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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.

Friday, June 8, 2018

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"

Thursday, June 7, 2018

Moving forward at the townhall meetings with Hyflux

The past few days have been a pretty big eye opener from me. I have been sleeping well ( impt to me) ,engaging with some entities, waiting for answers, trying to 'read' the vested interests objectively using publicly available information ( links to the sources are referenced in my articles) , reading up on the electricity market and carrying on with my daily life, spending time with my kid and watching him grow up to be such a adorable and more and more lovable person.

This makes me wonder!

Expensive "tuition" fees have been paid ( probably a slight dent in my son's education funds..haha..Don't worry Papa will work harder) and now just to make sure that i learn as much from this episode and not let it go to waste.

Moving forward, im so eagerly looking forward to the townhall meetings with Hyflux BUT life beckons and work calls. I may not be able to attend.

So these are the questions i hope are being asked and of course if the interested parties are reading this obscure blog, it gives you time to prepare your nicely worded answers.

Question 1

Hyflux raised $400 million in funds from the non-accredited retail investors through SGX in 2011. It is stated ( here) that the funds are used for the water , infrastructure projects and for general working capital.

Why did Hyflux commence the daily share buybacks from Nov 2011 to Nov 2015, spending a total of $83 million?

Subpoints :

Did Hyflux board knowingly raised funds with the intention to use part of it to do a daily sharebuyback since the preference shares were offered in April 2011 and the share buybacks commenced not long after in November 2011?

If yes, why did Hyflux not fully disclose that these raised funds could possibly be used for daily share buybacks? ( Or if Hyflux did disclose, i couldn't find it. )

Question 2

Given that Hyflux operates in a capital intensive industry, what is the rationale for conducting the daily sharebuybacks ?

Based on the cashflow of Hyflux, Hyflux isn't getting much cash from its operations . It has in fact been negative every year since 2010.

(The effort for this diagram is fully attributed to the good folks at valueinvestasia, not me.

Thank you valueinvestasia.)

Question 3

Why didn't Hyflux conduct any equity rights issuance to raise funds, but instead chose to conduct a sale of preference shares and perpetual securities to retail investors who may have used their CPF or SRS account?

As a comparision, Ezion and Tiger Air conducted rights issuance to shore up funds.

Just some general knowledge.

Rights issuance result in the company issuing new shares, and if existing shareholders do not subscribe to the new shares, their voting power ( control) in a company decreases because the total number of shares in the market increases and they hold a proportionally smaller share of the total number of shares in the market.

Daily share buybacks have the opposite effect. Existing shareholders do not need to come out with any funds. The company will use its funds to buy existing shares from the market, thereby reducing the total number of shares in the market. Existing shareholders have more voting power(control) in a company as they own a higher proportion of the total number of shares in the market.

Question 4

Why did your proportion of Employee Stock Option as part of your compensation decrease along the years?

In other words, why did your compensation in cash increase along the years, given that Hyflux is in need of cash in a capital intensive industy and needed to raise funds from retail, non-accredited, unsophisticated investors, who counts retirees among its ranks using perhaps the CPF and SRS?

As a comparison, Ezion management reduced their compensation drastically.

Question 5

Tuas One is coming online in October 2018 based on filing with the Energy Market Authority. It will contribute about 136 MW of electricity. Will Tua-One be like Tuaspring in terms of being unprofitable?

Question 6

What is the rationale for some of the board of directors to be so long serving in the board?

Why is your role of CEO and Chairwoman not separated?

By acting as a CEO and chairwoman, together with a majority stake of 34% of the company and with long serving directors on the board, it seems that there is no check and balance in the company.

Question 7

Based on this article, it states that in 2011, Hyflux bidded for $0.35 per cubic metre while the next closest bid was $0.52 per cubic metre. The other bids were more than $1 per cubic metre.

Can you clarify if this is true? (The exact numbers are not important but rather the ultra low bidding is important in comparison with other bidders.)

If it is true or indeed Hyflux bidded very low, can you share what is the rationale?

If it is untrue, can you shed some light on the prices that were bidded for the project.

Question 8

What are the steps you are taking to save Hyflux?

As a comparison, Ezion management used their personal assets to secure funding and reduced their pay drastically.

Are you going to step down and seperate the role of chairwoman and CEO?

Are the long serving directors going to step down too?

Question 9

Why did you go into Hyflux shop and develop ELO water , and in the end, controlling Hyflux shop through the dividends-in-specie and offer?

Did you knowingly offer the dividends-in-specie when you know that Hyflux is going to be under a court ordered moratorium, as the dates of the events are so close?

Since dividends from Hyflux can only be paid if coupon holders of N2H and BTWZ are paid coupons, now that BTWZ ex-coupon which is payable on 28 May is stopped, could Hyflux shop be returned back to Hyflux.

Further reading
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question
4) Hyflux-Treatmeat of perpetual share holders- Ezion
5) Hyflux - loans and borrowings - Pacific Radiance
6)A happy ending for retail perpertual securities holders - Tiger Air and Hyflux
7) The Very Curious Case of Sharebuybacks- Hyflux
8)What did the founder/Chairwoman/CEO do to help hyflux throughout the years

Wednesday, June 6, 2018

What did the founder/CEO/Chairwoman do to help Hyflux through the years?

As stated in my previous post, Hyflux sold $400 million preference shares (N2H) in 2011 to unsophisticated retail investors whom among them are retirees who used their CPF or SRS.
After which, Hyflux conducted a series of massive sharebuybacks starting in 2011 all the way to 2015 (except in 2013).

In 2016, sold another $500 million perpetual securities (BTWZ) to, again, retail investors. In total, a grand total of about $900 million in such securities. All this done within a capital intensive industry structure.

Throughout the years from 22 Mar 2012 to 14 March 2018, the number of shares of the Founder/CEO/ Chairwoman stayed the same. However, the percentage holdings of the company ( layman term: control of the company) increased from 31.53% to 34.05%. This is done simply by share buybacks, using Hyflux funds, which of course partially contributed by the preference shares and perpetual securities retail investors.

Compensation of Founder/CEO/ Chairwoman

Let us take a look at the compensation table.

Take note that the exact compensation given is unknown. Directors or senior management's compensation are given in bands. ( in blue)

At first glance, the bands seem to decrease over the years which follows the decline in Hyflux's share price. This looks reasonable.

However, do take note that the % of Employee Share Option decreased over the years from AR2012 to AR2017. While the % share of salary, bonus, fees , allowances and other benefits (in green) increases over the years as the share price drops .

Stop and think for a moment.

Would you want your compensation in employee share options or in cash if the company is not doing well?

Compensation amount in cash

In cash, i take it as the columns in green in the table above.
Namely, salary, bonus, fees, allowance and other benefits.

Look at the rows highlighted in red.

From AR2014 to AR 2017, the compensation in cash increases every year , from $683,500 in AR2014 to $875,000 in AR 2017 as Hyflux's shares decreases over the years and ending with a financial reorganisation in 22 May 2018!

100% in cash in AR2017!

I am truly disgusted.

Conclusion

From AR2011 onwards ( Annual report 2011), it can be seen that without paying for any shares, the Founder/CEO/ Chairwoman was able to increase her control of the company without any increase in the absolute amount of shares. This is done through the use of Hyflux share buybacks from the open market.

Money, totaling $900 million was raised from retail shareholders before and after these series of share buybacks. It must be stated again that we are talking about a capital intensive industry, a company without a strong cashflow which needed $900 million to be raised from non-accrediated investors who count among her ranks, retirees and many others who used their CPF and SRS.

Taken from Hyflux presentation . Click on the presentation

From AR2014 onwards, compensation in absolute terms ( in cash) of the Founder/CEO/ Chairwoman , has increased every year, culminating in a 100% cash in AR2017. At the same time, % in terms of Employee Stock Options decreased as the market value of shares also decreased.

Compare this with Ezion.

I rest my case.

600 investors who have voting power ( about 66%) need to exercise their voting power.

Further reading
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question
4) Hyflux-Treatmeat of perpetual share holders- Ezion
5) Hyflux - loans and borrowings - Pacific Radiance
6)A happy ending for retail perpertual securities holders - Tiger Air and Hyflux
7) The Very Curious Case of Sharebuybacks- Hyflux

Tuesday, June 5, 2018

The Very Curious Case of sharebuybacks - Hyflux

In my previous posts, i wrote what management of other companies proactively did to try to save the sinking ship.

Ezion

- Proactively issued rights to access capital

- A drastic reduction in management compensation and doing more with less people

- Usage of family and personal assets as a collateral to gain more funds for the company

- Acceptable terms for perpertual securities holders ( Accreditated investors)

Tiger Air

- Proactively issued rights to access capital

- Capital injection by parent company

- CEOs who were changed along the way ( ok i didn't write this in my previous post)

- Redeemed retail perpetual securities at principal

Hyflux

How about Hyflux? I am actually very appalled that not only did they not issue any rights to raise funds, they undertook massive sharebuybacks across the years. I actually digged deeper and here are the various sharebuybacks.

Take note that in April 2011, Hyflux raised $400 million of preference shares (N2H) from the retail public ( not Accredited investors but unsophisticated investors, i must state again). And what did Hyflux do to some of the money, in November 2011, they commenced their sharebuybacks, up till 30 November 2015.

It is quite ridiculous that despite Hyflux knowing that they are in a capital intensive industry and despite having raised funds from unsophisticated,retail investors who have retirees among their ranks, they still undertook such a value destruction sharebuyback. Just look at the prices of the shares Hyflux bought back from the market at the 4 column.

And then having spent so much money on the share buybacks, they went to sell their $500 million perpertual securities (BTWZ) to again, a majority of unsophisticated retail investors in April 2016.

Why does Hyflux do sharebuybacks when they are not in the best position to do so?
If Hyflux do survive, i think its imperative for Olivia and her long time directors to step down for Hyflux to gain the trust and respect of the public again.

Further reading :
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question
4) Hyflux-Treatmeat of perpetual share holders- Ezion
5) Hyflux - loans and borrowings - Pacific Radiance
6)A happy ending for retail perpertual securities holders - Tiger Air and Hyflux

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