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Thursday, 1 December 2011

I was so wrong on Hyflux preference shares!

Can anyone still remember the hoo-ha surrounding Hyflux’s perpetual preference shares issue back in April? I wrote a tongue-in-cheek satire on it:

Can you lend me some money?

With the benefit of 7 months’ hindsight, boy! Was I dead wrong or what?

I was skeptical on this Hyflux preference shares as I was wrongly comparing European sovereign bonds with it… Spain 10 years bond is now yielding 6.7%, Italy at 7%, and don’t even mention Greece 

I was “right” (face saving mode on now) to question something is not right when you have to “borrow” at 6% - when the interest rates environment today is so “benign”…

And plus my confidence in finding another vehicle to invest in with greater yield. Several months later, I invested in another vehicle that yields 10%, with a “bonus” downside price protection since the management is aggressively buying back its shares to prop up the share price. (OK, turning off face saving mode)

I am now kicking myself for not acting on my opinion. I was so engrossed on having fun in the discussions that I forgot to put money where my mouth is!

If a company needs “new” money not for expansion in future growth, then it must be to “repair” or prop-up its balance sheet… I missed a bloody great shorting opportunity!!! I should be focusing on the Hyflux common shares instead!!! I stupid as stupid do…

Instead of me giving a summary of what has transpired in theory, please see the review of this senior “man of leisure” who voted with his feet and money – not talk:


Quote with permission from RBM, Retired Botanic MatSalleh at ValueBuddies.com:

I realise I am in a tiny minority of forummers, possibly a minority of one, on the subject of Preference Shares/Bonds attractiveness. But I do believe that Preference Shares and Corporate Bonds have their time and they have their place - i.e. sometimes they are a smarter investment. As an illustrative example, please consider the performance of Hyflux's two listed entities; they listed their 6% p.a. Preference Shares second-half-April this year........

Hyflux Equity Shares........ Share Price on 26 April '11: 2.19. Share price on 30 November '11: 1.155, i.e. down 47.3%

Hyflux Preference Shares. Share Price on 26 April '11: 1.00. Share price on 30 November '11: 1.045, i.e. up 4.5%.

Hyflux equity shares are currently trading 63.1% (repeat 63.1%) below their 52-week high.

Hyflux Preference Shares are now trading 2.4% (repeat only 2.4%) below their 52-week high.

Additionally the Preference Shares paid out their six monthly 3% coupon interest several weeks ago.

I rest my case m'lud. Seriously, no gloating here - I am well down on most of my investments this year.

Vested ............ in Hyflux preference shares, not Hyflux equity shares. Now considering selling some preference shares and buying equity shares.


OK, if shorting is not my cup of tea, I could do what RBM did in this volatile time of wild price swings – with a bias towards the downside. I can buy the preferences shares, it will act like a “put option”; and if the common shares crash like in reality today, I can rotate out some of my preference shares position back into the common shares! Hey! I so smart!

My logic is simple. If preference shares do not drop during a market downturn, conversely, it will not go up much relative to the common shares in a market rally. No?


I have always been impressed with Hyflux’s management when it comes to financial management. Guess what they did recently?


Quote from Business Times article:

Water treatment specialist Hyflux bought back shares for the first time since August 2009, with 1.33 million shares purchased from Nov 22 to 25 at $1.20 each. The trades, which accounted for 34 per cent of the stock's trading volume, were made on the back of the 42 per cent decline in the share price since July, from $2.08. The counter has also fallen sharply since December 2010, from $2.35.
The company previously acquired 500,000 shares in August 2009 at $2.58 each. Investors should note that the company's buyback prices were sharply higher than the IPO price in 2001 of 32 cents. The company resumed buying back this month after it announced on Nov 3 a 28 per cent drop in Q3 profit to $14.07 million for the three months to Sept 30, 2011. Earnings in the first nine months fell by 32 per cent to $36.39 million. The counter closed at $1.185 on Friday.



Now, you tell me. If got money to buy back its own shares why the need to issue preference shares in the first place? Oh? The money comes from… Clever!

Hey! Hyflux is also doing what my other vehicle is doing that’s yielding 10%. Buy back its own shares. Interesting…

It’s OK to miss the ride down, but I’ll be damn if I miss the ride up again!


I better buck up and get up to speed with this preference shares asset class. Global Logistic Properties also issued one recently (but only to investors with deeper pockets – are they trying to tell small investors something? That’s not cool!)

I don’t want to be mocked by a journalist 10 years later that retail investors (with 10 years of vested position?) have no clue what preference shares are all about… Ouch!



P.S.  If you have patiently read this far and have not taken offence, you have passed the test of being open to feedback. The reward will be the words of wisdom from RBM:


a) Some people often mix things up, fail to break the issue down when it comes to Preference Shares and Corporate Bonds. What do I mean by this? They fall into the trap of continually challenging the wisdom/decision by the "mother equity company" to raise money by means of Preference Shares/Bonds - this leads them to challenge the merits of the Preference Shares/Bonds. That is flawed logic. Once the Preference Share/Bond is "out there" you need to look at it on its own merits, rather than challenge whether the "mother company" was correct in using this route to raise capital in the first place. Hope this is clear.

b) I have chaired two listed companies in my lifetime. A conventional bank loan usually comes with all kinds of encumberances, covenants, liens etc. With a Preference Share you don't have all that hassle. Most people miss that.


So now you know! Don’t listen to Bards like me. I've made all mistakes he mentioned. Listen to those who have walked the walk; chaired the chair! (Is that proper English?)

“Insiders” are giving us free advice and what do we do? I really got eyes never see “or-yi-or” (Tarzan)!  LOL!

6 comments:

  1. actually we should be careful. i could be wrong on preference shares of hyflux, but there is a trend if you notice on the us financial circuit.

    the advisors and bankers are getting to know that in a risk adverse environment investors want safe dividend paying companies and as such they are touting instrutments or instruments of similar nature.

    the risk is that some of these preference shares functions like equity and are ncps and really do not provide a good risk versus rewards.

    caveat emptor. we should evaluate well as well.

    ReplyDelete
  2. Hello Drizzt,

    You are right. Nothing is black and white.

    There are no "safe" vehicles of investment for ALL seasons and for ALL investors.

    I still don't like Hyflux preference shares since it's cumulative. But that's another story. But facts have proven me wrong (at least for now)...

    Thanks for your input. It gives me the opportunity to make it clearer that my post is purely evaluating the Hyflux common and preference shares performance from the time frame of April to end November 2011. I can't argue with the reality!

    But of course if we take another time frame of 1 years, 3 years, or 10 years, then the conclusion may be different. (It's also called data mining)

    I am an equities man-whore. And I have no problem to admit I was wrong.

    My normal swing trading time frame is 6 to 18 months. Another investor with another time frame will have another opinion, and that's OK too. We are all different.

    My main focus should be WHY I am investing in the first place ;)

    ReplyDelete
  3. Hi,
    "Another investor with another time frame will have another opinion, and that's OK too. We are all different.'
    Well put.
    My time frame is "flexible" whether making money or not. In practice it's not so easy. My emotions may interfere with my "cold logic".
    Anyway, we are all here to learn. That's the main thing. But if you are happy to contribute ideas, i am happy to be the "parasites of ideas".
    Ha! Ha!
    Cheers!

    ReplyDelete
  4. Thanks Temperament!

    How we see the world is coloured by our own experiences.

    An investor who bought Hyflux at the IPO price of 0.32 cents in 2001 will hold a different view on "buy and hold", and probably sing praises on Hyflux's management - despite the recent "hair-cut" price.

    Another investor who bought Hyflux at above $2.00 prices may either explore the merits of having a stop-loss plan (internalise), or start to "run" the company by questioning why Hyflux management took on so much debt, why expand so aggressively, why venture to "risky" countries (on hinsight), etc (externalise).

    I focus on what I can "control". I have no desire to buy a dog and do the barking myself :)

    ReplyDelete
  5. Ya. Be a man and don't bark like a dog. LOL

    ReplyDelete

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