It may seem like a long time ago, but Hyflux Ltd (SGX: 600) was once a stock-market darling. From 2008 to 2010, Hyflux’s share price had more than tripled in value. There was plenty of optimism surrounding the company due to the government’s emphasis on sustainable water solutions.
However, as most of us know by now, happy days were soon behind it. The company’s inability to generate cash flow led to a liquidity crisis that eventually culminated in a court-supervised process to reorganise its liabilities in May 2018.
Now the company is in the midst of negotiating a financial restructuring from an investor, SM Investments Pte Ltd. The injection of cash from the restructuring will hopefully save the company from insolvency, but it will also lead to a major dilution of existing shareholder interest.
There are two parties here who have lost the most from the whole Hyflux debacle. First are the investors who own shares of the company, and second are the investors of the perpetual securities the company issued in 2016.
However, with every painful experience, there are lessons to be learned. Here are three painful lessons we can take away from the Hyflux saga.
Lesson 1: Watch the cash flow
A company’s cash flow is the change in the company’s cash position after each financial period. If a company has a chronic inability to generate cash flow from operations, it will soon fall into a position where it will have insufficient cash to meet its day-to-day obligations.
Hyflux was in such a position. Between 2010 and 2017, Hyflux was burning cash through operations each year. At the same time, it was still spending money on capital expenditures that further worsened its cash position. Its issuance of perpetual securities in 2015 at a high cost of 6% annual interest led to an increase of about S$18 million in annual payments that worsened its cash-flow situation.
Eagle-eyed investors would have clearly picked up on this and realised that a company that was burning cash as quickly as Hyflux was would soon be in deep financial trouble.
Lesson 2: The yield should never be your only consideration
In May 2016, Hyflux issued the aforementioned 6% perpetual securities. Despite the clear red flags surrounding the company, there was a huge appetite for the offering, which resulted in Hyflux increasing the size of the issue from S$300 million to S$500 million.
Not only was Hyflux burning through cash at an alarming rate, but its balance sheet was also laden with debt. At the time, Hyflux’s net gearing ratio stood at 0.98.
Many of those who bought the 6% perpetual securities were retail investors who were chasing high yields. According to a Channel NewsAsia article, some of the investors were retirees who splashed out more than $200,000 to invest in these securities.
As investors, it is easy to get tempted by securities that offer high yields. However, yields are just one aspect of any investment. The security of the yield and the preservation of your capital are even more important factors of any investment.
Lesson 3: Never invest simply because of hype
We are all probably guilty of this at one point in our investment journeys.
Our broker recommends a stock, or we hear news of the latest trends, and we immediately jump on the bandwagon — investing our money without lifting a finger to do more research.
It’s easy to get sucked into making a rash decision as the fear of missing out grips us. If we invest next week, it will be too late, won’t it?
Hyflux certainly falls into that category. In its early days, Hyflux was at the forefront of sustainable water solutions and had won major contracts. But on closer inspection, all was certainly not well within the company.
Hyflux is not an isolated incident. Other similar high-profile cases around the world include Enron Corp, Lehman Brothers Holdings, Inc, General Motors, and Noble Group Limited (SGX: CGP).
As investors, we must not fall prey to investing based on hype. Do your due diligence and ensure that you know what you are investing in before risking your hard-earned savings.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.