Friday, October 14, 2016

Hyflux: The Morning After

You drank too much and got into bed with a pretty looking lady.

Now you have a hangover, your butt hurts and she kinds of looks like a he.

What the hell happened?

Back in May, the Hyflux 6% retail perp news came in hot and heavy. Retail investors immediately got wet hearing such a high coupon. What's better than a 6% coupon bond? A 6% coupon PERPETUAL bond! Yay! Buy all the bonds! So shiok and juicy, don't need to think twice.... right?

Well, it didn't smell too good to me, especially since I've noticed their previous pattern of issue perps. Chut pattern more than badminton. Minister Sim Ann would be shaking her head.

I did a post and I made a case against taking up this perpetual issue. One of the things that I did highlight is my strong speculation that this issue is merely to pay back another maturing perp bond. Fast forward 1 month from then, and looky looky. They did exactly just that and redeemed their 4.8% perp bond. It's like I can see the future.

Since then and now, there has been a few developments.

Share price has dropped 16% from $0.56 to $0.47 as of today.
Revenue is still stagnant, while profit has dropped even more.
Debt to asset has improved from 60% to 52%, but nothing is an indication that it is a new trend.

More importantly, bond prices have gone from 100 par to 96 in such a short time.

Honestly, that is not a very good indication at all. I think a lot of retail investors are feeling pissed. Let's assume that the 3% semi annual coupon is being valued at 100%, that means the actual bond price without the accrued interest is more along the lines of 93 once it pays out its coupon next month. A 4% loss for a 6 month investment is not very comforting, especially when people were expecting at least a 3% profit. That's an expectation gap of 7%!

Honestly, the better investment would actually be their 6% preference shares. While it has had a strong track record since it's 2011 listing, perhaps its investors are suddenly realizing that everything in Hyflux isn't all rainbows and unicorns anymore. From consistently maintaining value over 101, it has since plunged in August and it is pretty much trading at its low of 94.6. This translates to a yield of 6.325%, instead of the previous yield just 2 years ago at 5.6%! A bonus is that Hyflux has a time bomb on this preference share because it has until Apr 2018 to redeem it, if not it will step up to 8%.

Hyflux is playing a dangerous game of ring around the rosies with investors, using 1 issue to redeem another issue due for step-up. From the looks of it to me, this isn't a one-off occasion, it is their modus operandi.

It seems like the smart way to be playing this and not getting face-ripped like other investors is to choose issues based on their earliest redemption date. Of course comparing the 6% perp bond and the 6% pref shares, the perf shares are much much more attractive due to their lower price, higher yield and earlier call date. It's definitely worth a consideration if you're willing to take on the risks that Hyflux has and are looking for a decent short term flip. At least within 1.5 years you would know if your gamble was a fruitful one. Potential gain in 1.5 years is approximately 15% if it works out. Not too shabby actually.

The reward is there, but the risks has to be further analyzed before the conclusion can be made that this is a gamble worthwhile due to it's hopefully high probability of success. I will probably be doing some expanded research on this over the weekend or soon. There really isn't a rush. If I enter Hyflux, I'd definitely be posting about it.

As for now, all I can hope for is that Hyflux investors lose their nerves and force my hand by driving prices down to levels too attractive for me to resist, and for Hyflux to improve their fundamentals so that the risk of my possible investment failure gets lower. It doesn't seem like this kind of thing happens in tandem, but you never know.

But of all the unknowns out there, one thing is for sure - I'm happy I ain't an equity investor of Hyflux. If you still are, I congratulate you for having the stones to sit through a 67% stock price decline over the past 5 years.


  1. The best way for investor to sleep nicely on this one is when the PS/Bond constitute just a few percent on one portfolio. Is not worth to "Gamble" a larger portion for the gains given.
    Having says that, I will not even put 1% even with trading mindset if the business is not viable. There are many stocks out there to trade with.

    1. Hi Cory, I agree. I usually allocate my capital on the stocks which I am most confident about succeeding. The bigger the gamble and uncertainty, the smaller the allocation!

      That's right, no point dressing up a donkey and pretend that it is a race horse! So many other stocks out there!

  2. Hyflux preference shares is interesting to me. The upside is that they redeem it end April 2017. This means a returns of 11.4% over a 1.5 yr period or 7.5% annualised return. The downside is that you have to hold onto a perpetual 8% coupon.

    1. Hi Choon Yuan,

      I think we are seeing the same opportunity! I'm strongly considering it! If they aren't redeemed at Apr 2017, I would actually probably just sell it at market price and close my trade on that.


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