First Ship Lease Trust - Q4 earnings

FSL has released its Q4 results. All in all, a rather muted outlook. So here's a summary

Lower Cashflow generation

Year on Year cashflow generation ability has fallen to US$40 million range, previous year was US$51.4million Thereafter, this amount is likely to drop to US $20 million with the loss of the lucrative US$ 20 million evergreen charter come 2021.

Valuation based on Balance Sheet

On balance sheet, FSL has debts of $97 million 6.7% per annum interest and a 7% convertible bond of 6.3 million.

Using a simple cash flow projection, it is now estimated that FSL is likely to pay down this loan up to Year 2024. However this is unlikely to happen.

It seems FSL is planning to expand its fleet by adding brand new ships to its existing fleet. Cashflow wise, the conversion to interest only loans and that of convertible bonds ensures that the Trust will be able to finance the building of new ships which are to be delivered to the trust

This changes the entire situation and we will have to see how much yield does this new ships achieve when they are delivered to the fleet. Previously, I had valued FSL on an assumption that the trust will self-liquidate itself but things are now changing

How Hyflux was taken advantage by almost everyone

I am pretty sure many readers will be following the Hyflux restructuring.

In my view, it is unfortunate that many external  parties are taking advantage of the situation and in turn, making the 34,000 stakeholders of Hyflux less well of - many of whom are ordinary Singapore Citizens and retirees who have their CPF/SRS or even retirement money in Hyflux's financial Instruments. Chief of this is Salim or Sembcorp who have tried to swoop in to take advantage of having a controlling stake in Tuaspring, a jewel in Hyflux asset despite it being  claimed "toxic".

For basic background information, the current deal is that Salim (SMI) is offering $400 million in equity injection for 60% of Hyflux with the condition that junior bond creditors, perpetual and preference shares stakeholders relinquish their current debt claims. This puts Hyflux at an overall value of $667 million, without needing to pay financial expenditure and cash outlay to bond and perpetual/preference shareholders.

Profitability and Cashflow Generation of Tuaspring

In Hyflux annual report FY2017, Hyflux made a loss of $81.89 million and if we are to strip off the financial cost of $46.6 million, the plant only made losses of $35.2 million. Tuaspring's revenue is greatly dependent on the Uniform Selling Electricity Price in Singapore (USEP). Next, in Hyflux's CEO court affidavit on14 Feb 2018, she revealed that spark spreads has turned positive in February 2018. This meant revenue earned from USEP covered the operational cost before financing cost at Tuaspring. This was when USEP is $99.5/Mwh.The USEP value fluctuates according to the power demand and supply of Singapore's needs. Below is a summary of USEP prices and Tuaspring profitability:

2016- USEP was $63/Mwh-- Tuaspring made losses of $114.4 million and if financing cost is excluded, the plant made a loss of $64.5 million.

2017 USEP was $81/Mwh-- Tuaspring made losses of $81.8 million and if financing cost is excluded, the plant made a loss of $35.2 million

Feb 2018 USEP was $99.5/Mwh-- according to Hyflux's CEO affidavit, it's points to the fact that  Tuaspring would have made only slight losses ignoring financing cost.

If we are to observe for every increase of about $18 in USEP, Tuaspring generates about $30 million more in profitability. Based on current USEP prices of $105 (as of 12 Feb 2019). The plant is definitely profitable (before financing cost) and cash flow positive, in terms of operating cashflow.

Bidding Process Of Tuaspring

Unfortunately, despite the upturn in USEP prices of Tuaspring, the regulatory bidding process for Tuaspring affected Hyflux's attempts to maximise the value of Tuaspring for its shareholders. In Hyflux's reply to townhall question by investors, it is revealed that only 2 out of 8 interested bidders were approved by PUB to bid for Tuaspring. The end result was that Sembcorp bidded in the region of $500 million for Tuaspring which had a book value of $1.3 billion. This greatly eroded the value of the most valuable asset in Hyflux' book.

If we are to view the timeframe of 2018-2019, USEP prices have been generally stable in the region of $100/Mwh.This means a significant portion of its $1.3billion book value is realisable under current circumstance. Furthermore, as Genecos have now stopped their construction of more power plants in the face of a power overcapacity in Singapore, it is plausible that USEP will remain at this $100+ level or even drift higher over time. Hence in my view, the plant does have a value in the region of $1 billion

Given that there were also indicative bid received of $1.3 billion from UAE or PRC business parties, it is unfortunate that the full realisation of Tuaspring's value was curtailed by regulatory approval process. If all 8 bidders had been pre-approved by PUB, the likelihood is that Tuaspring would have received a higher bid than Sembcorp's lowball bid. To add salt to the wound, when PUB called for an open tender to build Tuaspring 2011, there were no restrictions and companies from various countries were allowed to bid for the construction of Tuaspring.

Salim's Low Ball Bid

Salim was not one of the two pre-approved bidders for Tuaspring, however what Salim did was to mount a takeover for the entire of Hyflux (including Tuaspring) under the condition that it will offer $400 million in equity injection for 60% of Hyflux with the condition that junior bond creditors, perpetual and preference shares stakeholders relinquish their current debt claims. This put Hyflux at the value of $667 million.

If we are to assume that the rest of Hyflux's operation is of zero value and that Tuaspring contributes to the entire profitability of Hyflux. Paying $667 million for Tuaspring is a steal because of the current USEP environment etc. This is indeed higher than Sembcorp's bid of $500+ million, but in my view is an offer to take advantage of Hyflux's financial malaise.

Being Taken Advantage of

Undoubtedly, if Hyflux had not been forced into a financial corner, the company would have realised most of the $1.3 billion in book value throughout Tuaspring's remaining lease. Because of the regulatory approval process which only allowed 2 out of the 8 interested parties to bid, it gave Sembcorp the opportunity to take advantage of Hyflux, who wanted to have Tuaspring to reap the plant economic value; after this failed, it was Salim's turn to attempt to take advantage of Hyflux's financial predicament.

Thus, many retirees and other stakeholders face the rude shock of losing close to 90% of what they have put into supposedly low risk financial instruments. This is the cruel reality of the world where people take advantage of the failings of others. Things don't seem fair.

Why Hyflux Perpetual and Preference Holders should Vote "No" to the Restructuring.

Hyflux has released its offer to bondholder, perpetual holders towards restructuring of the company after the Tuaspring's offer. 

Details of Offer for Perps and Pref Shareholders

To summarise, Hyflux has offered to exchange the $900 million in value for Perpetuals and Preference shareholders into 10.26% of the restructured company + a $27 million cash repayment.

Based on Salim action of injecting $400 million to obtain 60% of the restructured company, it can be seen that 10.26% of the company, worth roughly $67 million, was given to perpetual and preference shareholders. This means Preference and perpetuals holders will get about $94 million back for their $900 million

While the CEO and board of directors has made a goodwill gesture by giving their shares to retail holders, I think the current deal is not good to the current group of perpetual and preference holders and should be voted against. 

Voting "No" to the restructuring may result in getting more capital back

In Hyflux's reply to the Townhall questions, it was singled out that the company received an indicative bid which valued Tuaspring at $1.4 Billion (inclusive of Maybank's $518 million debt attached to Tuaspring) from parties of UAE or China, this is shown in the screenshot below, source

Hyflux Answer to the Townhall Question on Tuaspring Value

As mentioned, only two companies were pre-approved by PUB to bid and this resulted in Sembcorp submitting a bid less than $518 million (inclusive of Maybank's $500+ mil debt). Judging by the description of events, if more bidders had been pre-approved by PUB, Tuaspring could potentially fetch up to $900 million should Tuaspring be put into the market again.

Secondly, it is worth noting that in recent times, USEP in Singapore had been inching upwards and this means in future, Tuaspring will be worth more in value. The majority of Tuaspring's revenue is derived from selling electricity (via USEP); and since 2015, USEP prices in Singapore has increased from $60+ to that in the region of $110. The near doubling in electricity price in Singapore means a potential re rating of Tuaspring value and  possible realisation of a larger proportion of the stated $1 billion plus book value valuation.

To perpetual and preferences shareholders, an increase of $400-500 million in realisable value is a significant amount of money and points to a potential increase in capital recovered. Even if there are only given 25% of the extra money, it will mean a doubling in amount of capital they can recover.

During the townhall, Perpetual and Preference shareholders were offered the worst case scenario where in the event of liquidation they would receive nothing at all. However, this might not be true given that we are now aware that the value of Tuaspring is more than what Sembcorp has offered. Due to the restrictions imposed by PUB and the need for them to approve the buyers,  this has resulted in a massive loss to perpetual and preference shareholders 

It is strongly advised that the first offer be rejected. In my own opinion, a minimal 20% recovery rate is a possibility, considering all known facts

Investing mistake in Ezion Holdings

Ezion Holdings thus far is probably the largest investing mistake I have made so far. So perhaps its good to do an after action review of it.

Turn of Events- The straw that broke the Camel's back

The recent announcement of Ezion not having obtained its working capital financing is the most damaging issue. My mistake was that I had assumed when Ezion paid its lenders on 3 July 2018 the consent fee to obtain the working capital loan, it would have meant that the loan will be given soon after; however, it seems not to be the case.

7 Months on, Ezion has not obtained a working capital loan and is in a liquidity issue. This has resulted in its liftboats not being able to rented out because customers do not trust if Ezion can service and operationalise its lifeboats. As for the jack up rigs, Ezion has not been able to repair without the working capital.

As a result of not being able to obtain working capital loans, Ezion's revenue forecast is likely to be set back an entire year. This will affect its profit realisation to a great extent.

Lesson Learnt- A restructuring does not mean a complete restructuring

Lesson 1: Wait until the full restructuring has taken place- yes, the consent fee to banks may have been paid, but banks can still delay upon giving them the loans. Hence, I guess should I invest in distressed companies, it will be important to wait until the balance sheet is entirely cleared off its liabilities; no doubt the rewards may be lesser, but so too is the risk.

Lesson 2: Liquidity affects your customer perception of you- customers may be afraid that you are unable to fulfil your terms of agreement and as a result, return you your goods. This results in a loss of business for you.

AS for the valuation, given the unknown limbo it is in now, it is impossible to value the intrinsic value of the company any longer

The Curious Case of Sino Grandness (Part 2)

6 months back, I wrote about my interesting observation of Sino Grandness (SFIG). In the last few days, TTA a company which has loaned to SFIG made an announcement that SFIG has not paid back the loan amount of about RMB 140 million. This is despite the company having extended the maturity date of their loan once.

The link can be found here

In my opinion, given that SFIG has a cash balance of RMB$416million, it should not be possible for SFIG to miss the repayment of RMB$140 million.

Increasingly High Receivables and Dicey Cashflow

One thing that is increasingly worrying is how high the receivables are at. At current count, it is about RMB 1.5 billion, which is about 120 days of revenue. Furthermore, from the cashflow point of view, the receivables has always been increasing and never stopping. No doubt, the business could be expanding but I seriously doubt so.

Furthermore, in its last financial year, the company was able to produce RMB$500 million despite still increasing its receivables. This means operationally the company should be able to easily repay by managing its cash well for just one quarter; hence so to be unable to repay a RMB$140 million loan despite being cash positive does not seem plausible. Furthermore the company did an equity raising of RMB$200 million last year. This totals an amount of RMB$700 million in cash and yet they are unable to repay a small loan

Given these recent event, I will be adverse towards owning the company's stocks because of the fear of its eventual implosions.

Year End 2018 Portfoilo Update

It has been a while since the last update of my portfolio; since then the market has experienced a turbulent time of decline. Among my portfolio, a stock of mine, First Ship Lease Trust (FSL Trust)has announced a drastic corporate actions. This too has spurred me to react.

Divestment- First Ship Lease Trust

In Nov 2018, FSL announced plans to issue a non renounceable equity raising by issuing new shares at a ratio of 3 new shares for every 2 shares at a price of $0.045. The price of the new shares was at a massive discount to FSL's reported book value of $0.37 as well as the company's fair value of about $0.10 based on the current fleet's value. The issue price is deeply discounted. What is perhaps even more shocking is that is the "non renounceable" nature of this action.

A "non-renounceable" offering means that shareholders are not allowed to sell their rights off on the SGX. Shareholders have to subscribe with their own money or risk getting diluted. This prevents them from not being able to monetise the options should they decide not to subscribe. Seen in this light, my gut feel is that the management felt that it was difficult to raise money from other sources for its fleet renewal and hence, unitholders are forced to subscribe with their money or be heavily diluted.

Fortunately for me, I have started to divest my stake in FSL sometime back in Oct 2018, however I am still holding a significant stake in FSL. The reason for my divestment pre these corporate action is because better companies have pop out and I have re allocated my portfolio. I will be continuing to divest FSL, probably until my stake is in the low number such that I can subscribe to the offering without holding too much FSL shares in the end state. Furthermore the purchase of 2 more tankers will only boost the Assets under management for FSL and increase the management fees the trustee owner will get; I am not sure if purchasing new tankers with an overly dilutive offering will be beneficial to current unitholders.

Addition- Ezion Holdings.

What has been my biggest and highest addition is Ezion Holdings. It is more towards a gamble because I am speculating that liftboat charter rates will improve from its US$29,000 daily rate to that of about US$50,000 daily rate.

Based on a back of the envelope calculations, I foresee that Ezion should be able to charter 12 out of its 14 Liftboat fleet at about US$45,000 daily rate next year. With a cost structure of $46 million per quarter (which includes interest), based on its recent quarterly reports; the company should be able to breakeven in 2019. Current lift boat charterer rates are about US$35,000.

I am basing that eventual state of US$50,000 daily rate will help the company turnaround and this will improve its valuation. However, I too hope that the company will not indulge in too fast an expansion given how debt laden it is now and hopefully it has learn the lessons of the past which brought it to where it is now- too much debts and faced by an industry downcycle.

Addition- Asian Pay TV Trust

I bought this stock after the ex dividend of its recent corporate action. The rationale for the purchase of the company is because of my expectation that the new annual 1.2 cents Dividend is sustainable, as of now.

From its quarterly cash flow, the amount of cash APTT generates after netting off CAPEX and interest expense is approximately 38 million to 40 million annually. This translates to 2.5 cents to 2.75 cents in cashflow generated per share. At a dividend of 1.2 cents, the dividends outflow is only 50% of the current free cash produced. 

The company currently produces about 190 million in operating cashflow. Hence this means that if business is to decline by about 10%. APTT dividends to cash flow ratio will hit 100%. Factoring this into consideration and the apparent fact that APTT's business has deteriorated by about 6% last year; it shows that the current dividend may only be sustainable for approximately 2 years. However, at its current price of 12.5 cents, I feel there is a slight margin of safety at 9.5%. And I do not think the decline in ARPU for APTT will be as drastic as its previous 2 years. Of course should APTT share prices move up to the region of 14 to 15 cents range, I feel APTT will be fully valued at an 8% yield, considering the industry challenges in Taiwan as well as high debt load

So that's all I have to update- a Happy New Year of 2019 to readers!

First Ship Lease Trust (FSL) - Q3 Earnings

FSL has released its Q3 results. All in all, the trust has survived the threats from banks. However from its recent Q3 results, it seems there has been some damage to the company.

Higher Financing Cost

Reading its latest Q3 reports, it seems the new bank loans have a higher margin than the old loans interest of (2.8%+ LIBOR). The new loan arraignments have a weighted average of (4.012% + LIBOR). This means as of now the loan's interest rates are about 6.55%. This is quite high and will definitely affect my previous valuation of FSL.

Coupled with the refinanced 7% convertible loan, it is undeniable financing cost has risen. In my view with the Fed still likely to raise interest, I may have to assume that FSL will have to pay about 7.5-8% for its loan refinancing. After all most of its loans are floating rates.

Also based on its cashflow, it seems FSL is paying down on only the interest as opposed to the previous loan pay down which was amortized.

Cashflow

On the cash flow front, TORM's revenue loss affected as usual. The company is likely to be only able to churn US$37 million in cashflow until 2020. Thereafter, this amount is likely to drop to US $20 million with the loss of the lucrative US$ 20 million evergreen charter.

Valuation

Using a simple cash flow projection, my previous estimate of being able to pay down its loan by 2022 has been pushed back to 2024. This is because of the higher interest cost as well as the fact it has changed from an amortizing loan to that of interest only. This will definitely strain FSL's valuation despite making it easier to run on a cashflow basis.

There may be a chance of dividend resumption though because FSL's cashflow is now on a much better standing.

Based on the cashflow projection, scrap value of US$40 million and 8% discount rate, FSL's fair value is now 10.1 SG cents. There is still an upside from its recent price of 7.3 SG cents