Obligatory post about Hyflux

http://financials.morningstar.com/ratios/r.html?t=600&region=sgp&culture=en-US
https://www.gurufocus.com/news/155687/peter-lynch--a-simple-way-to-benefit-from-utility-investments

Better late than never!
Hyflux has been a distressed asset play I have been holding since April 2017. A boring and unexciting business turned out to be headline worthy when Olivia lum initiated a trading suspension in the exchange,  suspension of the dividend, and the restructuring of the debt position of Hyflux with the courts .

This is followed by the leaving of the COO which is long overdue considering the heavy operational blunders . Hyflux is working to reach an agreement to arrange a haircut discount on its liabilities and every Tom dick and harry is suddenly an expert on Hyflux, the same as bitcoin a few months ago. Even the housewives are talking about it as some of its perpetual are issued to the retail market. I take this as a symptom that this stock has reaches the point of maximum pessimism.

Ever since April 2017, I have initiated a small stock position in Hyflux in expectations of a distressed asset play. The operating cash flow, free cash flow and long term debt position is worrisome. The short term debt is manageable and long term debt was  was slightly mitigated by the consistent cash flow of  operations and maintainence business and the significant and consistent order book . The exciting EPC profits are very lumpy and project driven and highly dependent on completion of projects and divesting it to unlock cash flow. I have mentally written off the amount the moment I intiated the position. Ironically, it became my most covered stock considering its small percentage in my portfolio whereby I should be focusing on those with larger positions instead. Loss aversion at work perhaps.

I have considered the potential cyclical prospect of the energy business but I figured it should be near the bottom of the cycle. Energy prices can't stay low forever with increased oil prices. The industry will mark up energy prices up as energy is a essential input. I got punished for this foolishly optimistic assumption. I failed to understand the structural changes on the energy market and the willingness of the industry to tolerate continual losses over extended periods. The magnitude and duration of the losses is long and depressing. A cigarette butt play, burning cash as the body / assets get smaller and smaller over time, is not easy to stomach.

At my point of analysis 1 year ago, Hyflux has lousy financial health, debt level and cash flow which I will have not considered in normal circumstances. However, considering it's operational history over the years from its IPO until 2012, it has put up a brilliant performance. It had valuable assets which could be liquidated for strong cash flow, although now this assumption is undergoing stress. Its ambitious projects accomplishments, a strong willed Chairperson, in a simple moat like business that even an idiot can run, cant go too far wrong. Or so I thought. Even up till now,  I am not sure if I am too biased and optimistic to Hyflux outlook.

I am mentally prepared to wrote off  the entire pip squeak position in hopes of a multibagger. Now, I can only patiently wait for the court hearings to conclude and debt restructuring to commence. For any reader out there, please take note that the perpetual and shares had been suspended from trading until further notice and there might be severe short selling after the share price incorporates the good and bad news. Regardless of divesting to cut loss or buying in hopes of a turnabout play, do your own due diligence and be prepared to weather a stormy season ahead.

What if analysis

1) Outcome : TH steps in
In the worst case scenario, whereby Hyflux heads to bankruptcy, Tuaspring cannot be allowed by Hyflux to be sold off to foreign and potentially non friendly hands. The national security of the country will be threatened. The government cannot afford to let it happen. It is a too big to fail scenario. TH will step in as a lender of last resort, or a buyer of shares and replace the management to veto the decision. There is no certainty on whether they will provide a friendly bailout or set a severe tone and lowball Hyflux to punish the investors.

2)Outcome : Share acquisition / debt financing from PUB / local utilities

Even if Tuaspring is forced to be sold off to local utilities , there is unlikely any local utility that has the financial strength buy over the distressed asset even at a haircut discount. No one has the expertise in the short run to run the Tuaspring operations in both water processing and energy generation . Not the bankers. Not the creditors. Water processing and treatment must still continue and cannot be allowed to fail. Hyflux will still be allowed to operate and be in business

Moreover, Waste to energy plant is still contracted by Hyflux for completion until 2019. If the government handles it badly, and the company fails, it will cost them more in long run financial and reputational damages compared to the short run losses.

3) Outcome : Negotiating strength of  management.

It is up to the Olivia lum, the chairwoman to negotiate and blaze the path ahead for this distressed asset company. Based on my conversation with her at the EGM, she has a strong personality and a confident outlook despite the adversities she face for a prolonged  period of time . Given her experience in navigating in foreign countries and winning the tangled lawsuits, I hope she continues to perform in this regard.

4) Outcome : No bailout. Court restruturing of Hyflux subsidiaries. Forced liquidation or bankruptcy.

There is NIL friendly private entity whom is ready to inject share capital to keep the company afloat. Most likely, the preference shares can be forced to defer payment for a designated period of time.  The courts may structure a quasi equity to equity conversion depending on the risk appetite of the investors. The earnings per share will be heavily diluted and Hyflux moves towards a penny stock region. Further issuance of equity and debt is unlikely given the reputational damage. Company will be left to bleed out as banks cut off their project loan financing to Hyflux, and the company goes towards certain doom. It is possible that this company will be mothballed at a further discounted rate and my shares will be will be forfeit / forced acquired at a loss. I need to be absolute sure of the value of the assets left, before any further holding / accumulation / selling decision as its balance sheet has deteriorated significantly since 1.5 years ago.

5) Outcome : Friendly capital injection and in safe hands

In the best case scenario, if a white knight comes in and provide financial backing to this company and allow it to operate BAU, all of the short run troubles can be resolved. Cash flow and short term debt will ease, and the share price will rebound (hopefully and quickly)  to normalised levels. The utility business is not a buy and hold for the long term unless capex requirements improve, industry wide sharp increase in energy prices (unlikely)  , and deep fundamentals change. Buy when the dividend is ommited, and sell when the dividend is restored, is the name of the game.