Hyflux's preference shares are bond like instruments which gives the holders a fixed dividend payout at each time period (6% for Hyflux's case). These dividends are paid on a pro-rated semi annual basis and cumulative, meaning to say if Hyflux defers on paying dividend this year, it will be rolled to next year. It can be for an indefinite period However, these preference shares has no maturity date to redeem, but Hyflux has to pay 8% dividend if they do not redeem on April 2018. I have written how preference shares work in a previous post.
Why did I invest?
To me, it seems the preference shares looks like a deal. This is because at its selling price of 93.30 and if Hyflux decides to redeem its preference shares on April 2018 (at face value of 100.00), it means I will obtain a return of about 0.065 (100- 93.30- comission) and 3 semi annual dividends of 0.03. That is about a total return of 16.6% for a 1.5 year holding period
That is the good side.
What is the downside?- Hyflux going bankrupt in the next 5 years with its assets only able to repay it lenders; leaving nothing to shareholders. However, I find such a scenario being remote. This is because I hold the view that in the event of liquidation, Hyflux has enough stated assets on the balance sheet such that preference shareholders will recover a significant amount of principal.
As of now, equity shareholders hold 700 mil of the equity, which is about 20% of Hyflux's assets. Hence a loss of this magnitude is neccessary to have any impact on preference shareholders. That to me is an adequate margin of safety.
As of now, equity shareholders hold 700 mil of the equity, which is about 20% of Hyflux's assets. Hence a loss of this magnitude is neccessary to have any impact on preference shareholders. That to me is an adequate margin of safety.
The other downside is that Hyflux decides not to redeem in April 2018. In such a scenario, I will be left with a stock which I had bought at 93.30 but yields 0.08 cents annually. That gives me an effective yield of 8.57% which is decent. Furthermore given that these dividends are cumulative, should Hyflux turn around and decide to redeem the preference shares; it will have to pay the face value and all the accurred dividends.
Are the Dividends Sustainable?
Are the Dividends Sustainable?
As of now, Hyflux's operating cash flow generated, nett of PPE acquisition and interests, is roughly equivalent to the distributions (dividends) it has been paying out. Furthermore with the opening of more plants, which means more revenue, its semi annual payouts are definitely sustainable.
Conclusion
I find that Hyflux Preference Share is now a decent prospect to park some money and bank on the possibility of a redemption in April 2018.
This is mainly because the cost of financing an 8% "debt" is significant to Hyflux's finance and Hyflux will be inclined to redeem them with a financial instrument which has a "lower cost of capital".
Let's see how it goes.
According to shareinvestor factsheet, the net TANGIBLE assets of Hyflux is $(806,916)M for the trailing 12 months. The company has intangible assets of $1.12M and a long term debts. To me this is a risky investment.
ReplyDeleteBe careful of picking pennies in front of the steamroller. Word of caution :)
ReplyDeleteAh! I don’t want to ask that question to myself ever. I am being careful here and don’t want make a mistake while investing. Learning about capital bonds, equity and Balance Advantage funds as it will be helpful in deciding things in future.
ReplyDelete