Wednesday 20 February 2019

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.


  1. Apart from Hyflux not managing their liquidity well, the PUB and EMA also played a contributory role in the demise of Hyflux and the takeover by SMI of Hyflux at depressed prices! Each protecting their own turf and not acting in a holistic manner.
    A home grown company which once flew the Singapore flag high and contributed to strategic water/energy infrastructure in Singapore is now no more.In the process, the retail investors got screwed!

  2. How did you arrive at a $1b valuation for tuas spring?

    There's no terminal value for ts because it is a bot. You have to hand it over to pub at the end of the concession period.

    That's 20 years from now.

    Ignoring cost of capital, to make back 1b profit in 20 years means TS must make a patmi of $50m per year. What usep is required for $50m profit after tax per year?

    Once you throw in a cost of capital and discount rate, what profit must you make per year to recover your 1b present value?

    And because there is no terminal value, what usep will allow you to make a 10% pa return on your 1b investment? Or maybe even 20% pa return? Because remember the 1b plant has to be handed over to pub free of charge after 20 years, so your profits over the 20 years has to be sufficient to cover your initial 1b payment.

    What usep is required to achieve such returns? What is the likelihood of usep being at or above that level for 20 years? How much risk are you prepared to take?

    Does the 1b valuation (or 1.3b as Olivia imagines) stand up to these numbers?

    1. Hi Waileong, the one billion is not about profits but how much value the plant can bring (before depreciation) per year. In my opinion, yes the tuaspring plant can bring in 1 billion over its entire lease, in terms of cashflow from operations.

  3. Second this... even if apply dcf with a time period of more than 20 yrs , terminal value would hv been a small part of the entire cf and therefore insignificant..