The issue of perpetual securities and their classification (are they debt or equity) has resurfaced as the Hyflux enters the end game of its restructuring.
They got me thinking about another well-received perpetual security issue back a couple of years ago – Genting Singapore.
They have had starkly different outcomes with Genting Singapore redeeming its outstanding $2.3 billion perpetual securities in 2017.
Singapore’s credit market has had a rough couple of years (especially considering that interest rates have barely normalized). Hyflux is the latest in a line of casualties that has unfortunately spilt over to the retail market.
I’ve put together a case study trying to distil what I think are the key learning points from Hyflux.
Hyflux Case Study – Link
- The key takeaways and learning points of Hyflux
- How to think about fixed income issues
- Cash flow and how it is different from income
- How Hyflux’s business model works and why it led to its eventual distress
- Whether it would have been able to avoid Hyflux without hindsight bias
- The problems with “implicit guarantees” and why they should be avoided
At the crux of it, my belief is that it is the understanding of the difference between the income statement and cash flow statement could have helped investors avoid Hyflux far before it went into distress.
Secondly, examining the business model in greater detail would have alerted investors with the intrinsic challenges with the business.
Unfortunately, investors had “brand recognition” when it came to Hyflux. This is unsurprising given its close association with Newater and that Olivia Lam was one of Singapore’s entrepreneur success stories.
Behavioural biases are common and investing and hard to avoid without recognition of what they are in the first place.
That being said, the financial numbers would have provided enough red flags and warning signs for investors to be wary.
This is part of a series of new videos I will be doing on case studies in Singapore to better drive home investing principles.
The next case study upcoming will be Genting Singapore.
If you have any other suggestions or companies you would like me to feature, drop a comment or message and I will look into it for the future.
Disclosure: The author does not own Hyflux stock or any of its related securities at the time of publication. This is not a buy or sell recommendation but merely the written opinion of the author meant for educational purposes.