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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.