Hyflux

[Musicwhiz]

Business Times - 27 Apr 2011

Hyflux preference shares up 3.1% on debut

Issued at $100 apiece, the stock closes at $103.02 on first trading day

By JAMIE LEE

HYFLUX'S preference shares, issued at $100 apiece, surged as much as $3.10 or 3.1 per cent to $103.10 on its trading debut yesterday. The stock, traded in board lots of 10 shares each, closed the day at $103.02. It attracted attention for its annual 6 per cent dividend rate. Hyflux has the option to redeem the shares on or after April 25, 2018. If not redeemed then, the dividend rate will step up to 8 per cent.

With the minimum purchase under the public offer of 100 shares, retail investors who missed out on the shares in the ballot would have had to fork out some $300 more yesterday for the same number of shares.

They would also have to accept a smaller yield. The dividend yield of the shares at their closing price yesterday stood at 5.82 per cent.

Hyflux sold $400 million worth of preference shares, with $200 million of the shares set aside for retail investors, $190 million placed to institutional players, and the remaining $10 million for its directors, management and employees, and its subsidiaries under the reserve offer.

The offer of these Class A shares - the first batch of preference shares offered by the company - was double its original subscription size of $200 million.

The public offer attracted a subscription rate of five times.

According to the balloting results, about 10,000 applicants who applied for 100 shares each - or put up $10,000 upfront - received 30 shares each.

Five individuals who put up at least $2 million upfront for at least 20,000 shares received 3,170 shares each, costing $317,000.

Hyflux received about $1.4 billion in applications under the placement offer. Under the placement, more than 70 per cent of the preference shares went to private banks.

The rest of the shares were sold to asset managers and banks.

The non-convertible shares are perpetual in nature, which means that they have no expiry date but can be redeemed by the company.

[Jared Seah]

2 interesting scenarios:

1) This june 2011, let's see if Bernanke will have QE3. If yes, then interest rates will continue to be low. This bodes well for Hyflux preference shares and bonds. But if Bernanke indicates US will start to "normalise" interest rates, well........

2) Even more frightening is S&P downgrade on US 10 year treasuries. If risk free is no longer risk free, then all "debts" will be re-rated....
I may have to realign my portfolio to include more commodities!

[corydorus]

AUD currency will have another spike if that happens. A good alternative to commodities, easy to access, get interests and do not need to worry about fraud.


Cory

[RBM]

I am new to this so I had better make three declarations up front:

a. The other day I read in one Hyflux newspaper report a reference to "Botanical Garden Retirees" discussing the Preference Share Issue. I'm guilty as charged, although only semi-retired.

b. I have bought some Hyflux Preference Shares. Possibly more than I should have.

c. Some of the posts on this blogsite have been ten-out-of-ten stuff and I doubt I can come anywhere near the quality of their insightfull input.

I went in because of three key drivers: the coupon, the cumulative nature of the shares and I wanted a piece of my portfolio in fixed highish interest (I also have DBS 4.7%'s). I was and remain concerned regarding Hyflux's material debt level, its exposure to MENA countries and that this was their first Preference Share issue (no track record etc.). I was also concerned that the company availed itself of the Doubling-Up option - investors can only hope the Board doesn't allow the S$ 400 Mln to burn a hole in their pockets and they desist from further MENA forays.

Since going in I have been heartened to learn that:

i) 6 of Hyflux's 7 Directors have bought Preference Shares - if my arithmetic is correct ......... totalling 44,120 units. One Non-exec - Raj Mitta - took out 20,000 shares (S$ 2 Mln nominal value) and another bought 12,000 shares (S$ 1.2 Mln nominal value). The only Director not to buy the PS's (so far?) appears to be the one who sold out all his ordinary shares recently.

ii) Since listing, the PS's are trading at 103.00 or a tad above. Whenever the price drops near 103.00 it appears there is a buyer or buyers who want a decent sized chunk at 103.00....(but not at a higher price). The share price closed at 103.04 today, Thursday.

iii) I understand institutional interest remains strong. And us Botanical Garden types actually want to retain our units for the longer term (because of the coupon etc.) rather than make a quick small buck. Volumes in the first three trading days are less than I had expected.

iv) the US Fed Chief's remarks yesterday, which imply that interest rates will remain low near term, which should bode well for near-term Preference Share pricing in general.

I do not know if Hyflux's Directors have any trading restrictions imposed on them vis-a-vis their Preference Share holdings (e.g. minimum tenure) but it will be worthwhile monitoring their future dealings. I note that they purchased these holdings at par value. In any event ..... the Directors have provided us more humble PS holders with a potentially useful barometer.

Just My Thoughts
RBM - Retired Botanical MatSalleh

[Musicwhiz]

Business Times - 06 May 2011

Cost control, margin growth raise Hyflux net

Q1 profit up 15% to $7.4m despite 14% fall in revenue

By MINDY TAN

MAINBOARD-LISTED Hyflux Ltd's first-quarter net profit rose 15 per cent to $7.4 million, from $6.4 million a year ago. This was achieved despite a 14 per cent drop in revenue to $86.8 million. The higher net profit was attributed to the group's cost management strategies and growth in gross margin.

The group registered improvement in gross margin to 51 per cent from 41 per cent in the same period in FY2010.

The fall in revenue was largely attributed to projects in the Middle East and North African markets (MENA) approaching the final stages of the engineering, procurement, and construction works.

The MENA markets contributed some 39 per cent of total revenue, down from 78 per cent in the first quarter of FY2010. China and Singapore made up the remaining 61 per cent.

Group president and chief executive Olivia Lum said: 'The better performance of the Chinese market came through as we re-aligned our focus to take advantage of the increased opportunities in the Chinese water sector and the higher demand for water by industrial parks around China.'

Moving forward, the group expects Singapore and China projects to drive performance. A total of $850 million worth of projects in these two countries were secured in the first quarter.

In April, Hyflux, through its wholly owned subsidiary, Tuaspring Pte Ltd, sealed a 25-year Water Purchase Agreement with PUB, Singapore's national water agency, to supply desalinated water from a seawater reverse osmosis desalination plant which Hyflux will be developing and operating upon its completion in 2013.

In China, the group intends to build on the momentum of its order book growth in the first quarter. This will be supported by the rising prospects in China's water sector where investments in water infrastructure projects are estimated to double from US$30 billion in 2010 to US$60 billion from 2011.

The period saw earnings per share rising 7.5 per cent to 0.86 cents.

The group's cash position decreased to $165.4 million as at March 31, 2011 from $222.3 million as at Dec 31, 2010. Net cash of $54.3 million was used in the group's operating activities. Cash used in investing activities for the period was largely for capital expenditure of property, plant and equipment and intangible assets to support expansion.

Apart from China, India and Asean markets, Hyflux intends to explore opportunities globally including Australia and Latin America where there is an uptrend in demand for membrane-based technology solutions.

No dividend was declared for the period. Hyflux closed trading yesterday down 6 cents at $1.98.

[RBM]

I am vested in Hyflux Preference Shares.

Today Hyflux PS's closed at their highest level since listing, at S$ 106.36. Since listing at end April the PS's steadily rose up to 106.0 and have unexcitingly stayed above that level since. On top of the 6% p.a. coupon, this isn't too shabby a return for "mature codgers" like me - in the directionless market we seem to be in at the moment, I'm not complaining. I can't help feeling that yesterdays remarks by the US Fed Chief and similar recent utterings by other influential types imply lowish interest rates for a tad longer than many thought ........... and for Singapore PS's in general this is good news.

I am wondering if other non-financial listed companies will henceforth look more seriously at PS's when considering re-financing - it enables them to lock in their interest rates (if they are concerned about the impact of rising interest rates what better time to lock in a coupon than now?), for those with a good track record I would wager they could secure a coupon less than Hyflux's 6% p.a. ...... and we now have the "Hyflux precedent", which seems to have gone well for the mother corporation. Prior to this, PS's in Singapore seemed to be the domain of Banks.

On a somewhat related note .......... personally speaking I don't like the kind of financing we have seen e.g. Q&M Dental take out recently with IFC. Part of the loan package allowed IFC to convert to Q&M shares at a heavily discounted share price. Wanted to get that one off my chest.

[Musicwhiz]

I am vested in Hyflux Preference Shares.

Today Hyflux PS's closed at their highest level since listing, at S$ 106.36. Since listing at end April the PS's steadily rose up to 106.0 and have unexcitingly stayed above that level since. On top of the 6% p.a. coupon, this isn't too shabby a return for "mature codgers" like me - in the directionless market we seem to be in at the moment, I'm not complaining. I can't help feeling that yesterdays remarks by the US Fed Chief and similar recent utterings by other influential types imply lowish interest rates for a tad longer than many thought ........... and for Singapore PS's in general this is good news.

I am wondering if other non-financial listed companies will henceforth look more seriously at PS's when considering re-financing - it enables them to lock in their interest rates (if they are concerned about the impact of rising interest rates what better time to lock in a coupon than now?), for those with a good track record I would wager they could secure a coupon less than Hyflux's 6% p.a. ...... and we now have the "Hyflux precedent", which seems to have gone well for the mother corporation. Prior to this, PS's in Singapore seemed to be the domain of Banks.

On a somewhat related note .......... personally speaking I don't like the kind of financing we have seen e.g. Q&M Dental take out recently with IFC. Part of the loan package allowed IFC to convert to Q&M shares at a heavily discounted share price. Wanted to get that one off my chest.

Hi RBM,

My view is that the time frame may be too short to conclude that Hyflux's CPS are doing well. While the price has risen 6% from the offer price, the long-term attractiveness of the PS still depends on Hyflux's ability to honour the preference dividend payments. Thus, it hinges a lot of Hyflux's cash flow generation capabilities. 6% is frankly quite a high price to pay and I think most bank loans offer a much lower interest rate. This already signals to me that Hyflux was unable to secure cheaper financing, probably as a result of their Balance Sheet.

As to whether rates will remain low, I guess that is still uncertain. Inflation is going to be a very persistent problem for the USA in the mid-term, and Fed will have no choice but to eventually raise rates; and they may have to be uncharacteristically aggressive should inflation exceed economists' expectations.

I think PS is not exactly a very "novel" way to raise funds. Especially if you make them cumulative to boot! In such a low interest rate environment, fundamentally strong companies should have no problems securing much cheaper financing. OSIM recently concluded a CB raising exercise priced at 2.75% per annum, convertible at $2.025 per share (premium to its $1.62 share price). Which begs the question - if a Company has a good balance sheet and stable cash flows, would it need to resort to CB or CPS to raise funds? Companies like Boustead can quietly secure long-term loans to cover their working capital requirements on real-estate projects without much fuss, and I believe they may pay as low as 1.6% to 1.8% on their bank loans (usually SIBOR-pegged + 125 to 150 basis points spread).

So my conclusion - I do not think CPS is a good way to raise cash, and it somehow signals the Company may not be as fundamentally sound as it should be!

[RBM]

Thanks Musicwhiz - good thoughtfull pushback, which is appreciated ........... particularly the points on it being early days and the (unusual) cumulative nature of this particular PS.

My approach to Hyflux PS has been to consider selling after the first (half-yearly) 3% dividend payment at end October and thats why I am not displeased regarding the Fed Chief's ongoing morose utterings, i.e. which have the effect of prolonging low interest rates. I also believe its a fair assumption to assume that Hyflux will have >S$ 12 Mln of its S$ 400 Mln gained from the PS listing remaining at end October! If the PS price remains > 106, then I'll be looking at a return of > 9% in 6 months or ~ 19% p.a. I've more often done worse than this in the past. My "Botanic Garden" chums may hang on to their PS units somewhat longer.

Regarding the last line of your message ........... "I do not think CPS is a good way to raise cash, and it somehow signals the Company may not be as fundamentally sound as it should be!" ..... I've continually asked myself why Singapore's banks pursue the PS route - DBS, UOB and OCBC all have weighty PS's listed on the SGX ........ and bluer than blue DBS issued its latest offerring in Q4 2010 at a 4.7% coupon. While I realise DBS have taken out a variety of debt instruments and like other Bank PS's they are non-cumulative in nature, I can't believe they are issuing a 4.7% coupon PS if it isn't cost effective for them. I'm obviously missing something here.

Vested in both Hyflux PS & DBS PS.

Off now for my late morning walk. Thanks again Musicwhiz.

[freedom]

Is Hyflux Perpetual Cumulative Non-Convertible Preferred share considered fix-income instrument?

As a fix-income instrument, there should be promise of principal and return. For Hyflux Preferred share, there is no promise of principal, as it is perpetual in nature and may or may not be redeemed by Hyflux. There is indeed promise of return, 6% cumulative and step up to 8% if not redeemed in 2018. To make Hyflux a fix-income instrument, we must make sure that Hyflux will redeem the Preferred share on a future date in the normal course of business.

But will Hyflux redeem its preferred share?

Under current low interest rate environment, Hyflux needs to issue 6% CPS. If interest rate was to rise to historical level, What would be the yield required for Hyflux to issue new equity? Definitely should be above 6%, maybe possibly above 8%. A 6% or 8% perpetual preferred share is a great deal for Hyflux (average 10-year Singapore government(AAA rating) bonds yield around 3%, US 30-year treasury yield chart: http://finance.yahoo.com/q/ta?s=^TYX&t=m...=l&p=&a=&c= ). So Hyflux is unlikely to redeem its preferred share.

So to me, Hyflux 6% CPS is more like an equity investment, rather than a fix-income investment. And as an equity investment, Hyflux 6% CPS does not provide too much upside (Even Hyflux common share was to be $100 from current $2, the preferred share would probably be still on par), so it is not a good equity investment as well.

[D123]

Hi freedom,

There is a section on preferred shares in Ben Graham's Security Analysis which I enjoyed reading and helped improve my understanding of the topic. Perhaps you may find it useful too. They are Chapters 14 and 15 of the sixth edition.

Here are some snippets from the opening chapter:
"That the typical preferred stock represents an unattractive form of investment contract is hardly open to question. On the one hand, its principal value and income return are both limited; on the other hand, the owner has no fixed, enforceable claim to payment of either principal or income. It may be said that preferred stocks combine the limitations of creditorship (bonds) with the hazards of partnership (common stocks)"

and

"One of the basic principles of investment is that the safety of a security with limited return must never rest primarily upon the future expansion of profits. If the investor is positive that this expansion will take place, he should obviously buy the common stock and participate in its profits. If, as must usually be the case, he cannot be so certain of future prosperity, then he should not expose his capital to a risk of loss (by buying the preferred stock) without compensating opportunities for enhancement."

----------------------------------------------------------------------

You mentioned that you don't see it as a fixed-income instrument since principal is not guaranteed. Well, I don't see it as an equity investment since my upside is capped! I guess what we have in the end is really what Graham described it to be, a combination of the limitations of both fixed-income and equity.

Taking Hyflux's case, I think that the preferred shares was all in all, as good a financing deal as the company could have gotten, given the issue's low coupon rate (compared to its MTN notes) and perpetual status, and the company's high level of debt. And if this whole raising-external-financing-for-expansion thing works out in the end, the real winners should be the equity holders (but that doesn't mean the share is attractive now at its current price). What the shareholders got was cheap financing and a debt they possibly never have to repay.

In fact, I can think of a few ways in which common shareholders can screw preferred shareholders. One way is to not pay any dividends at all. Most of the earnings should then be reflected in the appreciation of the share price. If it doesn't, and the share price is lower than intrinsic value, the company can still execute buy backs to return value to shareholders, thus skipping dividends totally. (This last buy back part is hypothetical, I'm not sure if skipping preferred dividends and buying back common shares is legal).

Having said that, there can be situations where Hyflux's preferred shares can be attractive. Firstly, I would prefer if there wasn't a debt as large as common shareholders equity in front of me blocking my principal repayment. Secondly, I would want to be confident of the cash flows of the company going forward. I want it to be so huge that they have no good alternatives for capital allocation and cannot justify holding as cash, and would be forced to pay it out as dividends. In the meantime, I am not going to risk my money just reaching for that 1% or 2% more yield.