Wednesday 31 August 2016

Transaction Update, Ausgroup, Future of Singapore's O&G

Transaction Update

For the month of August, I have divested the following:

Silverlake Axis - Banking on today's price run, I have taken the profits as I think silverlake is just about fairly valued at 4.8% dividend yield

First Ship Lease Trust -  The MR2 tanker prices have been falling and thus time to sell off.

XMH- Sold off for better utilisation of cash.

Using the cash, I have started accumulating Ezion at 31, 27, 26 and 22 cents. Please see the "Future of Singapore's offshore"


Ausgroup's financial results was a disappointment. The group has impaired its assets, resulting in a net loss of close to 100mil. However, one thing stood out.

Reading, page 6 & 7 of its full year results, it seems DBS has been actively lending money to it on a short term basis. What stands out is that in Q2, the company was already in bad shape for its balance sheet but in Q3, DBS still lent support. Nevertheless, I still think Ausgroup is in serious trouble and is unlikely to be able to repay its bonds and outstanding bank loans.

Future of Singapore's Offshore

Reading Ausgroup's financials, Krisenergy and Swiber events, to me, it seems DBS is trying to contain the O&G's malaise by extending credit to prevent a contagion effect. However, many of these companies in the O&G sector are over leveraged. In my opinion, there may be further defaults as it is very difficult for our national bank to support all of them.

The outlook is pretty bleak as of now with many oil majors slashing capital expenditure. It is going to be difficult for all companies to tide through when there is a fall in orderbook.

I have started to sieve out companies which are "too big to fail"; and will have a domino effect. One such company sieved is Ezion, whose debts is in the region of 1 billion. It is one of the largest rig charterer in South East Asia. Doing my own research, I have found one of its recent bonds is uniquely structured with DBS supporting it [see here]. However, I will like to warn my own position stake in Ezion is a risky bet because the banks may just give up on Ezion and let the 1+ billion of debt default with domino effect being felt in the ofshore industry.

I highly doubt Swiber and Technics will be the only listed companies we will hear that defaults; despite our national bank's valiant efforts. More default are likely.

Saturday 20 August 2016

How Perpetual Securities affect Ordinary Shareholders

Perpetual Securities are a class of financial instrument and has in recent times gained popularity due to a low interest environment. Companies such as Ezion, Hyflux and even Mapletree Logistics Trust have issued such instruments to retail investors. This post seeks to cover the basic of Perpetual Securities and how it affects ordinary shareholders

Classifying Perpetual Holders

Perpetual Securities are bond like instruments which gives perpetual holders a fixed dividend payout at each time period. In addition, it has no maturity date to redeem and its dividends are either non-cumulative or cumulative (cumulative means the payment of dividends are accumulated and brought to the next payment date). It is classified under "Equity" in the balance sheet. Below is Hyflux's balance sheet which shows that perpetual securities are classified under the "Equity" section.

Hyflux Balance Sheet
So while Perpetuals do have bond-like payments, it is classified as "equity".

Perpetual Securities where do they rank?

In the event of a liquidation, the proceeds of the companies are distributed in this general order:

1) Secured Lenders
2) Unsecured Lenders
3) Perpetual Holders
4) Ordinary Shareholders

Perpetual holders are behind lenders but ahead of ordinary shareholders when receiving the leftover proceeds from the sale of a company assets.

What it means to Ordinary Shareholders?

As ordinary shareholders who own shares of a company, we are the last in line to: i) Receive dividends/payments or ii) Proceeds from a company's liquidation. Seems quite a lousy deal for us and this is precisely why we should always carefully assess the value of our shares! 

Therefore, while some companies may proclaim that they have a healthy leverage or debt servicing ratio; as investors, it is our due diligence to check the validity of their claims by analyzing for other obligations or preferred shareholders who are ranked ahead of us. Using Hyflux's balance sheet as an example, it can be seen that preference shares contribute to approximately half of the company's equity. 

Quiz time: Usng Hyflux as an example, if Hyflux is liquidated and instead of relaising its full equity value of 1.7 billion,  the company only receives 1 billion as leftover for its equity holders. How much does perpetual holders and ordinary shareholders receive separately? 

Answer: $964 million to perpetual holder & $36 million to ordinary shareholders

Yes, this how it works. Perpetual Holders receive proceeds before ordinary shareholders.

Profit effect to Ordinary Shareholders

That's not all. Let's look at Hyflux's latest profit & loss financial statement

Both snapshots are taken from the same financial document. However there is something strange. On the first page, Hyflux reports a net profit to the owner of the company; but digging deeper, Hyflux in fact made a loss for ordinary shareholders. How is it possible?

This is because the dividends paid to perpetual shareholders was factored. As a result, while Hyflux did report profits for the period, ordinary shareholders of the company faced with a loss. This also means the net asset value of their shares decreased. This is the effect of perpetual securities dividends to ordinary shareholders.

Company's net profit - dividends to perpetual holders =  Eventual Profit to Ordinary                                                                                                     Shareholders


As equity investors, it is important for us to check for the presence of such financial instruments in a company's balance sheet. It tells us a lot of information and will affect our valuation of a company's earnings, cash flow generation ability and proceeds available to ordinary shareholders in the event of a liquidation. 

< The author is neither vested nor shorting Hyflux Stocks, Hyflux is used because it is a good case study and a popular brand name people can associate with in Singapore>

Friday 19 August 2016

A new addition - Ezion Holdings

Thanks to the roll out of Pokemon Go in Singapore, I have been fairly quiet in the investing realm. However, the achievement of "level 20" milestone has turned my attention back to investing. My recent purchase has been in Ezion holdings in the region of 0.29.

In one sentence, Ezion owns liftboats and charters them out. Its business segment is mainly in South East Asia where many oil wells in SEA are maturing and will require maintenance; this is where the use of liftboats is needed. Its share price has fallen drastically due to Swiber's turn of events and its own recent rights issue. However there are a few positives for the company.

1) Customers

Ezion has a few customers who are national oil companies in the South East Asia region. As these customers are mainly NOC and SOEs, the delinquency rate should be better. However, it is worth noting that Ezion did impair a significant amount of receivables last FY. It is important to note that even despite being national oil companies (NOC), there is still a chance of late payment. One of the most newsworthy article is how Saudi Arabia, a rich oil nation, has delayed payment to its contractors ( see here).

In addition, the company has been trying hard to charter its liftboats as evident by its venture to offshore wind farm support with its partner, a Chinese SOE - Chinese Merchant group.

2) Balance Sheet

The recent rights issue has strengthened Ezion's balance sheet. In addition, Ezion's debt maturity has a long duration. Rolf has provided a good breakdown of Ezion's debt in his blog, which can be found here . A significant portion of Ezion's bonds matures in 2018 to 2021. Hence if liftboat charter rates do not improve in 2018, it will be when I have to reconsider my position.

In addition, one of its debts caught my attention - "Ezion 3.65% 2020". The bond has been uniquely structured in that if Ezion defaults on its s$120 mil bond, DBS will repay on its behalf and convert the amount as loan to Ezion. Details of the bond can be found here . To me, it seems Ezion has the credit support of DBS and this will enable Ezion to get lower interest for its loans. In many business models such as Ezion's, it is important that banks give their backing, otherwise, you will be in for a hard time during tough times like now.

From Ezion's annual report 2015, Ezion's loans are of relative low interest. Furthermore, with the recent rights issue s$140 million, its balance sheet should be strong enough to last till the first tranche of bond due in August 2018.

Ezion's Bank Loans

Worries on Ezion

As a shareholder, Ezion's perpetual securities of 7.0% is a sore thumb. In my opinion, as ordinary shareholders of a company, perpetual securities should be viewed as a debt because 1) perpetual holders are ranked higher than you in an event of liquidation and 2) often, they will have to collect their dividend before you do. I will write more about what perpetual securities are and its effects to ordinary shareholders of a company in a separate article.

Moving back to Ezion. Ezion has perpetual securities which are cumulative and costs 7% per annum. It was issued in 2014 and if the company does not redeem it at the end of 2018, the "interest" will step up to 10% per annum. In my opinion, the company will definitely have to redeem its s$150 million in 2018; this is because "debts" at 10% interest will kill off the company's margin. Hopefully DBS will grant it a loan to redeem its perpetual securities, otherwise another rights issue will happen.


My investment in Ezion is more of a special situation, the company's valuation by Mr Market has been beaten down so much, that there is likely value in it. Post rights, the market is currently pricing Ezion at a market cap of s$551 mil (US$ 410 mil) - valuing Ezion's PPE+ JV+ Associates to be worth 1940mil instead of 2540 mil on its balance sheet. To me, there seems to be a slight mis-pricing, given that its many service rigs are new. However, I do agree that the value of its associates are not worth its 83 million stated because it contains Ausgroup, Charisma Energy and JK tech, which I think are worth much less.