Tag Archives: Hyflux

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.

Portfolio building: Should we start with dividend or growth stocks

Abstract – In a dialogue with a student, he asked me whether he should start off with growth stocks or dividend stocks if he plans to build a portfolio. This, obviously was not a do-or-die situation, because building a portfolio does not require an instantaneous action or have to be right first time. But still, it actually set me a bit of thinking because that starting point was a long time ago for me. I was trying to picture myself what I would probably do in that situation. Presumably he was young working adult, perhaps with some decent savings. Obviously, he did not divulge how much he had as he meant it to be a passing question.  

Dividend stocks are stocks that pay good dividends. Usually the companies behind these stocks have grown to a level that the growth potential is unlikely to be significant (at least in the near future). Given that the company still has good earning power, they are able to distribute out their earnings in the form of high dividends. Of course, we are talking about companies that are able to distribute sustainably good dividends and not those that distribute dividends from debts. Apart from REITs, some high dividend stocks can have their dividend pay-out as high as 90%. Constant dividends usually help create a floor price for stock unless the market detects a fall in future dividends.

Growth stocks, by their stage of development, distribute little or even no dividend. Investors are usually rewarded through significant growth in the share price (if we purchased the correct stocks). However, we can expect more volatility in their stock price because there is little or no fall-backs on dividends as we go forward in time. The obvious risk of buying growth stocks is when the company share price plunge for whatever reason and shareholders get close to nothing when they sell their shares.

By nature, companies usually start off as a growth stock paying little or no dividends before they finally become mature and start to pay good dividends. So, if we were to buy into such a right stock early enough, we are effectively riding on the path of growing dividend and finally enjoy the big, fat dividend as the company matures. Of course, during its development, investors stand a high risk that the company could not take off, got derailed or becomes debt-laden(*). In such a case, it is likely to end up in a big hit on the share price and, of course, the loss of dividend. In making such decision whether to buy into a growth stock, one really needs to assess the affordability as well as the WILLINGNESS TO LOSE. It is a question of risk tolerance based on our own experience and background. No one else knows better of our own financials and investing character other than ourselves. The only thing that is obvious to me is that this young man is in a life-stage when he has a higher risk tolerance compare to another person supporting a family with mouths to feed. To me, buying the right stock in growth companies actually helps grow our wealth. Imagine if we buy a stock at $5 per share and it grows to $10 per share, it would have grown our wealth by 2 times, apart from the growing dividends along the way.  This is obviously the objective of getting into any investments (not necessary buying into stocks). But, of course, getting into such investments comes with huge risks which we have to be always mindful of. Perhaps, the saving grace in maintaining a growth stock portfolio is that, at any one time, each stock is at a different growth stage and the good and bad ones tend to offset or cancel out each other.

Now on the dividend stocks. It is likely that when a company pays good dividend, it has already passed its growth stage and that is why it is able to pay us good dividends. They are generally proven companies. So, buying a dividend stock is like buying an annuity, as if we pay an insurance company a sum of money and we get back the payments in the form of dividends. There is some kind of protection from an investor’s point of view. On the share price, it is relatively difficult for dividend stocks to advance significantly because a huge percentage of the profit is paid out to the shareholders. In effect, shareholders do not really get to enjoy share price appreciation but just good dividends. Still, this type of investment is good in a falling interest rate environment because risk-averse investors would look for alternative investments to park their money. Obviously, under such a circumstance, there would be price appreciation not due to the company growth but due to liquidity in the system. The situation would certainly reverse itself when we get into upside slope of the interest rate curve. We are likely to see the share price drop because the same group of investors would start to shift their money back to the bank, base on their risk-reward philosophy. Nevertheless, this type of investment appeals to people who do not have an active income and they need to see their returns almost immediately, in particular, the retirees.

Back on the young gentleman’s dilemma. While it is always good to see rewards coming back to our pockets almost immediately after we invested, the uprising interest rate environment would certainly see the value of the portfolio shrinking going forward if we have too many of these high-yield stocks. Perhaps, he can take on a more aggressive path of growth than income at this stage. After all, he has an active income to fall back on. It is unlike another person who has no active income. If he really needs a protection, then perhaps he can separately purchase an annuity. On the other hand, the capital appreciation for growth stocks can be very rewarding. Imagine the above-mentioned growth stock has a dividend yield of just 2% at $5 and it continued with the same yield, would mean that the dividend is 20 cents when the share price is at $10. At the purchase price at $5 with a dividend of 20 cents would mean that the dividend yield is 4%. In time to come, this dividend yield can be even higher than the dividend yield from a dividend paying stock. In effect, it is a capital appreciation, a growing dividend and a low capital outlay. Certainly, it is even more rewarding if we invest the dividends because it is a growth stock. This is exactly how wealth is made. Wealth is not made by buying an annuity. An annuity is just a protection. But that said, we have to constantly aware of the risk that we are in, especially when we hold growth stocks. A lot of growth companies fall from grace, not because they are in the wrong product, but because of pure mismanagement. Never wear a hat that is too big for our head. Certainly for his case, I am not saying that he has to be 100% on growth stock. I am just saying that he can afford to be slightly more aggressive at this life-stage. Taking on some risks at this stage can be very rewarding for the future. But, whether he is willing to take that risk is another question.

(*) At the time of post, at least three SGX stocks were in such a situation, namely, Noble, Midas and Hyflux.

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

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.

Yield hungry? We need to change of our investing paradigm

The much anticipated interest rate hike in December had caused a sharp recent drop in the price of REITs recently. Many REITs are now trading at the 2016 low, retreating generally about 7-10% from its peak level at 2016 high and around 15-20% from their all-time high. During the low interest rate environment like in the past few years, many have seen buying into REITs as a no-brainer investment, with yield of between 5% and 8% of passive income, depending on the type of REITs. With the recent falls, many people see them as opportunities. Whether, these REITs are going to be good investments…well, seriously, I do not know. It is too early to tell. There are actually several other factors apart from the REITs price itself to determine if one is buying into a gem. The income of a REIT can fall drastically because state of economy or a change in the customer mindset, resulting in a drastic fall in the DPU going forward. The REIT manager could also take advantage of the generally depressed property price to add more properties into the REIT portfolio or it could be the REIT has some issue with re-financing such that it has to issue rights at depressed price to get existing unit-holders to support the corporate action. All these could happen with swipe of a pen, to get existing unit-holders to fork out more funds instead of the note-holders getting passive incomes out of the REIT.

In fact, by now many bond-holders or note-holders have experienced rude shocks of bond prices falling off the cliff. Several offshore and marine notes are now trading 35-40 cents on a dollar, erasing two-third of the value. Yes, the note holders had enjoyed 6%-7% in the last one or two good years of coupon distribution, but these returns simply are not able to offset the huge fall in the bond price. Many note-holders are now having legal tussles with the note-issuers. These tussles will take months and even years to resolve with no guarantee that note-holders can get their money back.  After all, it is a situation of a willing buyer and a willing seller when the transaction was made. The promise of high return is bundled together with the risk that the issuer could get into a default.

With the local low interest cycle apparently coming to an end, there came a herd of companies trying to tap into pockets retail investors by issuing notes and perpetual bonds with seemingly high coupon rate ranging between 4.5% and 6% in the first half of the year. These companies are highly indebted. The reality came when Swiber Holdings default its coupon payment in July 2016 and all these bond prices are now trading below the IPO issued prices. Even before the first coupon was issued for all these bonds, the yield has already shot up showing that retail investors are probably paying too much in exchange for the risk assumed. In fact, those that missed the over-subscribed IPOs enjoyed a better yield by buying from the open market. However, the crux of the matter is whether any of these companies will default. It is still too early to know. But we do know that these companies are highly indebted and may get into serious financial trouble when the interest rate perks up.   


With the spectre of interest hikes coming up soon, investors are now off-loading interest rate–sensitive financial assets in exchange for safer assets such as bank stocks, which are said to benefit when interest rate rises. After all, the bank stocks just one week ago, were trading either below book value or close to book value. But again, this is just a flight to safety. While the banks delivered fairly good results in this quarter, it is not expected that they would perform extremely well going forward given the state of the economy and their exposure to the offshore and marine sector. But still, over a short span of a few days, the banks shot up between 3.5% and 8%. While I am generally happy with this situation due to the components of my portfolio, the interest rate increase may be a double-edged sword for the banks. It’s not the time to be too aggressive.

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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.

There is no dearth of investors, but there is a dearth of trades

Senior Correspondent, Goh Eng Yeow, wrote an article “SGX, where have the investors gone?” He cited that economic slowdown and changing demographics are the main culprits. Perhaps these may be some contributing factors, but they have yet to fully explain why trading volume is getting much less. Personally, I think there is a confluence of factors that have been happening that lead to today’s plight.

(1) Low interest rate
First of all, we have been incubated in an extremely low interest environment for far too long. Banks are offering such a low deposit rates that it is no longer viable to keep money in the bank for a long time. These monies are starting to find its way into high yield instruments, such as bonds and notes, perpetual and REITs. Bonds & notes, unfortunately, do not involve the participation of stock remisiers as banks are the ones who brokered those deals. For perpetual and REITs, even though they appear to be trading instruments for the stocks dealers and remisiers, they are not really traded. In my opinion, many clients buy these securities to keep rather than to trade. These instruments offer a much higher yield and there is no point to trade. After all, many of these investments distribute dividends, some as frequent as every quarterly. It does not make sense to trade, especially when the most of these instruments were priced at least $0.70 and above during IPO. It is no point to trade based on a small change of 0.5 to 1.0 cents on a dollar compare to possibly 0.5 to 1.0 cents on a penny stock of say 20 cents per share. Surely, the quantum of these investments cannot be ignored in view of the amount and the number of notes and bond raised during the last few years. Even perpetual bonds were not lack of investors. As recent as just before Swiber defaulted in the bond coupon in end July this year, several perpetual bonds such as Hyflux was selling like hot cakes so much so that they upped the perpetual bond issue to $500m from the originally intended amount of $300m. The amount raised during the issue was even bigger than the company’s market capitalization of about $440m. Besides Hyflux Perennial Real Estate Holdings, Oxley Holdings, and Aspial Corp all managed to upsize their high-yield bonds due to a huge demand. Apart from these paper products, a big chunk of money could have also flowed into properties. Since the global financial crisis in 2008/2009, properties prices have been on the uptrend and the government had to introduce a series of curbs to contain the upward trend. It was only very recently that the trend seemed to have been arrested even though the transacted prices are still on the high side. So, in summary, there is actually a lot of money at the sideline waiting to pounce on opportunities that pop up from time to time. It is just that was not channelled via the stock market.

(2) Penny stock crash
Then there was the penny stock crash during October 2013, when stocks like Blumont Group, Asiasons Capital and LionGold Corp crashed, wiping out more than $5 billion in a single day on 4th October 2013. Within that week, a total of $8 billion had been wiped out. Surely, this had dented the retail investors’ confidence in trading stocks, particularly, the penny stocks. In the 12 months than followed, the trading volume and trading value shrunk by 60% and 30%. Apart from these stocks, many other unrelated penny stocks were also not spared. The crash had reduced many penny stocks to super penny stocks. So, even if the transacted did not change, the transacted amount would still be significantly lower.

(3) Minimum Trading Price (MTP) of 20 cents
The introduction of minimum trading price (MTP) of 20 cents on 1st March 2015 seemed to have taken place at wrong time and wrong place. News were then abound that the FED was considering increasing the interest rate, and this had taken a toll on the overall stock transaction volume. When the requirement was imposed, stocks have to be consolidated to meet this requirement. At that time about one-third of company stock prices on SGX were struggling below 20 cents. This requirement, forced many companies to consolidate their shares making them extremely illiquid. Even though grace periods are extended under certain circumstances, things cannot be changed overnight given that the global economy was only trudging along. Some company shares had to consolidate as much as 100 to 1 share. And after the consolidation, some share prices still fall significantly shrinking market capitalisation even further.

(4) Bond defaults
Before Swiber defaulted on its bond coupons, bond defaults were generally brushed off as isolated cases. The default by Pacific Andes Resources Development Limited (PARD) and PT Trikomsel was largely ignored. It was when Swiber defaulted that investors started to realise that the whole offshore and marine sector was at risk. Many of the related stocks started to tank and many have since become super penny stocks. Several stocks that were traded at around $1 or even more per share are now trading much lower, with some even trading below the MTP.

All in all many stocks are now at extremely low price. With a shrinking volume due to a confluence of these factors as well as extremely low price, it is no wonder than the trades via SGX keeps shrinking.

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.

Post-Swiber: Expect more difficulty for companies to raise funds

The past 12 months have been dominated by companies raising funds through bonds or perpetual issues in anticipation of interest rate hike by FED. There were no short of investors.  Many of the issues were over-subscribed, and most of these companies up-sized their bond issue way above the originally amount. Just by a stroke of their pens, they could easily raise another $50m to $100m. Aspial Corp made 2 issues within 7 months, and in the latest issue recently raised to a maximum of $200m against the original public offer of $50m for a 4-year bond at a coupon of 5.3%. Perennial Real Estate originally planned a $200m 4-year bond issue at 4.55% increased the offer size from $200m to $280m. Hyfux, whose original $300m offer of the 6% perpetual bonds also increased to $500m, even bigger than the market-cap of the company. Whether in the full-fledge corporate bond for high net worth individuals (HNWIs) or sliced tranches for retail investors, there were no short of takers. Investors see these investments as passive incomes in comparison to the bank’s paltry interest rate of less than 1%. Until late last year, defaults on bond coupon payments were almost non-existent. Even when PT Trimkosel Oke and Pacific Andes Resources defaulted more than six months ago, they seemed to be widely ignored as these companies were foreign based. Unfortunately, these bonds were sold through the private banking network, which also meant that some of the local High Net-worth Individuals (HNWIs) had also been affected.  Now with the default of Swiber, investors now suddenly realise that many high-yield bonds are prone to default and the expected return might not duly compensate for the risk. Unfortunately, the damage has already been done. Bondholders suddenly find the recently purchased notes and perpetuals now trading below par. Going forward, at least for the time being, it is unlikely that companies are able to raise funds through this avenue any more. Certainly, banks with their private banking network, are likely to scrutinize the bonds more closely before selling them to their clients.

Following the default of Swiber, banks are also likely to become more cautious with their lending programs. With the ever-increasing non-performance loans (NPLs), company financials will be scrutinized closely and asset value will be assessed with higher safety margins before banks lend out to them. It is certainly not going to be easy for companies to borrow from banks without quality collaterals on the table.

With the bank network being almost severed from them after the Swiber saga, companies may have a hard-time raising funds for their operations. They may have to resort to scaling down their operations and to sell off some of the assets, especially the inoperative ones. Unfortunately, inoperative assets are more of a liability than an asset during bad times because no company would want to stifle their own cash flow by buying assets that not revenue-generating. Even supposedly good assets that are able to preserve values over time, such as properties and land, may not fetch good prices when times are bad or when seller companies are in dire straits.

So what are other options can a company explore to raise funds? Perhaps, issue rights or raise notes or perpetual bonds from retail investors. When a company has to resort to issuing rights during such times, it is likely that company is not in a good shape. In all likelihood, the company share price is trading at their lows. Hence raising rights can be a huge challenge. Many companies, even after shares consolidation, were trading even below 20 cents, which is the Minimum Trading Price (MTP) threshold for SGX shares. Certainly, a right issue will set the trading price below the MTP putting a lot of pressure for them to make good on their share price in future.

So, in summary, even though a company may have several avenues to tap funds, the real situation may not be as rosy. We may say that some companies were lucky to be able to raise bonds before the Swiber saga. In fact, some might have felt even luckier to have raised more than their expected needs. However, we will only know if they are really that lucky somewhere in the future. Paying out coupons of 5%, 6%, 7% and even 8% is no small matter compare to paying a smaller interest to the banks. Paying a bigger quantum as coupons for an enlarged debt is even worse. They may be able to solve their operating needs now, but it is really kicking the bucket down the road because they have to pay for a higher price in future. In all likelihood, companies may have exhausted all the channels of getting cheaper funds, and they have to resort to paying a higher interest to attract investors. Investors, instead of zooming and be attracted the expected return, should now turn the table around and ask himself a critical question. Why does the company willing to pay me 6% (or 7% or 8%) per year in coupons when the bank rate is only around 1%. Only when one starts to ask himself such critical questions would he then become less bias in his thoughts.

Take Care!

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.