AMA The Fifth Person
Asked on 21 Feb 2019
Revisting this older question after being reminded about it from reading an article on Hyflux on Business Times. These are the points given by S&P on what we can learn from this fiasco, and I'll just share my brief thoughts on there as well.
TL;DR Don't take defensive industry for granted, beware of volatile earnings, debt instruments can be volatile and don't expect the government to save you.
"No Sector is Immune to Financial Troubles"
S&P brought up the fact that distrissed situations were mainly confined to cyclical industries like the energy and commodity businesses. However, they also brought up defaults of other services such as telecoms in 2015, which had been traditionally thought to be a defensive sector.
This reminded of the fact that althought industry analysis is important, we can't just bank on that because high debt levels, poor cashflow management and lack of management foresight can cripple any business.
"Situations can evolve quickly with narrow or uncertain earnings quality"
S&P cited volatitle EBITDA fluctuation of Hyflux that occured during the past few years, which had led to deep operating losses. This made reminded me of being especially careful with businesses that fluctuate so much.
Not only do investors have a harder time predicting the health of the company, management may also have a tougher time forecasting cashflows and being unable to manage their working capital and leverage, which led to Hyflux crumbling.
"Losses can be harsh depending on the characteristics of debt instruments outstanding"
This is an important point as well, since the increase in more sophisticated debt instruments in the market to retail investors should cause investors to be more cautious. Such instruments have also made it harder to analyse the debt profile of the company.
"Investors should not make assumptions regarding a private company's importance to the government"
This is another interesting point brought up by S&P, arguing that even though water security is important to the country, this shouldn't lead investors to the assumption that a bailout is likely. Hence, we should also not think that as long as Temasek or GIC has a major stake in a business, we are safe.
I had once review Hyflux Preference Shares and considered it. But when I reviewed its finances, I cannot believe they are still around after burning so much cash.
When we look at value investing and liquidation, there is also a point we need to take note - Liquidation means selling fixed assets and fire sale. In Hyflux case, their significantly "good" fixed asset is Tuas Spring plant. But when no one wants it, the "good" fixed asset becomes bad. and as in its case, quite useless.
Try selling a Blue Ray DVD player now.
Always look at operating cash flow and debt level.
If debt level is high and the company consistently producing negative cash flow, there will be a high probability that they will get into financial trouble.
I think should be, looking at their:
1) Operating Cost vs Cash flow and
2) if any valuable fix assets that can also bring in monthly income.
If Operating Cost Cash flow and
NO valuable fix assets that can bring in monthly income
then it's quite a warning sigh to not hold any investment in this company.