Sunday, 22 May 2016

Do Hyflux's 6% Perps Have Sufficient Margin of Safety?

Hot on the heels of Aspial, Perennial and Oxley, Hyflux has launched an IPO for its retail 6% perpetual capital securities (perps). I used to own its existing 6% preference shares when it launched in 2011. However, that was before I calculated whether it had sufficient margin of safety based on Benjamin Graham's criteria. After I calculated the figures, I sold it off in Jan 2014. Hyflux's preference shares were the first bond / preference shares that I evaluated using Benjamin Graham's criteria of minimum average earnings coverage and minimum current stock value ratio as discussed in The Lost Art of Bond Investment. When I posted it in Jan 2014, I did not expect retail bonds to become so popular. The criteria have been very useful in assessing whether the various retail bonds launched since Aug last year have sufficient margin of safety.

Since the post 2 years ago, has Hyflux's financial strength improved and do its 6% perps have sufficient margin of safety? Based on Hyflux's latest financial statements, the computation of the earnings coverage and stock value ratio are as follow.

Earnings Coverage

 Profit before tax = \$38.8M Adjusted for: - Add: Share of losses from associates = \$19.6M - Add: Finance cost = \$42.8M Total earnings available for covering fixed charges = \$101.2M Current finance cost = \$42.8M Add: Dividend for preference shares = \$24.0M Add: Distribution for perpetual capital securities = \$25.7M Add: Distribution for proposed perpetual capital securities = 6.00% x \$300M = \$18.0M Total finance cost = \$110.4M Earning Coverage = \$101.2M / \$110.4M = 0.92

The earnings coverage of 0.92 times is below the minimum average earnings coverage of 2 times for public utilities or 4 times for industrial companies.

Stock Value Ratio

 No. of shares = 785.3M Share price = \$0.545 Market value of shares = \$428.0M Current borrowings = \$1,423.9M Current preference shares = \$400.0M Current perpetual capital securities = \$475.0M Proposed perpetual capital securities = \$300.0M Total bond value = \$2,598.9M Stock value ratio = \$428.0M / \$2,598.9M = 0.16

The stock value ratio of 0.16 is lower than the minimum stock value ratio of 0.67 for public utilities or 1.5 for industrial companies.

Thus, based on the above figures, the proposed Hyflux's 6% perps do not pass both the earnings coverage and stock value ratio criteria. Hence, based on Benjamin Graham's criteria, the perps do not have sufficient margin of safety.