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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9 comments:

  1. When I left SG some number of years ago, I remember Hyflux was a market darling, what had since happened to this company?

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    1. I'm not sure what happened, but its earnings and dividends have been declining these few years, hence the decline in share price.

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  2. Hyflux had s0ld more than 500m perpetuals last yr.this money is standing ready to redeem the PS due 25 April2018,pls correct me if wrong.
    So there is minimum risk for redemption on 2018.

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    Replies
    1. Please refer to Hyflux's news release dated 26 May 2016, which has a section on how the proceeds of the $500M perps will be used.

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  3. Hyflux is selling off its stake in its China holdings and tuaspring waterplant to unlock cash flow. It is hit hard by the losses in the energy sector (tuaspring energy). Management warned losses may persist throughout the year.

    Can I enquire where you estimated the nav for Hyflux? As far as I know share price is not an accurate representation of book value or NAV

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    Replies
    1. Thks for the info.

      The NAV is obtained from Hyflux's financial statements.

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  4. Hi,

    Thanks for this writeup.

    Hyflux is really a risky company . if u look at the 2015 ar it had bank overdraft with interest of 9%pa. That's quite a red flag to me.

    A part of me feels the perp or pref share is an OK investment since its clients are mainly munis. And for hyflux, I think many are getting it wrong looking at cash flow from operations . instead we should be looking at cash flow from investments since dboo projects are held for sale and their business model is to sell for a profit .

    Still its a 50-50 .. Risky yet some silver lining

    Sgdividends

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    Replies
    1. Hi SGDividends,

      Thks for the info. I haven't been following the company's business plans.

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    2. Hi Sg dividends, interesting insight.

      Hyflux cash flow is indeed lumpy in nature and highly depends on completion and then selling of assets / plants as its operational model. Cash flow of operations can be misleading as it depends on selling of its water filtration systems.

      It is diversifying into elo water (retail) to smoother out its cash flow over time but don't count on that. It is transiting to a more capital light model but it will take time to actualise it. Might be strong turnabout play but still high risk high reward.

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