$$$ KPO and CZM $$$: Hyflux Saga - Obvious Red Flags!

Sunday, July 22, 2018

Hyflux Saga - Obvious Red Flags!

This should not be a new news anymore, Hyflux defaulted its coupon payment for its 6% perpetual securities and has applied for a debt reorganization and in the worst case scenario, it may even go bankrupt. Unfortunately, I realized that a few of my colleagues are/were holding either the shares or the perpetual securities. They were under the impression that it is a monopoly and is back by the government so nothing will go wrong? I got curious and went to take a look at its Annual Reports over the years. To my horror, there was an obvious red flag!

Turns out the company has been reporting negative operating cash flows for the last 8 years! In my opinion, this is easily one of the most important numbers one should be looking at. Operating Cash Flow (OCF) as defined in Investopedia is the amount of cash generated by a company's normal business operations. Companies can report positive net profit with negative operating cash flows which may not be that intuitive. You can read more about it from Quora - Why is a company's operating cash flow negative but its net profit is positive?

You will be able to find it in the cash flows statement. Look specifically at the net cash used in operating activities.

The most impressive part was Hyflux continued to pay dividends throughout the years. One should always question if the dividends are sustainable. Ideally, we would want to invest in a company that is capable of generating lots of Free Cash Flow (FCF) where dividends can then be paid from there. There are many ways to calculate FCF and one of it is OCF minus Capital Expenditure (CAPEX). If the OCF is negative, FCF cannot be generated, how would the dividends be sustainable? It would then have to come in other forms such as through the sale of assets or borrowing/using debts/bonds to pay...

This is a list of all the retail bonds trading on SGX. At one glance, you will see that Hyflux has the highest yield (high risk = high return). I went to search for the prospectus to find out/determine how they will be using the money.

Hyflux was borrowing at 6% to repay debts of 3.5% and 4.8%?! This is another red flag! Borrowing to repay debt and not to grow the business. When Hyflux launched the 6% Perpetual Securities in 2016, what exactly attracted one to invest? Interestingly, one of the comments in HWZ was "definitely gg to press this, its a no brainer". I really wonder why...

This is a very unfortunate event for the investors of Hyflux and one can only prepare for the worst and hope for the best. As for the rest of us, I hope that this can be a learning lesson on what kind of company to avoid.

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  1. What would you do now, if you are in the shoes of Hyflux?

    1. Hi Rykel,

      I was in a similar situation - Ezion. I cut loss and sold on the day it resumed trading after being suspended for a year.

      You can read about it here - http://kpo-and-czm.blogspot.com/2018/04/ezion-bleeding-stopped.html