Tag Archives: debts

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.

Good company’s management? Look at the company’s financial trend

Many people asked how to evaluate the management’s ability. Unlike calculating ratios, it is one of the non-quantitative factors. It involves a bit of science and a bit of art. By the term, Management, I meant to loosely mean the company directors and the company executives taken collectively even though they are supposed to play different roles in their respective positions. The point here is that most of us do not have the luxury of knowing them personally. Even if we do, it can be very different from the perspective of personal friends and from the perspective of shareholders. Many people mentioned that the only way to know the management personally is to be a shareholder and, by the time, we get to know them better, we have already had a stake in the company. This means our fate as far as the company is concerned is now in their hands. If the management turns out to be a lousy one, it is hard to get out because the share price keeps falling. It is true. Usually, a falling share price has a lot to do with how a company is managed. Similarly, the reverse is also true. Well managed companies are ones that will become the blue-chips of tomorrow. Very often, the types of products are not the driving factor that affects the share price. It is usually how a company is managed that drives the share price. Remember, resources cannot simply move by themselves and a company’s fund cannot be operated by itself without the management’s hands in it. While I do not wish to mention unworthy companies (unless you are my student discussing in a private setting) in this public space, good companies certainly deserve a mention.

Take a look at Venture Corporation. When I first got to know about this company, it was still in Sesdaq (a predecessor of catalist) in the 90s. Its share price was about $4. Today, it is trading at north of $9 paying out a dividend of $500 per 1000 shares. Of course, depending on the way we look at it, paying out high dividend does not necessary mean that the company is investible. However, if the company is able to dish out high dividend at a high payout ratio in a sustainable way, it does throw some light on the company’s good financial management. Certainly, the company would not be able to do it if the debts are high and its ability to keep its debts low provides further endorsement of the management’s financial management capability. As a quick glimpse, the total debt was $92.7m against the quarterly revenue of $680m, which should translate to about $2.5-$3.0b for the 4 quarters. [Note: This is not an advice to buy or sell this stock as the key favourable factors have already been built in the price of the stock.]

I remember another company – Cerebos Pacific.  I had held the stock for many years buying in consistently with an average price of $2.50 per share in the early 2000s. It paid, without fail, a normal dividend of 6 cents and a special dividend of 9 cents making a total dividend of 25 cents every year. This translates to a yield of about 10% per year. The reason for its ability to pay the special dividend was clearly its low debts position.  The company’s finance cost was only around $3.5 to $3.9m compare to the revenue to nearly $1b for the last reported financial year. After 10 years of receiving the dividends, it can almost be said that we did not pay anything for the stock (apart from taking into consideration of time value of money, of course.) When the parent company Suntory Ltd took it private in 2012, the offer was a whopping $6.60 per share.  While the company is giving out special dividends, the company was actually in the midst of building new manufacturing plants in Thailand. This meant that cash flow of the business had to be so strong that the management could continue to distribute special dividends to shareholders.

While I am not saying that low debt is always good as it sometimes meant that the company is not optimising its sources of fund, but we can tell over time that management is consistently managing its finance prudently, increasing value for the company and enabling dividends to be paid out consistently without affecting the company’s cash flow.

Perhaps, the next time, we should be talking about negative companies. Until then, enjoy your investing journey.

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned herein. The numbers used are the past performances and they do not represent future performances.

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.