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Understanding the economic cycles and market valuation will not help anyone predict the direction of the market in the short term or even in midterms like a year or two.  However,

  • it keeps investors from looking in the rear-view mirror, and 
  • they will have a clearer view of the future and be able to stay rational when the market gets euphoric or sinks into fear again.

For analyzing individual companies, having a good knowledge of business cycles and the likely future market returns can be useful in evaluating

  • management's capital allocation decisions, 
  • their aggressiveness in accounting and 
  • the quality of earnings related to pension-fund return assumptions.
Buffett is a bottom-up value investor and rarely talks about the general market.  But he has a tremendous understanding of 
  • business cycles, 
  • the role of interest rates, 
  • market valuations and 
  • the likely future returns and risks.

Over the long term, investors should always be optimistic.  They should focus their investments on the quality companies that not only can pass the test of bad times, but also can come out stronger.

Now, more than any other time, it is vital to invest only in good companies.
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“You’re looking for three things, generally, in a person – Intelligence, Energy, and Integrity. And if they don’t have the last one, don’t even bother with the first two.


Sourced from Farnam Street
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Over the long term, investment return is more a function of business performance than valuation, unless the valuation goes extreme.

More effort should be put into identifying good businesses and buying them at reasonable valuations.

Investors should not be obsessed with the valuation calculations. All calculations involve assumptions. They are valid only if the underlying businesses perform as expected.
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All eyes on Genting Malaysia’s 1Q results
Joyce Goh
The Edge Malaysia

April 30, 2019 15:00 pm +08

This article first appeared in The Edge Malaysia Weekly, on April 22, 2019 - April 28, 2019.

The 400,000 sq ft Skytropolis Funland indoor theme park was opened a few months ago.
Photo By Annual Report

Source: Genting Malaysia Bhd Annual Report

Source: Bursa Malaysia

INVESTORS will be keeping a watchful eye on Genting Malaysia Bhd’s results for the first quarter ended March 31 (1QFY2019), which are due next month. They will be interested to see how well the casino operator is handling the hike in gaming taxes that came into effect in January.

The additional taxes are estimated to total at least RM650 million this year, based on the gross gaming revenue for the group’s Malaysian business last year.

Industry observers and gaming analysts say the group has only a few cards to play this year when it comes to boosting its earnings, but what it can do is to manage cost efficiently to help ease the blow.

“There is expectation that Genting Malaysia’s FY2019 earnings will fall 41% year on year due to the 10-percentage-point casino duty rate hike this year. The group has been hit on multiple fronts of late ... from the delayed outdoor theme park project to the additional gaming taxes. Given the circumstances, Genting Malaysia will have to look at what it can control in terms of financials, and that is clearly cost. It would need to be very mindful of cost,” says an analyst with a local bank.

“A cost-cutting exercise makes sense,” another analyst tells The Edge.

Genting Malaysia chairman and CEO Tan Sri Lim Kok Thay had acknowledged in his chairman’s statement for the group’s 2018 annual report that the revision of casino duties and casino licence fee will impact the group’s earnings from FY2019 onwards.

He noted that in view of the severity of the increases in casino duties, the group will continue reviewing and managing its cost structure, and this includes reducing or delaying capital expenditure as well as implementing various cost rationalisation initiatives such as “manpower optimisation”.

While he did not elaborate on what manpower optimisation means, analysts point out that the possibility of job cuts could be possible for certain high cost segments.

“It had to recruit people for the outdoor theme park and this included some high-cost hires. Now that the project is on hold due to litigation, perhaps Genting Malaysia will need to relook its cost structure for that,” says the analyst with a local bank.

Asked to comment, Genting Malaysia tells The Edge that talk about potential job cuts at the group is “speculative”.

However, a spokesperson says the group has been mindful of its headcount since 2013, when the outdoor theme park closed for the construction of the new theme park, and adopted a strategy not to replace headcount when staff leave certain positions.

Another potential manpower rationalisation strategy would be to instal more machine-enabled games and look at managing its margins when it comes to commission rates and junkets, says the analyst.

“Understandably, it can look at cutting commission rates for junkets and the rebates it gives VIPs, but this can be a double-edged sword because it could also deter VIPs and high rollers from visiting. It is important to maintain the business volume. The regional trend now is for casinos to increase their commission rates and rebates,” he says.

The analyst says another cost-cutting measure would be to increase the number of gaming tables a pit manager looks after. For example, instead of one pit manager managing three or four tables, he or she would have to manage five or six. “At the end of the day, the group will have to ensure any cost-cutting exercise it embarks on is sufficient and enough to help ease the blow from the higher gaming taxes.”

Casino duties were raised to 35% from 25% on gross gaming income — said to be the first hike in casino duties in 20 years — and gaming machine duties rose to 30% from 20% on gross collection. The last hike in casino duty, from 22% to 25%, was in 1998, when the government needed the extra revenue boost for pump-priming measures during the 1997/98 Asian financial crisis.

Duties on gross collection refer to taxes taken straight from the top line prior to deducting expenses.

Taking the FY2018 figures as a guide, a back-of-the-envelope calculation shows that gross gaming revenue is estimated at RM6.5 billion, and an additional 10% hike in casino duties on that would result in RM650 million in additional taxes.

In addition to higher duties, the Ministry of Finance increased the annual casino licence fees by RM30 million to RM150 million, and machine dealer’s licence fees to RM50,000 a year from RM10,000 a year.

Over the years, Genting Malaysia’s stra­tegy has been to diversify into hospitality to transform itself into more than a gaming group. The outdoor theme park is one of the strategies for this diversification, but its timing is unclear given the lawsuits against Fox Entertainment Group LLC and The Walt Disney Co.

Genting Malaysia is suing the two companies for alleged breach of contract related to the Fox World theme park in Genting Highlands, which was set to open this year. Disney’s acquisition of 21st Century Fox apparently raised issues because the Genting resort includes a casino, which conflicts with Disney’s stance against gambling. Fox units have filed a counterclaim against Genting Malaysia.

Nevertheless, the 400,000 sq ft Skytropolis Funland indoor theme park was recently opened as well as Imaginatrix, an attraction that combines physical rides with state-of-the-art virtual reality gaming technology.

It also recently acquired Equanimity, the super yacht formerly owned by fugitive businessman Low Taek Jho, for US$126 million, but it has yet to reveal what it intends to do with the luxury vessel.

Genting Malaysia’s share price was battered in November last year following the announcement of the increase in gaming taxes and closed at a 7½-year low of RM2.72 on Dec 14. It has since recovered 19% to close at RM3.24 last Friday. At RM3.24, the stock is still trading at a 44% discount to its 7½-year closing high of RM5.77 in August 2017.

According to Bloomberg data, 35% of ana­lysts covering the stock have a “buy” recommendation, with 45% calling a “hold” and 20%, a “sell”. The 12-month consensus target price stood at RM3.46.

At RM3.24 per share, Genting Malaysia is trading at one times book value and has an estimated forward price-earnings ratio of 15.12 times.

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A person who holds stocks has the choice to become
  • the owner of a business or 
  • the bearer of tradable securities.

Bearer of tradable securities

Owners of common stocks who perceive that they merely own a piece of paper are far removed from the company's financial statements.

  • These owners behave as if the market's ever-changing price is a more accurate reflection of their stock's value than the businesses' balance sheet and income statement.  
  • They draw or discard stocks like playing cards.

Owner of a business

For Buffett, the activities of a common-stock holder and a businessperson are intimately connected.  Both should look at ownership of a business in the same way.

"I am a better investor because I am a businessman, and a better businessman because I am an investor.  (Warren Buffett)

Buffett's investment philosophy is the clear understanding that, by owning shares of stock, he owns businesses, not pieces of paper.  

The idea of buying stock without understanding the company's operating functions is unconscionable, says Buffett.  These include:

  • a company's products and services, 
  • labour relations, 
  • raw material expenses, 
  • plant and equipment, 
  • capital reinvestment requirements, 
  • inventories,
  •  receivables, and 
  • working capital needs.

This mentality is reflected in the attitude of a business owner as opposed to a stock owner.

Types of companies to purchase in the future

Buffett is often asked what types of companies he will purchase in the future.

First, he says, he will avoid commodity businesses and managers in which he has little confidence.

What he will purchase is the type of company that

  • he understands, 
  • one that possesses good economics and 
  • is run by trustworthy managers.

"A good business is not always a good purchase," Buffett says, "although it is a good place to look for one."

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Buffett first purchased Coca-Cola in 1988.  In 1988:

  • Owner earnings (net cash flow) of Coca-Cola = $828 million.
  • Risk free rate of 30 year US Treasury Bond = 9% yield.

Discounted value of Coca-Cola's current owner earnings.

If Coca-Cola's 1988 owner earnings were discounted by 9% (Buffett does not add an equity risk premium to the discount rate):

  • the value of Coca-Cola would have been $828m/9% = $9.2 billion.

$9.2 billion represents the discounted value of Coca-Cola's current owner earnings.

When Buffett purchased Coca-Cola, the market value of the company was $14.8 billion, indicating that Buffett might have overpaid for the company.

Because the market was willing to pay a price for Coca-Cola that was 60% higher than $9.2 billion, it indicated that buyers perceived part of the value of Coca Cola to be its future growth opportunities.

Where is the value in Coke? Its net cash flows discounted at an appropriate interest rate.

Buffett first purchased Coca-Cola in 1988.

People asked, "Where is the value in Coke?"

The company's price was
- 15x earnings (30% premium to the market average), and,
- 12x cash flow (50% premium to the market average).

Buffett paid 5x book value for a company with a 6.6% earning yield.

The company was earning a 31% ROE while employing relatively little in capital investment.

The value of Coca-Cola, like any other company, is determined by the net cash flows expected to occur over the life of the business, discounted at an appropriate interest rate.

When a company is able to grow owner earnings without the need for additional capital, it is appropriate to discount owner earnings by the difference between the risk-free rate of return (k) and the expected growth (g) of owner earnings, that is (k-g).

Using a two-stage discount model

Analyzing Coca-Cola, we find that owner earnings from 1981 through 1988 grew at 17.8% annual rate - faster than the risk-free rate of return. 

When this occurs, analysts use a two-stage discount model.  
  • This model is a way of calculating future earnings when a company has extraordinary growth for a limited number of years, and 
  • then a period of constant growth at a slower rate.

We use this two-stage process to calculate the 1988 present value of the company's future cash flows.

In 1988, Coca-Cola's owner earnings were $828 million.

If we assume that Coca-Cola would be able to grow owner earnings at 15% per year for the next 10 years (a reasonable assumption, since that rate is lower than the company's previous seven-year average), by year 10, owner earnings will equal $3.349 billion.

Let us further assume that starting in year 11, growth rate will slow to 5% a year.  Using a discount rate of 9% (the long term bond rate at the time), we can calculate that the intrinsic value of Coca-Cola in 1988 was $48.3777 billion. (see Appendix A below)

Using different growth-rate assumptions

We can repeat this exercise using different growth-rate assumptions.

  • If we assume that Coca-Cola can grow owner earnings at 12% for 10 years followed by 5% growth, the present value of the company discounted at 9% would be $38.163 billion.
  • At 10% growth for 10 years and 5 % thereafter, the value of Coca-Cola would be $32.497 billion.
  • And if we assume only 5% throughout, the company would still be worth at least $20.7 billion [$828 million divided by (9% - 5%)].

Market price has nothing to do with value

The stock market's value of Coca-Cola in 1988 and 1989, during Buffett's purchase period, averaged $15.1 billion.

But by Buffett's estimation, the intrinsic value of Coca-Cola was anywhere from

  • $20.7 billion (assuming 5% growth in owner earnings), 
  • $32.4 billion (assuming 10% growth), 
  • $38.1 billion (assuming 12% growth), 
  • $48.3 billion (assuming 15% growth).

So Buffett's margin of safety - the discount to intrinsic value - could be as low as a conservative 27% or as high as 70%.

"Value" investors considered Coca-Cola overvalued and missed purchasing it.

"Value" investors observed the same Coca-Cola that Buffett purchased and because its price to earnings, price to book, and price to cash flow were all so high, considered Coca-Cola overvalued.


Appendix A: 

The Coca-Cola Company Discounted Owner Earnings Using a Two-Stage "Dividend" Discount Model (first stage is 10 years)

First stage:
Owner Earnings in 1988  $828 m
Growth rate 15% for next 10 years
Discount factor 9%

Sum of present value of owner earnings   = $11,248 
(Year 1 to 10)

Second stage:
Residual Value or Terminal Value

Owner earnings in year 10  $3,349
Growth rate (g)  5%
Owner earnings in year 11   $3,516
Capitalization rate (k-g)  4%
Value at end of year 10   $87,900
Discount factor at end of year 10  0.4224

Present Value of Residual                           =  $37,129

Intrinsic Value
Intrinsic Value of Company                        =  $48,377

Assumed first-stage growth rate = 15%
Assumed second-stage growth rate = 5%
k = discount rate = 9%
Dollar amounts are in millions.

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Management determines if it is going to 
  • distribute earnings in the form of a dividend or 
  • reinvest all earnings to further the business plan of the company. 
The ratio of dividends paid out to investors versus the amount of earnings retained is called the payout ratio.  

The Dividend Decision

Changes in tax law and investor preference can influence decisions in the corporate boardroom regarding how much profit to retain or to pay out to investors in the form of dividends.  

However, dividend increases often lag behind an increase in earnings because management will want to be certain that a new higher dividend payment will be sustainable going forward.

Change in Dividend Yield has a lot to do with change in Share Price

Looking back over market history, we can see that dividend policy and payouts have remained relatively steady and that any change in dividend yield has had a lot more to do with the change in stock prices than with changes to dividend policy made by corporate directors.  (Note:  You can 'price' your stocks by looking at historical dividend yields.)

A cut in dividends is often perceived negatively

Management is usually very reluctant to reduce dividends because a cut is often perceived as a sign of financial weakness.  

Even during the Great Depression, companies were loath to cut dividends.  
  • From 1929 to 1932, dividend yields soared because most companies maintained their dividends as stock prices collapsed in the crash.  
  • But, as stock prices rose from 1933 to 1936, dividend yields fell - even though companies were actually increasing the dividends they paid.

This inverse relationship between dividend yield and price was really evident during the huge bull market run from 1982 to 1999.  
  • Companies increased dividends steadily over the period, actually increasing dividends paid by almost 400 percent.  
  • Yet the dividend yield collapsed to historic lows because stock prices increased by 1,500 per cent.

Some companies do run into trouble and cut or omit their dividend payments, but this is the exception rather than the rule. 

The typical dividend-paying company

The typical dividend-paying company not only maintains the dividend payout it establishes, but follows a policy of steadily increasing its dividend as earnings increase. 

Some companies increase their dividend payments 
  • (1) every quarter, 
  • (2) some once per year, and 
  • (3) others only as profits allow.

Some companies will even pay extra or special dividends if earnings have been quite good for a number of years.

Dividend policy

Many established public companies pay cash dividends and have a dividend policy that is well known to their investors.  

Some of them have been paying cash dividends for a very long time.
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How does Buffett value his companies?

For Buffett, determining a company's value is easy as long as you plug in the right variables:  the stream of cash and the proper discount rate.

If he is unable to project with confidence what the future cash flows of a business will be, he will not attempt to value the company  This is the distinction of his approach.

Critics of Buffett's DCF valuation method.

Despite Buffett's claims, critics argue that estimating future cash flow is tricky, and selecting the proper discount rate can leave room for substantial errors in valuation.

Instead these critics have employed various shorthand methods to identify value:

  • low price-to-earnings ratios, 
  • price-to-book values and 
  • high dividend yields.  

Practitioners have vigorously back tested these ratios and concluded that success can be had by isolating and purchasing companies that possess exactly these financial ratios.

Value investors versus Growth investors

People who consistently purchase companies that exhibit low price-to-earnings, low price-to-book, and high dividend yields are customarily called "value investors."

People who claim to have identified value by selecting companies with above-average growth in earnings are called "growth investors."  Typically, growth companies possess high price-to-earnings ratios and low dividend yields.  These financial traits are the exact opposite of what value investors look for in a company.

Growth and Value investing are joined at the hip.

Investors who seek to purchase value often must choose between the value and growth approach to selecting stocks.

Buffett admits that years ago, he participated in this intellectual tug-of-war.  Today he thinks the debate between these two schools of thought is nonsense.  

Growth and value investing are joined at the hip, says Buffett.

Value is the discounted present value of an investment's future cash flow; growth is simply a calculation used to determine value.

Growth can be add to and also can destroy value.

Growth in sales, earnings, and assets can either add or detract from an investment's value.

Growth can add to the value when the return on invested capital is above average, thereby assuring that when a dollar is being invested in the company, at least a dollar of market value is being created.
However, growth for a business earning low returns on capital can be detrimental to shareholders.

For example, the airline business has been a story of incredible growth, but its inability to earn decent returns on capital have left most owners off theses companies in a  poor position.

Which valuation method(s) to use?  Which stock to buy?

All the shorthand methods - high or low price-earnings ratios, price-to-book ratios, and dividend yields, in any number of combinations - fall short, Buffett says, in determining whether "an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value for his investments.............Irrespective of whether a business:

  • grows or doesn't,
  • displays volatility or smoothness in earnings , 
  • or carries a high price or low in relation to its current earnings and book value, 
the investment shown by the discounted -flows-of-cash calculation to be the cheapest is the one that the investor should purchase.

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Thursday, 4 Apr 2019

Mark Mobius is worried about the frenzy of construction that’s adding to the existing glut in Dubai real estate.

DUBAI: Three years ago, Mark Mobius saw his luxury apartments in Dubai go up in flames. While the suites have by now been restored to their old splendor, the investor has something else to worry about: the frenzy of construction that’s adding to the existing glut in real estate.

The downturn “will get much worse from here,” said Mobius, a pioneer in emerging-market investing, adding he’d hold off on buying more property.

“I would probably want to wait until there’s a real slump when all this new building comes in and people are really hurting to sell.”

Prices and rents have already dropped by as much as a third in the past five years during what S&P Global Ratings has called the property market’s “long decline.”

The slump will run for another 12 to 18 months because government measures to stimulate the economy -- including granting long-term visas which benefit the affluent and people with specialized expertise -- won’t be enough to revive demand, said Lahlou Meksaoui, a Dubai-based analyst at Moody’s Investors Service.

Mobius recalls how he watched on television from Singapore as revelers in Dubai rang in 2016 with fireworks shooting off the iconic Burj Khalifa.

Just steps away from the world’s tallest building, flames were engulfing Address Downtown and the two luxury apartments he owns in the 63-story tower.

Dubai, one of seven of the United Arab Emirates, lives and dies by real estate. When a property bubble burst a decade ago, it needed a $20 billion rescue from neighboring Abu Dhabi to pull back from the brink of default.

Since prices peaked in 2014, the $108 billion economy had a softer landing as it transitioned from boom to bust.

Early signs of a bottoming out in the property sector even prompted Morgan Stanley to “double-upgrade” U.A.E. stocks in February. An index tracking the city’s real-estate and construction stocks climbed 5.8 percent in the first three months of the year, snapping five quarters of losses.

But Mobius said shares of Dubai’s developers aren’t cheap enough. While the World Expo 2020 fair will reinforce the city’s position on the world map, it won’t be enough to revive the emirate’s property sector unless the government relaxes its immigration policies, he said.

“That’s where you’re going to have real problems,” he said.- Bloomberg

Read more at https://www.thestar.com.my/business/business-news/2019/04/04/burned-by-dubai-mobius-joins-chorus-of-doom-after-property-bust/#IxMsdcbKXA628xpI.99
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Thursday, 4 Apr 2019

Hyflux’s catastrophic slump has spotlighted the plight of about 34,000 retail investors who were lured by the promise of a 6 percent annual return forever from a company that seemed to have a gold seal of government approval.

SINGAPORE: The embattled Singapore water and power company Hyflux Ltd. has canceled a crucial debt restructuring vote after failing to get a commitment from its would-be savior, throwing one of the country’s highest-profile distressed cases into disarray.

Hyflux’s catastrophic slump has spotlighted the plight of about 34,000 retail investors who were lured by the promise of a 6 percent annual return forever from a company that seemed to have a gold seal of government approval. Their ordeal is now even more uncertain.

The company said in a filing Thursday that it has no confidence that SM Investments Pte, the consortium of Indonesian businessmen that agreed last year to rescue Hyflux in return for a majority stake, is prepared to complete a S$530 million ($392 million) cash infusion plan that forms the core of its survival plan.

Hyflux sought “a final clear and unequivocal written confirmation” from the investor on the proposal that would have enabled voters to make an informed decision, it said.

The investor has declined to provide the company with such written confirmation, and thus repudiated the restructuring agreement, it added.

The breakdown follows public spats over some terms in the Hyflux restructuring plan as the company faces demands from creditors. The case also sparked a rare public protest over the weekend in Singapore.

“The restructuring agreement is therefore terminated and the company intends to take all necessary action in connection with such termination,” Hyflux said.

It now intends to work closely with the key creditor groups and relevant stakeholders to find mutually acceptable bases to pursue alternative opportunities, it said. - Bloomberg

Read more at https://www.thestar.com.my/business/business-news/2019/04/04/hyflux-scraps-restructuring-plan-after-spats-with-investors/#WGR1wsEwbfbfZUGy.99

Background story

Once a star company, Singapore’s Hyflux faces major challenges

Hyflux, one of Singapore’s most successful business stories, has applied for court protection to begin a reorganisation of its business and address its growing pool of debt.

SINGAPORE: It had been another record year for Hyflux, as its founder and group CEO Olivia Lum described in its 2010 annual report.

That was the year when the Singapore-based water treatment specialist saw its market capitalisation peak at an eye-popping S$2.1 billion, while raking up another high in revenue and net profit on the back of rapid growth.

But fast forward eight years, and the homegrown firm sent ripples through Singapore for a very different reason.

On Tuesday (May 22), Hyflux said it had applied to the High Court to begin a court-supervised process of debt and business reorganisation – an announcement that some market observers told Channel NewsAsia “has been a long time coming”.

The company blamed “prolonged weakness” in the local power market for its financial woes, which has led to “short-term liquidity constraints in recent weeks”.

In a separate letter to stakeholders, Ms Lum, who also holds the position of executive chairman, said the decision will provide the space and time to focus on ongoing discussions with strategic investors and among other things, optimise operations.


Founded in 1989 with S$20,000, Hyflux has since grown from a fledgling three-person start-up into a leading player in water and fluid treatment with worldwide presence employing more than 2,500 people.

Its rise was synonymous with its founder’s rags-to-riches story.

Much has been said about Ms Lum’s challenging early life. Abandoned at birth and later adopted by a widow whom she called "grandmother", Ms Lum, a Malaysian, started work from a very young age to support the family.

She was determined to do well in school and later moved to Singapore, where she graduated from the National University of Singapore and found a job as a chemist at Glaxo Pharmaceuticals.

However, she soon decided to strike it out on her own and founded Hydrochem with “a big dream and youthful idealism” to solve the world’s water problems.

The initial years of entrepreneurship weren’t easy. In various interviews done over the years, Ms Lum shared how she worked 14 hours a day to sell water treatment products and systems by knocking on the doors of factories in Singapore and Malaysia.

The company got its first break in 1992 when it obtained the exclusive rights from a supplier to distribute membranes and membrane filtration plants to industrial customers. This later paved the way for a research and development team in 1999, which aimed to make its own membranes that would set it apart from competitors.

Then came 2001 – the “defining year” when Hyflux, with Hydrochem as its wholly-owned subsidiary, made a splash by becoming the first water treatment company to be listed in Singapore. It also secured its first municipal water treatment project in Singapore to supply and install the process equipment for the country’s first Newater plant in Bedok.

Other key projects that followed included Singapore’s third Newater plant in Seletar and the SingSpring Desalination Plant, the country’s first seawater reverse osmosis desalination plant.

It also began reaching out further beyond the shores of Singapore, with projects in China, India and the Middle East North Africa (MENA) region, which included Oman and Algeria.

In 2011, Ms Lum became the first Singaporean and the first woman to be crowned the Ernst & Young (EY) World Entrepreneur of the Year award.

That year, it also clinched Singapore’s second and largest seawater desalination project, and proposed incorporating an on-site 411 megawatt combined cycle power plant to produce electricity for the desalination plant and power grid.


But that marked the start of the company’s woes, analysts said.

Touted to be the first in Singapore and Asia, the Tuaspring Integrated Water and Power Project was expected to raise efficiency levels and reduce the cost of desalination. The power plant, which began operations in 2016, also marked Hyflux’s foray into the energy business.

It has, however, been a drag on earnings.

For the full year ended Dec 31, 2017, the integrated water and power plant registered a net loss of S$81.9 million, with wholesale electricity prices clearing at levels that are below fuel costs.

This contributed in a big way to the company’s first annual loss since listing – a loss of S$116.4 million, compared to a restated profit of S$3.8 million for FY2016.

The losing streak continued in the three months to March 31 as Hyflux logged losses of S$22.2 million, widening considerably from a restated loss of S$64,000 a year before. To turn a profit in 2018, a stronger rebound in wholesale electricity prices at a sustained pace will be needed, the company had said.

This strain in the balance sheet and financial covenants coming up may have proven too much.

The water treatment firm has a coupon payment due May 28 on its S$500 million of 6 per cent perpetual securities, which it has said it will not make. It also has S$100 million of 4.25 per cent bonds that will mature in September.

“Hyflux seems to have borrowed too much and the debt is a millstone around your neck when the environment becomes adverse,” said Associate Professor Nitin Pangarkar from the National University of Singapore (NUS) Business School.

While companies with strong balance sheets can survive these downturns, “too much debt can bring down a company”, he warned.

In the case of Hyflux, there was “too much risk” that included the oversupply and deregulation of the local electricity market. “These different sources of risk will tend to multiply.”

Agreeing, CMC Markets sales trader Oriano Lizza said Hyflux has incurred a mounting debt burden from “over-expansion into additional sectors that (the company) may not be so specialized in”.

In addition, market conditions like the massive overcapacity depressing prices and an influx of natural gas as an alternative energy source certainly did not help Hyflux to sizzle in its energy venture.

With the company having “overcapitalised too rapidly and spread itself too thin in terms of asset allocation”, Mr Lizza said Tuesday’s announcement "has been a long time coming".

For iFast’s senior fixed income analyst Ang Chung Yuh, “the speed at which things went downhill” exceeded his forecasts. He had expected Hyflux to be able to meet its obligations for the next 12 to 18 months.

Mr Ang added that he is also unsure as to why Hyflux opted for a court-driven reorganisation process, instead of first approaching creditors, including bondholders, with a proposal.

“But in any case, if management has crunched the numbers and found that it is impossible for them to come up with the money needed one or two years down the road, we think it is a good thing that management has chosen to bite the bullet now rather than later,” he added.


Analysts agreed that the 30-day moratorium, which kicked in automatically from the date of Hyflux’s application to court, will buy the company some much-needed time.

Mr Lizza thinks the immediate remedies for Hyflux include turning to its investors and shareholders for additional capital injection or speed up the sale of its existing loss-making assets.

“If they are able to shift these assets for cash in the short term, it will give them continued breathing space until they can balance their books.”

Hyflux said in February last year that it is exploring a partial divestment of Tuaspring, and has also been looking at a potential divestment of its Tianjin Dagang desalination plant. Alongside the release of its first-quarter financial report earlier this month, it said that divestment discussions for these two projects are in progress with interested parties.

But now that things have changed, Hyflux will have to play its cards carefully.

“The problem is that investors will be circling these assets in hope of a bargain because they know the situation that Hyflux is in,” said Mr Lizza. “If they sell too little, it won’t get them out of the current situation but if they are unwilling to budge on current prices, they won’t (get) any interest.”

“They are really in a sticky situation,” he added.

Mr Ang reckons a debt restructuring could be a “virtual certainty”.

“In our opinion, to have some chance of restoring Hyflux’s financial health for the long run, the exercise needs to involve a debt-to-equity conversion of a substantial part of the perpetual securities,” he said, adding that the firm had about S$2.4 billion of debt outstanding at end-March if the perpetual securities are taken into account.

“Short of a Government bailout, it is difficult for us to conceive a scenario where a capital injection by external investors could achieve a sustainable capital structure for Hyflux.”

Hyflux on Wednesday morning called for a suspension of trading in all its shares and related securities, which had been halted since Monday and analysts do not rule out the prospect of heavy selling when it resumes trading.

The route ahead for Hyflux will not be an easy one, experts added.

Describing the trading halt and seeking of court protection as “a broad, open admission of its festering business problems”, NUS Assoc Prof Lawrence Loh said: “Hyflux’s ongoing reorganisation move is necessary to ensure that any asset divestments will get the best value for its stakeholders, particularly creditors and shareholders.”

“While there were already market expectations for the troubles at Hyflux, the issue has probably brewed for a time much longer than necessary. Hyflux has probably seen this coming and could have been more expeditious and decisive in its restructuring efforts along the way,” he added.

As Ms Lum had forewarned in the company’s latest annual report, 2018 was going to “be another challenging year”. But with “boldness, entrepreneurial spirit, customer satisfaction focus, and teamwork”, she said she was confident of overcoming the obstacles ahead.

During a 2016 interview with Channel NewsAsia, the award-winning entrepreneur described herself as a “more optimistic person”, and that challenges and uncertainties are the norm for any business.

“I still have the hunger in me,” she said. “Every day, I still look forward to more and more exciting business opportunities and persevere to manage the challenges.”

And with that, all eyes will likely be now on the businesswoman to see if her unique brand of tenacity can reverse the fate of one of Singapore Inc’s most-visible success stories.

Source: CNA/sk
Read more at https://www.channelnewsasia.com/news/business/hyflux-singapore-court-supervision-faces-major-challenges-10260230
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