock might have overlooked the capital structure and had focused too much on the stock price.

Extending the same arguments, there are actually many non-essential but sexy and well-loved products on the market. The share price of these companies has been very strong and their cash holding can be tremendous. Apple Inc is one of them. Think about it. We do not really need an iphone to live. Years ago, there were no iphones, but yet we still continue to survive as a civilisation. Even till today, they are many who simply live by surviving on food, water and shelter, but go without an iphone. Yet, the share price of Apple Inc. continues to be strong and unrelenting.

In summary, it does not mean that a company producing a product viewed as essential (not exactly though, as the process is not essential) will always see its share price growing. It is still very much dependent on a few fundamental attributes like management, profitability, cash flow etc.

Happy investing!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.