Sunday, 27 August 2017

Did Hyflux Make Money for its Ordinary Shareholders?

Hyflux is an interesting case. In FY2016, it reported a net profit attributable to owners of $4.8M but a loss per ordinary share of 7.51 cents. Its net asset value correspondingly dropped from $0.56 in Dec 2015 to $0.45 in Dec 2016. The main reason? There are a few different types of owners of the company. Besides the ordinary shareholders, there are preference shareholders and perpetual capital securities (perps) holders. The net profit attributable to owners of $4.8M has to be shared among these different types of owners. Both preference shareholders and perps holders have prior claims over ordinary shareholders. In total, they were paid $63.8M in preference dividends and distributions in FY2016. Thus, ordinary shareholders ended up with a loss of $59.0M after accounting for the preference dividends and distributions instead of the reported $4.8M. Divided over 785.3M ordinary shares, the loss per ordinary share was 7.51 cents.

In order to make money for its ordinary shareholders, it has to make a net profit attributable to owners that is more than sufficient to cover the preference dividends and distributions payable to preference shareholders and perps holders. In FY2016, this amount was $63.8M. In the last 12 months, Hyflux has begun to redeem some of its perps. In July 2016, Hyflux redeemed $175M perps bearing interest of 4.80%. In Jan 2017, it also redeemed $295M worth of perps bearing interest of 5.75%. The remaining perps left are $500M bearing interest of 6.00%. In addition, there are outstanding preference shares of $400M bearing a dividend rate of 6.00%. These preference shares are callable on 25 Apr 2018, failing which the dividend rate will step up to 8.00%. Thus, Hyflux needs to make a net profit attributable to owners of between $54.0M and $62.0M every year, before ordinary shareholders get to enjoy the profits.

Since Hyflux made less money than is sufficient to cover the preference dividends and distributions of its preference shares and perps in FY2016, the money has to be drawn from its retained earnings. Its retained earnings thus dropped from $284.2M in Dec 2015 to $210.3M in Dec 2016. In 2H2017, the figure dropped further to $146.9M after reporting a loss attributable to owners of $24.3M. Preference shareholders and ordinary shareholders have to watch this figure very carefully. If the retained earnings drop to zero, there will be no more reserves to pay dividends, including the 6% preference share dividend.

Thus, at this point in time, Hyflux is not making any money for its ordinary shareholders.

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Sunday, 20 August 2017

Buying the Most Expensive Integrated Shield Plan When Young and Downgrading When Old

Integrated Shield Plans (IPs) are hospitalisation insurance plans offered by private insurance companies to cover hospital stays in public and private hospitals. They are integrated with the basic Medishield Life plan run by CPF. There are typically 3 types of IPs, namely those covering Class B1 wards, Class A wards and private hospitals. For ease of reference, they are named as Class B1, A and P plans respectively. Annual premiums increase with age and are most expensive for Class P plans. For this post, I will use the IPs offered by my insurer as the basis for discussion, since I signed up with them and have records dating back to 2006 when as-charged plans were first introduced. I believe the trends discussed below are applicable to all other insurance companies offering IPs.

Private hospitals offer the best care compared to public hospitals. However, Class P plans are the most expensive compared to other plans. One of the strategies used by some people to afford private hospital care is to sign up for Class P plans when they are young and premiums are affordable, and downgrade to Class A/B1 plans when they age and premiums become more expensive. As an example, for the Class P plan offered by my insurer, premiums for a person aged 25 is only $417. However, as he ages, premiums increase rapidly to $2,639 when he reaches 70. At this age, the corresponding premiums for Class A and B1 plans are $1,758 and $1,428 respectively, which are equivalent to 67% and 54% of the Class P plan premiums.

It is a good strategy to use, but do note that annual premiums do not stay static. The figures below show the annual premiums for Class B1/A/P plans since 2006, which have been increasing. To be fair, the increases in premiums are also accompanied by enhancement in insurance coverage.

Fig. 1: Class B Plan Annual Premiums Since 2006

Fig. 2: Class A Plan Annual Premiums Since 2006

Fig. 3: Class P Plan Annual Premiums Since 2006

Thus, when you buy an IP, please take note that annual premiums are not static and are expected to rise over time. And for those who plan to use the above-mentioned strategy of buying the most expensive Class P plan when young and downgrading to Class A/B1 plans when older, be prepared to downgrade earlier than expected.

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Sunday, 13 August 2017

No Need to Maximise Profits with Cash of Last Resort

CPF funds are my cash of last resort in investing. I have quite a good record of investing my CPF funds. However, that statement would be incomplete, because majority of the time, the funds are parked in bank preference shares and collecting regular dividends that pay higher than CPF Ordinary Account's interest rate of 2.5%. On equity investments, there were only 2 occasions when CPF funds were deployed. The first was during the market doldrums during 2000-2003, when I ran out of cash for investments and had to rely on my CPF funds. The second was to buy more of Global Logistic Properties (GLP) than what was allowed for in my cash portfolio (see What is My Target Price? for more info).

Since CPF funds are my cash of last resort, the overriding principle is safety rather than maximising profits. Hence, majority of the time, they were parked in bank preference shares rather than being invested in equities. Furthermore, on the 2 occasions when they were invested in equities, they were not held until profits were maximised. On the first occasion, CPF funds were invested in STI ETF when the STI was at 1,316 points in Feb 2003 and sold when the STI reached 2,169 points in Mar 2005 for a 66% gain. The STI went on to hit a high of 3,876 points in Oct 2007. The reason for selling STI ETF early was because by early 2004, the stock market had recovered from the doldrums and my cash portfolio had turned a profit. There was no longer any need to use CPF funds for equities investment. Hence, they were returned to CPF.

On the second occasion, I bought GLP at $1.985 in Nov 2016 on rumours that a Chinese consortium was interested to buy GLP. Last month, GLP announced that it had selected the Chinese consortium as the preferred bidder, which offered to privatise it at $3.38. I sold the GLP shares bought with CPF funds at $3.22, even though there is another $0.16 to gain if they were held until completion of the privatisation, which has to be completed by 14 Apr next year (unless extended). The gain is 62%. In my opinion, the job is done. There is no need to further expose the CPF funds to unnecessary risks to get the remaining gains. They can be returned to CPF until the situation calls for them again.

When you have a cash of last resort, the important thing is to keep them safe and have them ready when you need them. There is no need to expose them to unnecessary risks for longer than is required.

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Sunday, 6 August 2017

What Are Driving Those Numbers!

The quarterly earnings season has started and I have been busy reading the financial results. It is sometimes frustrating that the reports do not reveal much about why the business is doing well or poorly and whether the trend will continue. The reports contain a lot of numbers and some discussions, but most of the time, the discussions just regurgitate what the numbers already show. To illustrate what I mean, I will use M1's financial results as an example, but it is not the only company that has the issue.

The figure below from M1's financial results shows the numbers generated by the various business segments in 2Q2017. For instance, it shows that revenue for the mobile telco services segment dropped by 2.1% Year-on-Year (YOY) in 2Q2017, customer subscriptions rose by 4.5% YOY, etc. These are useful numbers to understand how well the business is doing. But they do not explain why revenue has fallen even though customer subscriptions have increased. By right, if customer subscriptions increase, revenue would also increase correspondingly, isn't it?

Fig. 1: Numbers

Following the numbers in the financial results is a discussion of those numbers. The figure below shows the level of sophistication of the discussion. 

Fig. 2: Discussion

The opening paragraph of the discussion says, "YOY, operating revenue at $251.6M for 2Q2017 and $512.3M for 1H2017 were 4.7% and 2.9% higher respectively due to higher fixed services revenue and handset sales. Compared to 1Q2017, it was 3.5% lower." Haven't all these information been reflected in the numbers already? What extra information do investors get after spending time to read the discussion?

What investors really want from the discussion is to understand the factors driving those numbers. Investors should not be left to guess why those numbers rise or fall and whether the trend would continue. An example of a good discussion is actually given by M1 in the second paragraph of Key Drivers, which explains why churn rate hit a high of 1.7% in 2Q2017 when the average historical churn rate is only 1.0%. It explains that "Churn rate was 1.7% for 2Q2017 and 1.4% for 1H2017 as a result of the migration of customers who were previously on 2G data to the M2M platform following the shutdown of the 2G network in April 2017." This gives investors assurance that customers did not desert M1 in droves in 2Q2017.

The discussion should not just be a repeat of what the numbers already show. If companies are serious about providing a discussion, I hope they would be more forthcoming and provide an intelligent discussion about the challenges the company faces and what plans does it have to overcome those challenges. Investors who are informed of these challenges and plans would be more willing to stick through thick and thin with the company when it is going through a difficult patch.

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