Hyflux on course for horror finale
What a finale. What a finale. On 3 April, I wrote that Hyflux saga is so bad that its good. The following day, Olivia Lum confounded investors by announcing the termination of a key restructuring plan with white knight, Salim-Medco consortium SM Investments. Prior to this latest turn of event, Hyflux investors had staged a public protest and planned to vote against the proposed rescue plan. But as the saying goes, Man proposes, God disposes. Apparently, Olivia had the last laugh.
Hyflux in doomsday path?
The latest twist is indeed stunning because Hyflux claimed that it has no confidence in SM Investments in completing the rescue deal and is currently seeking other potential investors. But what is even more bizarre is that Hyflux claimed that PUB’s intention of taking over Tuaspring Desalination Plant without seeking compensation would enable the firm to reach out to a “wider pool of investors”.
Does Hyflux deserve a comeback like OSIM?
SembCorp Industries should invest in Hyflux
The holy water of Hyflux Perpetual Securities
Make no mistake, Tuasping is an integrated plant consisting of both water desalination and gas turbine power plants. Obviously, it makes sense for PUB to take back the Tuaspring Desalination Plant from Hyflux because of water security purposes. As water is a strategic resource, Singapore will not want Tuaspring to fall into the hands of a foreign entity.
But it does not make sense to me when Hyflux claimed that potential investors would be more interested in investing in Hyflux now. After all, if PUB really did take back the desalination plant, who would want to invest in the loss-making power plant of Tuaspring? The key culprit for landing the water treatment firm in such a terrible state was the collapse of the oil price, which led to depressed electricity prices. For years, Hyflux had tried to sell off its Tuaspring Integrated plant in a bid to revert to its asset-lite business model. And now Hyflux is trying to woo investors with this ailing asset on hand. Who in his right mind will bite the bait?
While much public attention had being focused on the destiny of the Tuaspring plant, I would share my insights on Hyflux perpetual bonds and how they enabled the company to mask its financial weaknesses (legally). As many REITs and SGX companies issue perpetual bonds, the key accounting lessons may be applicable as well. Most importantly, I will also share the most important data investors must pay attention to when reviewing financial statements. Hopefully, this sharing will help investors avoid stinkers like Hyflux.
Dark side of Hyflux perpetual bonds
Many elderly investors had invested in the preference shares and perpetual bonds. In the event of a liquidation, they stand to get back nothing at all. I wish I do not have to write this but I think Hyflux investors should hope for the best and expect the worst. With the collapse of the SM restructuring deal, chances of a new white knight coming to the rescue is quite remote in my opinion. Thus, liquidation should be imminent. Of course, I hope that I am wrong because I do not wish the homegrown company going down in flames.
At the centre of the storm should be Hyflux perpetual bonds and how the company had used it to [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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Not sure about accounting today, but when I took a basic 1st year elective accounting module in Uni in 1990, preference shares & other perpetual securities were taught as equity, and to be treated as such, i.e. dividends not guaranteed, company doesn’t need to pay the dividends, company doesn’t need to redeem, if liquidation likely to get zero.
There are some bonds, especially co-co’s or contingent convertible bonds, which are debts but market pricing can be “equity-like”. Rare or non-existent in Singapore market or Asian markets, but a favourite method of Warren Buffett especially when doing “rescues” of companies in need of cash.
OCF and FCF were kinda made popular & got the attention of retail investors in Kiyosaki’s 1997 book Rich Dad Poor Dad. This was something new to me at that time, as my intro accounting module in Uni didn’t even cover cashflow statement, but only balance sheet & income statement.
For me that insight was worth the time to read his book, which I felt was mostly rubbish, high risk high loss methods that were mostly applicable in US only e.g. non-recourse loans or mortgages — OPM, you cannot pay mortgage or the house valuation drop to less than what you owe >> becomes bank’s problem. Not in Singapore though! LOL!