Hyflux

[dydx]

We have to simply look at Hyflux's proposed $200m - likely to be up-sized to $400m, i.e. by 100%! - 6%p.a. cummulative pref share issue as just another way for the company to borrow money. And we should bear in mind that Hyflux will use the money from the pref share issue to invest in overseas greenfield water projects under various BOT, BTO, etc. investment structures, including the use of large amount of additional long-term non-recourse debts to be borrowed by the individual projects. While water projects appear basic and great, we should also bear in mind the usual risks, including potential sponsor related problems (e.g. Dubai, Libya, etc.) or default, cost overrun or delay, technical/engineering problems, change of rules/regulations in the host countries, tax issues, forex restrictions, etc. - and the fact that many of these risks just cannot be effectively 'boxed', and when any becomes a problem it will hurt and cause a major loss to Hyflux, and the company may not be able to handle/resolve them, even though Olivia Lum may try her best.

In such kind of high-profile issues, many local investors - insurance funds, wealthy individuals, laymen, etc. alike - are simply quite willing to part with their money because (1) Hyflux is a well-known and therefore perceived as an 'acceptable' name; and (2) the 6%p.a. yearly return is perceived as attractive, when compared with the prevailing low rates/yields from bank deposits, SG and stat board bonds, etc.

But the fact remains that Hyflux's proposed pref share issue is a quasi or near equity risk. There should be no argument that the actual underlying risk is closer to equity, as Hyflux will use the money to inject into stand-alone water projects as equity or subordinated (to the projects' non-recourse lenders) shareholders' loans. 2 relevant questions: (1) What is a reasonable yearly return for such kind of risk?; and (2) Is a return of 6%p.a. good enough? For me, the answer for (2) is definitely a "No". We just have to bear in mind that even for a leading local bank like OCBC, most smart investors or institutions would expect a projected return of 12%p.a. before they will bite on a new major equity fund-raising deal by the bank. O.K., people may argue that pref shares are not as risky as equity, but neither is Hyflux as safe as OCBC. Perhaps a fair return is 10%p.a., and 6%p.a. is just not good enough for the underlying risk.

If my above argument is true, then after its issuance and listing, a more rational Mr Market, having understood the underlying risk, may choose to price the Hyflux pref shares at an expected yield of 10%p.a. instead, which means that its market price will have to go below its par. If for whatever reason Hyflux misses a dividend payment on the pref shares, I think in all likelihood Mr Market will choose to price it like a 'junk bond', in which case the market price will almost certainly fall below its par.

I was very disturbed when I first read that Hyflux could up-size the proposed pref share issue by 100%, to $400m, and DBS (as Arranger) is supporting it. A relevant question: If the original deal size is a well-conceived one by Hyflux's CFO, Olivia Lum and the BOD, and supported by professional advice from DBS - and is duly structured based on Hyflux's projected funding requirements and borrowing capacity - under what circumstances now can the company justify doubling the amount to be raised?? It appears totally irrational!!

If not because of desperation, why would Hyflux take on a new debt load of $400m which incurs 6%p.a. in cost in one single go? For sure, Hyflux can never deploy the entire $400m sum quickly into new water projects. So at best as a gap measure the money could be applied to pay down its outstandinfg bank debts which cost 3+%p.a. That means from Day 1, Hyflux's shareholders will have to suffer and pay for a negative funding cost burden of 2+%p.a. on $400m, before counting the issuance fees and other expenses (legal, PR, SGX related, etc.). I am just happy that I am not a shareholder!

Let's be rational! - Investors should not just look at the "Hyflux" name and the 6%p.a. yield to invest in the proposed pref shares.

[etan]

Looks like I am the only one in this forum taken in by greed; never invest with eyes wide open!

This forum is indeed abt value investing, serious value investors here are so forthcoming with their individual analysis. I guess unpaid analysis of a company is more truthful. I bet you can get the best analyst here!

Olivia Lum’s salary is in this range? Wow, that’s alot!

Details of the Directors receiving remuneration from the Group for the year ended 31 December 2008 and 2009 are set out as follows:
Number of Directors
Remuneration band 2009 2008
Between S$1,000,000 to S$1,250,000 1 0

If retail investors like dydx and muzicwhiz, by extracting some figures, can predict the scenario that may likely happen some years down the road, then Olivia and her team had better start thinking out of the box before things get worse.

I have faith in you Olivia! (What more can I say, money already plonk inside, must think of when to exit, before it’s too late!) You once did SG proud, so don’t let the pref s holders down!

Many thanks to all who had spent time to share their analytical thoughts on this issue although they have no vested interest. You all are just so generous in sharing!

[mikh]

the following might be worth considering:
1. the CEO is a major shareholder. She would want to look after her own share interests.
2. from company's view, while 6% may appear a lot on one hand (to the man in the street) it is locked in (till 2018). Incrementally, if the company does any business that returns > 6% on the $2 or 400 mil, it is accretive to earnings. Percentages are also not everything.
3. from CPS owner's point of view. At 6%, recovery of capital is ~8 yrs if compounded. After that is all pure return which increases to 8%. The downside is whether:
a: company goes belly up. Is Hyflux likely to go belly up withing next 6-8 years or so bearing in mind the projects it has? I dun think so. If it does, there is still recourse above normal shareholder priority; and
b. opportunity cost of other investments (now 3-4% pa if you invest safely and the increase assuming rates go up in 1 year). How far can interests rates go up? Under the Sg regime environment, the strength of the currency is favored over rising interest rates...

So it may not be all so one sided

[etan]

OFFER OF UP TO S$200,000,000 IN AGGREGATE LIQUIDATION PREFERENCE
OF 6% CUMULATIVE NON-CONVERTIBLE NON-VOTING PERPETUAL
CLASS A PREFERENCE SHARES
– CLOSING OF OFFER
– UPSIZE OPTION EXERCISED; OFFER INCREASED TO S$400,000,000

http://hyflux.listedcompany.com/newsroom...D74A.1.pdf

~At the close of the Placement, applications were received for approximately S$1,400,000,000
in aggregate liquidation preference of the Class A Cumulative Preference Shares. Under the
Placement, more than 70% of the Class A Cumulative Preference Shares was allocated to
private banks, and the remaining to asset managers and banks. ~

~At the close of the Public Offer, valid applications were received for S$1,011,718,000 in
aggregate liquidation preference (or 10,117,180) of the Class A Cumulative Preference
Shares. To ensure a reasonable spread of the Class A Cumulative Preference Shareholders,
the Company has decided on the following basis of allotment....... ~

Looks like I am alloted only a quarter of the no. of shares I applied for.

[lonewolf]

100% allocation! All 25,611 of applicants got something. Everyone happy.

[Image: hyfluxballoting.jpg]

(not vested)

[cyborg]

the following might be worth considering:
1. the CEO is a major shareholder. She would want to look after her own share interests.
2. from company's view, while 6% may appear a lot on one hand (to the man in the street) it is locked in (till 2018). Incrementally, if the company does any business that returns > 6% on the $2 or 400 mil, it is accretive to earnings. Percentages are also not everything.
3. from CPS owner's point of view. At 6%, recovery of capital is ~8 yrs if compounded. After that is all pure return which increases to 8%. The downside is whether:
a: company goes belly up. Is Hyflux likely to go belly up withing next 6-8 years or so bearing in mind the projects it has? I dun think so. If it does, there is still recourse above normal shareholder priority; and
b. opportunity cost of other investments (now 3-4% pa if you invest safely and the increase assuming rates go up in 1 year). How far can interests rates go up? Under the Sg regime environment, the strength of the currency is favored over rising interest rates...

So it may not be all so one sided

By Rule of 72, it should be 12 years for recovery of capital.

[Musicwhiz]

Teh Hooi Ling sounds rather downbeat in her assessment of Hyflux's CPS.

(Not Vested)

Business Times - 22 Apr 2011

Hyflux preference shares: a good idea?

By TEH HOOI LING

ON THE back of strong institutional demand, it was reported, Hyflux appeared very likely to double the amount it planned to raise from its cumulative preference shares from $200 million to $400 million.

The preference shares promises 6 per cent return a year - a princely sum for investors in today's low-interest-rate environment. The first question that comes to mind is: Why such a generous pricing given that its latest borrowing cost is only about 3.85 per cent?

So what will the preference shares mean for Hyflux's finances? Well, 6 per cent on $400 million is $24 million. In the last three years, the water treatment company's free cash flow (that is, excess cash generated by the business after allocating sums for capital expenditure) was $81 million in 2010, $47.5 million in 2009 and $6.2 million in 2008. Adding an outflow of $24 million annually would no doubt be a strain.

Furthermore, Hyflux already has quite a bit of debt on its balance sheet. Total debt amounted to some $600 million. And net debt to equity is at 73 per cent now, before this preference issue.

Then there is the currency issue. In its prospectus, Hyflux said that the funds raised from the preference shares would be used to fund the group's water and infrastructure projects and for general working capital.

For the financial year just past, Hyflux's revenues totalled $569.7 million. Out of that, Singapore projects accounted for only 13.2 per cent. The bulk of the projects - 60.3 per cent - are from Middle East and North Africa (MENA). China accounted for the remaining 26.5 per cent.

For projects outside Singapore, the bulk of the contracts are denominated in US dollars. According to Hyflux's latest annual report, as at Dec 31, 2010, the group had trades and other receivables amounting to US$362.8 million, and cash in US dollars amounting to US$82.1 million. Meanwhile, it had loans and borrowings which totalled US$243.4 million, and trades and other payables of US$132.8 million.

So its net US dollar exposure is just $68.7 million.

However, with the issue of the preference shares that are denominated in Singapore dollars - 400 million of it if the issue comes to pass - Hyflux will have a significantly higher obligation in Sing dollars, while continuing to earn the bulk of its revenues in US dollars.

The Sing dollar, as we know, has been on this inexorable climb against almost all other currencies in the world. In the past 10 years, it has gained 3.3 per cent a year against the US dollar.

It just doesn't seem like a good idea to earn from a depreciating currency in order to meet obligations in an appreciating currency.

It might, however, make more sense if the funds were to be used for the $890 million seawater desalination plant project which Hyflux recently won from PUB. That's the group's largest contract to date.

Even then, 6 per cent seems a tad aggressive given that Hyflux is also looking for other water and infrastructure projects in China, India and potentially in South-east Asia and Australia too.

In the final analysis, the preference shares may be good for the preference shareholders, but not that great for the ordinary shareholders. For one thing, it will drain cash available for dividends - not that Hyflux is known for being a high-yielding stock.

Since 2009, Hyflux has underperformed the general market by some 10 per cent. (Since 2010, it's been about 20 per cent.) Given its still relatively high estimated PE ratio of 20 times, and the numerous risks - be it currency, liquidity or geopolitical risks associated with MENA - the odds appear to continue to be stacked against any outperformance.

hooiling@sph.com.sg

[Jacmar]

Teh Hooi Ling sounds rather downbeat in her assessment of Hyflux's CPS.

(Not Vested)

Business Times - 22 Apr 2011

Hyflux preference shares: a good idea?

By TEH HOOI LING

In the final analysis, the preference shares may be good for the preference shareholders, but not that great for the ordinary shareholders. For one thing, it will drain cash available for dividends - not that Hyflux is known for being a high-yielding stock.

hooiling@sph.com.sg

Hi MW, I think you meant she is rather downbeat on the hyflux mother share and not the CPS. After all that has been said, mr market did not mark down the mother share price after the announcement of the CPS.....???why with such a high PE, high gearing, low dividend or maybe even none.

[Musicwhiz]

Hi Jacmar,

I was referring to the overall tone of the article; and not just the Ordinary Shares or CPS.

It still remains to be seen if the CPS will trade at 6% yield, or a much higher yield.

I will be monitoring.....

(Not Vested)

[etan]

Now that the $$$ is on hand, Hyflux had better use the proceeds wisely!

I think whatever announcements they make is critical, esp. within the 1st yr.

It cannot be that outsiders know their company inside out, and they don't know so much about themselves? They have to come out with good solutions fast.

Btw, Lee Joo Hai, a director of Hyflux, divested his shares completely at $2.18 per share in open market sale on 15 April 2011. Total: 375,000 shares.

http://www.sgx.com/wps/portal/marketplac...anies_info

Does he know something that we don't? Sell mother share to buy CPS? Possible?