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Saturday, June 9, 2018

The Lucky Accredited Investors of Hyflux's Perpetual Securities - Part 3

When i grew up, my mum always reminded me " Son, impression matters. Not everyone is going to get to know you better but they form a general opinion of you from what you do, say and wear."

I guess i didn't heed her advice, with all this messy posts with no clear direction and spelling/vocab mistakes. I would therefore like to make it clear that my agenda is purely monetary in terms of the capital invested, that's all. Nothing else. Like what the bank robber said ," Give me the money and no one gets hurt" kind of Caveman like mentality.

Disclaimer: I am not an investment advisor. Heck, i am not even working in the financial industry. Below are my interpretation and i am grateful if you will let me know if anything i say is wrong and i will correct it in a reasonable time. I am not an expert and don't wish to be assumed to be one. I make losses frequently.

The Lucky Accredited Investors

$300 million 5.75% Perpetual Capital Securities (ISIN: SG6OE1000007)
In 15 January 2014, these were issued to them in denominations of $250,000.
First reset is on 23 January 2017 and subsequent resets occur every three years thereafter.
I couldn't find the step up rates.
The Accredited investors who bought this had theirs redeemed on 23 January 2017. Lucky you!

$175 million 4.8% Perpetual Capital Securities (ISIN: SG6SC0000003)
In 21 July 2014, these were issued to them in denominations of $250,000.
First reset is on 29 July 2016 and subsequent resets occur every two years thereafter.
I couldn't find the step up rates.
The Accredited investors who bought this had theirs redeemed on 29 July 2017. Lucky you!

The Unlucky Non-Accredited Investors

$400 million 6% Cumulative, Non-Convertible, Non-Voting, Perpetual Class A Preference Shares (N2H)
In April 2011, these were issued to them in denominations of $1000 but a minimum of $10,000.
First reset 25 April 2018 and step up to 8% pa thereafter. See here.

Not redeemed on 25 April 2018.

$500 million 6% Perpetual Capital Securities (BTWZ)
In May 2016, these were issued to them in denominations of $1000.
First reset 27 May 2020 and step up to the initial spread at 4.20 per cent. per annum plus the step-up margin of 2.00 per cent. per annum. See here.

Not redeemed and even had its coupon stopped, even after being publicly announced and ex-coupon

Observations

Firstly, who are accredited investors. Read here.
In short, they are:
i) Individuals with a personal net asset in excess of $2 million;
ii) Individuals with an income of not less than $300,000 in the past 12 months;
iii) Corporations with net assets exceeding $10 million in value, in their most recent balance sheet;
iv) Trustees of trusts that the MAS approves; or
v) Persons that the MAS approves

Based on the dates of issue and redemption, it does give me an impression that retail, non- sophisticated really got the short end of the stick.
$500 million 6% Perpetual Capital Securities issued in May 2016.
I guess part of the retail investors money was used to pay back the Accredited Investors as their was redeemed on July 2016 and January 2017.

The unlucky unsophisticated retail investors in terms of the BTWZ got it worst with its coupon withheld.

Now, for .....................

Question 11
Why did the the board, in 2016 and 2017, when they redeemed the perpetual securities from the Accredited Investors , not have the foresight to not redeem them since their interest rates were so low at 5.75% and 4.8% respectively compared with 6% for the retail investor ones?

Wouldn't it be beneficial to hold a cheaper " debt" longer?

Can you give some colour on the step-up rates given to the Accredited Investors issue?

Can you shed some light on why there was a need to raise such funds from the accredited investors since Hyflux seemed to have excess cash to be able to conduct sharebuybacks in 2014 and 2015?

I don't know about you, but i'm left with a very bad taste in my mouth.

Moving forward at the Townhall meetings with Hyflux - Part 2

Today my son reached out to my hand as i came back home from work. He tugged at my hand gently and placed his face next to mine. In his sweetest, angelic , softest voice he whispered into my ears " PaPa, i tell you a secret, I love you...."

Sensing the opportunity, i whispered back into his little ears" Son, i decimated your education fund.." knowing full well he wouldn't understand what i meant, and yet, offloading a heavy burden in my heart by confessing without any repercussions.....now for the Significant Other...Yikes ..

I echo what Mak Yuen Teen wrote.
I do think Hyflux is worth saving because it provides real value to society. It does have an obvious value proposition and real, hard assets that improves people's lives.

The issue is about the management and i reiterate what i wrote earlier, please step down to win the trust and respect of the public again. Hyflux will do better without you.

Question 10
In Annual report 2011 page 149, it stated (in red box), under Rationale for Shares Purchase Mandate "............ the Shares purchases will enhance the net asset value per share if the Shares purchases are made at a price below the net asset value per share......"

Figure 1: Page 149 Annual Report 2011

As stated on page 152 of AR 2011 below, the effect of the Net Asset Value per share before and after the share purchases has decreased from 60.6 cents / share to 50.2 cents/share (underlined in red) AFTER the share purchases.

Figure 2: Page 152 Annual Report 2011

Hyflux further states ( in blue box), "The Company intends to use it internal sources to finance the purchases of the shares.The company does not intend to obtain or incur any borrowings....."

Observations
It is reasonable to think that Hyflux , bought back shares through their daily share buyback programme while knowing full well that not only will it NOT ENHANCE the net asset value per share (NAV), it results in a destruction in value as seen above.

Sub-question 1
Can you provide other reasons for conducting Share buy backs that are more important than enhancing net asset value per share of Hyflux?

Sub-question 2
Based on the Shares Purchase Mandate, " ...protect existing shareholders' investments in a depressed share-price situation...", can you share how the management, when Hyflux bought the shares, believed that Hyflux was in a depressed share situation when its share price was significantly higher than its NAV/share?
Example: NAV/share in 2014 was 56.57 cents per share (based on Figure 4 below) and the average price paid in 2014 was $1 per share , 76% more expensive that the NAV. Large premiums were observed in the other years too.

Sub-question 3 Can you also share the metric that Hyflux uses to determine the true value of Hyflux when Hyflux did the share buybacks? This is because in the red box in Figure 1, it stated"Short term speculation...... depressed below the true value..."

Now,if Hyflux has no good reasons to justify that Hyflux was in a depressed share-price situation when the purchases were made, did the board follow the mandate?

Sub-question 3
Can you elaborate where these internal sources of funds ( in blue box in Figure2) come from to do share buybacks and how are these funds separated from the $400 million raised earlier in the year from unsophisticated, retail investors?

Since $400 million was raised externally from unsophisticated , retail investors through preference shares ( N2H) within the same year , essentially, a "borrowing", how can Hyflux be so clear to state that these sharebuy backs were internal sources of funds and there is no borrowing. Cash is cash, even if you separate it into different accounts, it still serves the same purpose.

Comparison between NAV per share and average price paid by Hyflux through share buyback

Figure 3: Page 4 Annual Report 2017

Figure 4: Based on company public announcements

As can be seen above, the average price paid per share has ALWAYS been higher than the Net Asset Value per share. Along the years, the NAV /share has been decreasing and along the years from 2011 to 2015, Hyflux has been doing share buybacks.

It is really distressing to me to see Hyflux buy the most shares when the shares were their average highest in 2012.

Conclusion
Let us put aside that there were about 20,000 unsophisticated N2H retail shareholders and another about 20,000 unsophisticated retail BTWZ affected by this incident who may have used their CPF and SRS funds. Let us also put aside the number of people who have invested in the ordinary shares (600) and who have given the board and management the mandate over the years.Let us also put aside the frequent sayings that the assets are strategic.

Why i think Hyflux deserves to be saved?
Purely because, it provides real value which we use and improves people's life. The issue is with the board of directors and management that has to be changed to save this company.

From Glassdoor reviews of employees who have worked in Hyflux these are some common statements. Please go read yourself.

(Please be mindful that these are anonymous posters, so do your own judgement.)

Leave you with some words of wisdom from an anonymous poster from the telegram group called King K.

"I always wonder - if A asks a question and B answers yes/no but it turns out to be wrong. A relies on it to his detriment as he doesn't bother to check himself. wonder if this happened to others before. Or does A rely on B's answer to be echoed by C D and E and if enough people say so, it must be so. I get how people can rely on other people's information as a starting point but shdn't A also try to verify it himself with a more credible source? wonder Wonder"

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Saturday, June 9, 2018

The Lucky Accredited Investors of Hyflux's Perpetual Securities - Part 3

Friday, June 8, 2018

Moving forward at the Townhall meetings with Hyflux - Part 2