Hyflux’s Worrying Cash Flow Situation

by: Tam Ging Wien

- Years of Profits Did Not Translate to Cash Flows

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This week, we decided to take a look at a company which hasn’t really been on investor’s radar lately. We have noted a general absence of coverage of Hyflux Ltd (Hyflux, SGX:600) in the media and decided to break the media silence regarding this well know company.

Patchy Revenue

Source: Hyflux Ltd Annual Reports

The first thing we note about Hyflux is its patchy revenue trend. This is understandable as it generates significant amount of revenue from project based work in its Design-Build-Own-Operate model.

Revenues from H1-FY2017 was sharply lower as Hyflux has plants to partially divest Tuaspring Integrated Water and Power Plant (Tuaspring). Revenue from Tuaspring is no longer recognised on its Income Statement.

Declining Profits

Source: Hyflux Ltd Annual Reports

The profitability pattern of Hyflux seem to correlate well with its revenue pattern during the period of FY2011 to FY2014. However from FY2014 onwards, profitability has been on the decline. Hyflux reported a loss during its half-year report ending 30-Jun-2017.

Hyflux posted a loss in H1-FY2017 due to losses from Tuaspring facility. Had the Tuaspring results been excluded, Hyflux would have posted a profit of $23.6mil for first half of FY2017 – in alignment with the pre-tax profit.

It therefore appears that by divesting loss making Tuaspring, Hyflux may improve its performance in the future. But we will need to monitor its future results announcement to be sure.

We noticed a peculiar pattern, Hyflux appears to be paying higher dividends from FY2014 onwards despite a fall in its profitability in the same period. As the dividend payout is higher than its profitability, it would need to pay the access from its retained earnings.

Declining Retained Earnings

Source: Hyflux Ltd Annual Reports

Not surprisingly, due to repeatedly high dividends (above its profits) payouts, Hyflux has shown a consistently reducing retained earnings trend since FY2014. At the time of writing, Hyflux’s retained earnings stands at $146.87mil – about half of what was reported during FY2014.

If this trend of low profitability and high dividend payout continues, Hyflux would eventually drain away all its retained earnings and would cease to be able to continue paying the same amount of dividends.

Consistently Negative Operating Cash Flow

Source: Hyflux Ltd Annual Reports

Turning to its operating cash flow trends, we notice that since FY2011, Hyflux has been operating in a negative operating cash flow situation. This means that its core operations does not generate enough cash flow to self-sustain.

If this is true, why isn’t the profits turning into cash? Where then does Hyflux get the money to pay the dividends?

Source: Hyflux Ltd Annual Reports

We decided to inspect the receivable and payables to see if we could find any clues. We noticed that both receivables and payables have been increasing since FY2014.

If the receivables are increasing, it means that the revenue made had still not be collected in cash yet, hence the amount owed to the business is recorded in the asset section of the balance sheet. Similarly, if the payables are increasing, it means that the payments owed to the creditors have still not been made in cash yet. It does look as if payments to creditors are increasing while payments from debtors are also increasing. But the receivables and payables alone are insufficient to explain the difference between the profits and the cash flow.

Source: Hyflux Ltd H1-FY2017 Financial Report

It turns out that besides the receivables and payables which are fairly significant, there are also receivables from service concession arrangements. These concession arrangements arise due to the Design-Build-Own-Operate contracts in Singapore, Oman and China where during the concession period, Hyflux will receive a guaranteed minimum payments annually. These concession arrangements are classified as “Financial Receivables” on the non-current asset section of the balance sheet.

But that still doesn’t explain where Hyflux get the money to pay the dividends announced.

Debt Loads Increasing

Source: Hyflux Ltd Annual Reports

The answer seems to be in Hyflux’s ever increasing debt loads. Their interest bearing debt (loans and borrowings) ratio has moved from 77.4% in FY2011 to 214.5% in H1-FY2017.

Debts are calculated by adding all the current and non-current loans and borrowings while the equity is the equity without the non-controlling interest and perpetual capital securities. The reason why the perpetual capital securities has been excluded from the equity is because it is also a form of debt – Hyflux will need to pay interest on these to the perpetual security holders.

Source: Hyflux Ltd Annual Reports

Plotting the trend of their annual interest also shows a steadily increasing trend. As the debt load increases, so does the interest payments. However we notice that FY2016 to H1-FY2017 shows an increasing interest paid despite their debt-to-equity ratio being constant. This means that they are taking on new debts with higher interest rates to pay off debts with lower interest rates. These could be confirmed with the release of future results in Q3-FY2017 and Q4-FY2017.

At $74.33mil interest paid in FY2016, it is significant compared to its $122.79mil operating cash flow generated before working capital changes. That’s nearly 60.5% of its cash flow used just to pay interest!

In FY2016, Hyflux has raised through a retail offering a staggering $500mil worth of perpetual securities paying a mouth-watering coupon rate of 6%! And that is not all, these perpetual securities come with step-up rates in 2020 to 6.2% plus the four-year swap offer rate if they are not redeemed! In the same year, they redeemed two earlier perpetual securities with coupons of 4.8% and 5.75% respectively.

Based on the current price of $0.50 and a total of 785,284,989 shares as of 30-Jun-2017, Hyflux has a market capitalisation of $392.64mil. But this is dwarfed when placed side by side with its existing loans and borrowings of $1,308.65mil. Hyflux current debts (not including the perpetual securities) are more than 3x its market cap!

Sale of the Tuaspring plant a turning point?

Announced in its FY2016 full year results released on 23-Feb-2017, Hyflux states that it is “seeking partial divestment of the Tuaspring plant subject to the relevant regulatory approvals”.

On its balance sheet, the “assets and liabilities held for sale” related largely to Tuaspring and Tianjin Dagang. Assets and liabilities of these 2 entities are recorded at $1,711.33mil and $664.62mil respectively. If it is even able to sell half the stake at the value stated on the balance sheet, it could potentially raise $523.36mil of cash which would go a long way to reducing its debt and hence its interest payments.

We hope to see a successful partial divestment of their Tuaspring plant in the coming months.

Perhaps this divestment is what they need to turn their fortunes around?

We will be monitoring this sale closely for a potential turnaround counter. But for now, we will be staying away from Hyflux.


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee, or other group(s) or individual(s).

The author at time of writing does not hold any stake in Hyflux Ltd.


Positioning to Ride the Recovery

Opportunities and Risk Post-COVID-19 Pandemic in the various S-REIT Sectors

The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.

The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.

But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.

Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.

Our speaker Tam Ging Wien will be sharing his knowledge and experience including:

  • Part 1: A Survey of the REITs Landscape Around The World
  • Part 2: Key Metrics in Identifying Strong REITs
  • Part 3: Real Estate Sector Review Amidst the COVID Crisis
  • Part 4: Screening for Opportunities
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Real estate sector-by-sector review on COVID-19 impact and recovery opportunities. Sectors covered include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
  • Opinion on which sector will continue to stay resilient and which are poised to recover quickly post-pandemic
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • Step-by-step demo of how to screen for high quality REITs on your own

During the sharing session, various Singapore-listed REIT examples will be used.

There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.

Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).

The details of the event are as follows:

  • Seminar: Positioning To Ride The Recovery
  • Date: 5th May 2021 (Wed)
  • Time: 7:00pm to 9:45pm
  • Venue: RNN Conference Centre - Kyoto Training Room (Level 4), 137 Cecil Street, Cecil Building #04-01, Singapore 069537
  • Fees: S$10.00
  • Sign-up Link: http://reitessentials.eventbrite.com/

To learn more about REITs, we recommend the article: What are REITs?


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