Hyflux

[freedom]

since the pref shares are cumulative, common share holders can't really enjoy any benefit till long long

[corydorus]

Why are they not continuing the normal channel at lower cost.
Will taking this path at higher cost means scrapping at thin operating profitability.


Cory

[ecym]

private placement over 7x oversubscribed now...

[freedom]

of course it will be over-subscribed. much better a deal than common share.

if I had common share, I would dump at least half of it and buy the pref share.

[D123]

of course it will be over-subscribed. much better a deal than common share.

if I had common share, I would dump at least half of it and buy the pref share.

Why so?

The way I see this preference share issue is that it is akin to a junior bond, in that its claims on assets and payouts are subordinate to senior bonds, but superior to shareholders. I'm not sure if coupons on senior bonds are cumulative, but I would assume so. No preference shareholders should be paid unless senior bondholders are paid first.

Common shareholders rank last in event of a liquidation but they get to participate in the equity upside of the company. So it's not really comparing apples to apples is it?

I don't think an issue of preference shares at 6% coupon rate by itself can make the common share unattractive.

Of course, the common share could have been unattractive in the first place, based on an appraisal of the company regardless of whether there was any issue of preference shares.

[freedom]

of course it will be over-subscribed. much better a deal than common share.

if I had common share, I would dump at least half of it and buy the pref share.

Why so?

The way I see this preference share issue is that it is akin to a junior bond, in that its claims on assets and payouts are subordinate to senior bonds, but superior to shareholders. I'm not sure if coupons on senior bonds are cumulative, but I would assume so. No preference shareholders should be paid unless senior bondholders are paid first.

Common shareholders rank last in event of a liquidation but they get to participate in the equity upside of the company. So it's not really comparing apples to apples is it?

I don't think an issue of preference shares at 6% coupon rate by itself can make the common share unattractive.

Of course, the common share could have been unattractive in the first place, based on an appraisal of the company regardless of whether there was any issue of preference shares.

it is cumulative pref share. it means if hyflux can't pay 6% this year, it need to pay it later.

the only benifitting situation for common share holders will be that hyflux keeps earning a huge profit so that common share holder will get more than 6% yield after paying loan interest and pref dividends.

currently hyflux is paying 2% for its common share, lower yield than pref shares and higher risk than pref shares. the eps of hyflux last year is around 10 cents, even if hyflux paid all to common share holder, still lower than 6%.

if in any year or period of years, hyflux could not make huge profit, for years, common share holder would get nothing.

[Musicwhiz]

My views are below. Comments are welcome!

When I first read the announcement and press release by Hyflux, my eyes were growing wider and wider. It would seem the yield on these CPS is a little high at 6%, but the fact that they are cumulative and rank above ordinary shareholders in payout should tell you something about Hyflux. In their (great) desire to raise money for their new projects, they might be short-changing their ordinary shareholders. Someone pointed out on another forum that ordinary shareholders get a yield of just about 2%, while CPS holders get a fixed 6%, triple the yield on Ordinary shares!

To further add to this, I looked at Hyflux's Balance Sheet and it was pretty heavily geared. This would imply that banks would not fund them anymore based on their Balance Sheet, and probably only on very expensive terms which would not be attractive to Hyflux. Since debt was out of the question, why not bonds or debentures to the public? This would further strain their gearing ratios and may interfere with some of their current covenants with their banks, I believe. Banks would typically require companies to comply with certain requirements for their Balance Sheet or else loans can be recalled or there may be interest-reset clauses (depends on the banking facilities letter).

So debt is out of the question, and this also rules out convertible bonds. For equity, a logical method would be a secondary offering (placement) at a discount to market price. Since this did not materialize I would have to assume that Hyflux could not get anyone to purchase additional new ordinary shares as the risks were either too high or the yield too low (or both lah). Hence, their resident financial engineer must have thought of this method of CPS, after seeing the blue chip banks like DBS issue RNCPS. Problem though, is that these are perpetuals and Hyflux has to buy them back some day, at par value. In the meantime, the Company will be coughing up 6% in interest twice yearly, and up to 8% after 2018 (I am assuing the company is still around by then). This is extremely expensive and the fact that it is cumulative also means ordinary shareholders may get nothing if the cash isn't in the kitty.

Hyflux must have a lot of confidence in its cash generation ability to dare to issue CPS with a 6% yield. Currently, the balance sheet (as at Dec 31, 2010) has about $600 million debt and just $222 million cash. This fund raising will raise up to $400 million, which means they just manage to be in a small net cash position. However, looking at the CFS, cash used for operations was $50 million, investing drained $95.7 million while the bulk of the inflows ($213 million) came from borrowings. Stripping the loans out, you would see interest paid on loans of $16.3 million and dividends paid of $34.2 million. This all adds up to about $196.2 million, which scarily is the amount the CPS hopes to raise (assuming no option to increase the number of shares issued). The Company had clinched some major contracts announced just recently and thus would need huge capex to fund these projects. Assuming strong competition and depressed margins, it remains to be seen if these new projects will bring about the desired cash flows which Hyflux is hoping for.

It also noteworthy that final dividend has been REDUCED to 3.5 cents from 5 cents per share a year back, even as the Company supposedly reported a 20% rise in net profit and a 9% rise in revenues. The key is to watch that Cash Flow Statement.

Financial liabilities (debts, loans) also increased 50% from $400 million to $600 million. Says a lot about their working capital management. The continual need to raise money would indicate that this round of CPS fund raising may probably not be the last.

So, in a nutshell, I'd avoid this as the high yield seems to be a veil which is hiding the true extent of debt and negative cash flows which the Company is reporting in its financial statements.

(Not Vested)

[freedom]

for the reduced dividend from 5 cents to 3.5 cents, probably because of the 1 for 2 bonus issue.

and for CPS to be at 6%, the common share at least must yield around 10%. Assume, Hyflux can pay 5 cents per year, which means, its common share must be at 50 cents. a long way to go.

[Nick]

It must be noted that some of the major listed water companies have undergone some kind of capital raising exercise over the past year:

1) United Envirotech raised S$21.1 million by issuing 40 million new shares when it dual listed in Taiwan in Oct 2010

2) Sound Global issued RMB 885 million 6% convertible bonds in late 2010.

Hyflux originally created HWT for capital recycling purpose. The venture didn't succeed very well so it has no choice but to adopt a capital injection strategy now in order to grow IMO.

[corydorus]

Bloody expensive for the company to offer such term. Really curious how much Growth can it generate to compensate 6% Cumulative.


Cory
(Not Vested)