Sunday 22 July 2018

Hyflux Sale of Tuaspring and the Financial Damages - Part 1

To inform investors on its financial restructuring, Hyflux held two townhall sessions on 19 and 20 July 2018. One of interesting fact is the presentation on the book value of their projects, reproduced below. The link to their slides can be found here.
Figure 1: Stated Book Value of Hyflu's Projects

The Elephant in the Room - Tuaspring Project

Hyflux's financial restructuring revolves around the sale of Tuaspring. The sale value of this project will determine how much losses investors will take. During the court hearing in June 2018, Hyflux's lawyers said they are hoping to close a deal of no less than s$1.3 billion in book value if time is on their side. Tuaspring is owned by Hyflux until 2038, after which it is no longer owned by Hyflux.

In my opinion, it is difficult, if not impossible, for Hyflux to fetch a $1.3-1.4 Billion Price Tag based on the following fact-findings:

Fact 1 - Overcapacity of the Power Generation Sector.

Singapore has an overcapacity of power generation plants. Quoting from the business times, the Singapore Power Generation Sector has a total capacity of 13,350 MW, while in 2017, Singapore only consumed 7,000 MW. Even with an annual growth of 3%, Singapore's power consumption will only grow until 13,000 MW in 2038 (which is the last year Hyflux owns Tuaspring). So until then we are likely to face oversupply.

Hyflux had built Tuaspring in 2012/2013 when Singapore did not have an overcapacity problem. Because Hyflux and other companies started building power plants at the same time, this resulted in the supply glut. It resulted in Singapore electrical prices falling by half. This is similar to what happened in the oil rig glut situation Keppel and Sembmarine faces now.

Fact 2- The loss making aspect of Tuaspring

In the latest FY 2017 results, Tuaspring made s$80 Million in losses for the full year, while in Q1FY2018, it already made losses of s$23 million for only 3 months. To explain, every loss a company makes, it has to record the same fall in numbers in the book value. For example, Hyflux book value of Tuaspring is $1,470 million. If it makes s$80 million of losses in 2018, Hyflux has to record s$80 million in decrease of book value. It results in Tuaspring having a new book value of $1,390 million.

AQ of Valubuddies [Link found here] highlighted an interesting fact and that is the LNG contract Generation companies have here. The price and volume of Genecos with LNG have been fixed until 2020 or even till early 2020s. This means Genecos like Hyflux have to continue to honor the agreed LNG prices and volume despite the depressed electricity prices. Hyflux is likely to continue bleeding $80 million a year assuming a 4 years period until it is able to renegotiate and get a new LNG contract.

Fact 3- Valuation of Tuaspring

The $1,470 million book value of Tuaspring is based on Hyflux's projection of the amount of benefit it will derive until 2038. Given the depressed electrical prices and prolong overcapacity in Singapore, potential investors will be questioning on the validity of Hyflux's inputs towards its valuation model. This is an area of contention.

Impairment of Tuaspring Project

With the Tuaspring likely to bleed a total of s$320 million for the next few years, bidding companies want to have a positive return for investing into a water/power plant that is in an oversupplied power industry; I would expect offers of about $700-$850 million in book value. 

My own estimate is that Hyflux may have to take a write down or losses close to s$600-$750 million with the Tuaspring sale.

In my next post, I will cover how a s$600-$750 million impairment affects the 4 different type of parties involved with Hyflux - i) Secured Bank Lenders, ii) Note Holders, iii) Perpetual and Preference Shareholders and iv) Ordinary Shareholders. [Link to Part 2]

1 comment:

  1. Awesome Investmoolah! Superb intellectual write-up on Tuaspring concessionary service agreement and the LNG issue. Looking forward to your part 2.