This morning, it was reported that SGX Listed Hyflux, Singapore’s prominent water treatment firm, is considering to seek court protection to facilitate negotiations with creditors.
Hyflux wasn’t in a good position. Hasn’t been for a long time. While it is one of the poster child for the government, investors have not taken a liking to the company.
And it is not hard to tell why. When you look at the balance sheets, income statement, it does not give you good account that you should further explore this business.
However, what is appealing is its perpetual securities and preference shares. Hyflux has high debt, a business that is not cash flowing for some time, and people question whether they will default on its perpetual securities and preference shares payment.
They are indeed appealing as they are far below par value, and give a very high yield, should Hyflux be able to avert their debt issues.
For that to happen, they would have to find some ways to sell of 70% of Tuasspring, a water desalination and power plant.
This evening, Hyflux made an announcement that they have voluntarily suspended trading of their shares and related securities.
They could have sold the TuaSpring stake but it is likely that people are vulturing to get it at perhaps a cheap price.
Distribution for Perpetual Capital Securities Suspended
As I said the 6% perpetual securities were damn appealing rewards wise.
The above chart is the performance chart, which factors in the dividend payments. Without the dividend payment the price chart would be closer to 50 than 60. As it is almost half the price the yield of 6% nearly doubled.
As of this article the yield to maturity is 12.3%.
As part of the reorganization process, Hyflux will be conserving its cash and only make critical payments to continue operations. Thus, they will not be making the upcoming coupon payments due on 28th May 2018.
Perhaps, when things get better they will restart the dividend.
While we are on this topic, be careful of high yield. The yield is attractive because in some cases the business will not stop. In some cases the business will stop.
Investors tend to blindly chase yield, and be risk seeking and basing on hope instead of feeling safe.
One similar case to this is Rickmer’s Maritime Case Study. You can read more here:
- Rickmers Maritime Trust Stops Dividend Payment
- Rickmers Maritime – Now for the Bond Holders to Suffer
- Rickmers Martime Winds Down. My thoughts on Position Sizing, the True Value of Ships and Prospect Theory
This puts into Question ESR REIT’s Management Acumen
There are some potential train collisions that we could see coming. Some Industrial REIT managers see the upside of boosting their asset under management, and perhaps hope for the best when it comes to some of the sale and leaseback deals.
Most believe that upfront rental security deposits are adequate for them to take on risk tenants. Soilbuild Business Space‘s tenant Technics Oil and Gas defaulted during the recent oil and gas downturn. While not a REIT, Boustead Project‘s tenant Ausgroup also defaulted.
Both depend on the security deposits to tide over 1 year.
The bigger question is could they lease out the sale and leaseback properties to a new tenant fast, and at a rate close to the passing rent?
Last we know, the Ausgroup property is still un-leased.
In October 2017, ESR REIT, after E-Shang took over, made their first acquisition with a $111 mil acquisition of 8 Tuas South Lane.
The net property income generated would contribute more than 6.5% of existing net property income.
This happens to be their largest tenant.
The property is near Singapore’s future global port and international maritime hub, the Tuas Megaport, which will be the world’s largest container terminal. This port will open progressively in 2021.
The property is leased to Hyflux under a 15 year master lease. The land lease of this place is 20 years with the option to extend for 15 years.
Now what happens if Hyflux cannot operate as a business anymore?
Would this be a major tenant default?
Whenever, the REIT manager makes an acquisition, divestment, AEI decision, it gives us a chance to assess the manager.
We thought ESR would be savvier than this. Cambridge Industrial Trust’s shareholders would hope to have a savvier manager. Now we wonder if they really know what they are doing.
Perhaps time will prove me wrong.
The shareholders of Viva Industrial Trust, whom are merging with ESR REIT would take note of this.
The merger might turn out to be timely, as in the event of Hyflux default, the merger would soften the blow.
I will file this as something to remind myself of the strength of the manager.
I shared more about stuff on REITs like this in my section on REIT where I go deep into the weeds of investing in REIT. It is FREE and available:
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