Sunday, 20 November 2016

KrisEnergy Bondholder Woes

Came across a Straits Time Article about Krisenergy seeking bondholder's consent to accept a new bond and the bondholder's unhappiness. The article is linked here.

Summary 

Basically KrisEnergy is asking existing bondholders to accept a new bond which is of a 5 year tenure and at a lower interest than the existing bond. In addition, bondholders get to enjoy some increase in interest rate repayment if oil prices move above US$70 during these 5 year period.

In addition, KrisEnergy shareholders (mainly Keppel Corp) will inject $140 mil into the company by subscribing to zero coupon secured notes.

My Opinion

In my opinion, it is highly unlikely for oil to turn around within these 5 years. This is because there is already a production surplus where supply outstrips demand. There are many oil tankers out at sea holding inventory, it will take years for this surplus to be used up.. Furthermore, oil producing nations like Saudi, Iran, Russia are inclined to pump more oil if it goes back to 60+ to cover their budget deficit, given their very low cost of drilling oil. To add to that, we now have a US president who is promising an energy independent policy (more production). We should be planning for a scenario where oil is unlikely to recover past 70 due to such factors.

Hence, I think it is a very bad deal for KrisEnergy bondholders. This is because if they accept the new bond and the zero coupon secured notes offering were to happen, existing bondholders will be pushed further behind in the queue of priority if KrisEnergy's assets are liquidated. This is because senior note holders are ranked ahead of bondholders (unsecured note holders).

Based on Krisenergy's latest balance sheet (3QFy16), if existing bondholders vote "no" and KrisEnergy's oil/gas/exploration assets are liquidated at 50% of stated book value, existing bondholders will be able to get some of their principal. This is likely to be a better scenario than in 2022; where secured note holders get the proceeds first in the event of liquidation. 


Disclaimer: The above are only my views and not to be construed as a solicitation or financial advice as I am not a certified financial adviser. Analysis of Krisenergy balance sheet is based on its latest reported financial results released on 3 November 2016. They are not guaranteed as being accurate or reliable as of the time of this posting. Readers should not regard this post as a substitute for the exercise of their own judgment. Any opinions expressed are subject to change without notice and this blog is not under any obligation to update or keep current the information contained. The author accepts no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

Tuesday, 15 November 2016

My Dividend Stock Purchase: Hyflux Preference Shares (N2H)

After holding  a large percentage of cash for a long while; I have decided to purchase shares in N2H, Hyflux Preference Shares. 

Hyflux's preference shares are bond like instruments which gives the holders a fixed dividend payout at each time period (6% for Hyflux's case). These dividends are paid on a pro-rated semi annual basis and cumulative, meaning to say if Hyflux defers on paying dividend this year, it will be rolled to next year. It can be for an indefinite period However, these preference shares has no maturity date to redeem, but Hyflux has to pay 8% dividend if they do not redeem on April 2018. I have written how preference shares work in a previous post.

Why did I invest?

To me, it seems the preference shares looks like a deal. This is because at its selling price of 93.30 and if Hyflux decides to redeem its preference shares on April 2018 (at face value of 100.00), it means I will obtain a return of about 0.065 (100- 93.30- comission) and 3 semi annual dividends of 0.03. That is about a total return of 16.6% for a 1.5 year holding period

That is the good side.

What is the downside?- Hyflux going bankrupt in the next 5 years with its assets only able to repay it lenders; leaving nothing to shareholders. However, I find such a scenario being remote. This is because I hold the view that in the event of liquidation, Hyflux has enough stated assets on the balance sheet such that preference shareholders will recover a significant amount of principal. 

As of now, equity shareholders hold 700 mil of the equity, which is about 20% of Hyflux's assets. Hence a loss of this magnitude is neccessary to have any impact on preference shareholders. That to me is an adequate margin of safety.

The other downside is that Hyflux decides not to redeem in April 2018. In such a scenario, I will be left with a stock which I had bought at 93.30 but yields 0.08 cents annually. That gives me an effective yield of 8.57% which is decent. Furthermore given that these dividends are cumulative, should Hyflux turn around and decide to redeem the preference shares; it will have to pay the face value and all the accurred dividends.

Are the Dividends Sustainable?

As of now, Hyflux's operating cash flow generated, nett of PPE acquisition and interests, is roughly equivalent to the distributions (dividends) it has been paying out. Furthermore with the opening of more plants, which means more revenue, its semi annual payouts are definitely sustainable.

Conclusion

I find that Hyflux Preference Share is now a decent prospect to park some money and bank on the possibility of a redemption in April 2018.

This is mainly because the cost of financing an 8% "debt" is significant to Hyflux's finance and Hyflux will be inclined to redeem them with a financial instrument which has a "lower cost of capital".  

Let's see how it goes.

Thursday, 6 October 2016

Looking for Bargains

I have been busy at work during the past 2 weeks and as a result, no postings has been done. So here's some of my latest transactions..

Transactions

Divestments: TTJ & Ezion today.

As of now, cash is the largest component of my portfolio, at 75%; Stocks is at 13.4%, while P2P is 11.6%. I have made no further P2P investments.

Opportunities

Action bias is now a real risk. Being a human, I will have to resist the urge to do something. As Blaise Pascal said: 

“All of humanity's problems stem from man's inability to sit quietly in a room alone.”

Like many, I will be tempted to put my money at work. However with the recent run up in oil & gas penny stocks, my own perceived mis-valaution has disappeared; and along with it - an opportunity to invest. Due to my narrow expertise in SGX stocks, it is difficult to seek out investments. The urge to invest in the current penny rally and idling is something I have to resist as I wait out the current oil crisis which is still ongoing.

Outlook 

No doubt OPEC has struck a deal to cap production and this has pushed oil close to the US$50 range. However two issues still linger: Oversupply and US shale

The global oil oversupply is still happening and the surplus still growing. Until concrete plans are put in place by OPEC, we will see growing inventories. To add to that, some completed oil projects in non OPEC countries are now coming online and this is adding to the oversupply.

The next issue is shale. At about US$60, the shale industry will start pumping again. This caps oil's rise.

On the SGX, we have many listed companies (whose services is dependent on oil's outlook). It is going to be tough on them given declining revenue. In their balance sheet, some of them hold huge amounts of PPE at stated value and have bonds maturing. Wth the public not inclined to purchase new O&G bonds due to Swiber's fallout, how much are these companies' PPE worth? Will it be enough to cover the creditor's principal? 

Rickermer's recent saga is a good example, where the market value of Rickmer's 16 ships are not even enough to cover the bank's loans; let along the principal amount of the bondholders. It is likely the worth e of their ships in the market is only about 20% of the value stated in the balance sheet.

Unless our local banks are willing to refinance these maturing bonds, the process of consolidation and restructuring among our local companies will continue. Perhaps opportunities will present themselves when more companies are closed and jobs are lost.



Thursday, 22 September 2016

Wells Fargo Scandal: Sales Target and Trust

Followers of US bank will be aware of the ongoing scandal at Wells Fargo - the bank has been found to open for its customers millions of unauthorized accounts which was earning banking fees without their knowledge. A summary of the Wells Fargo Scandal can be read here.

Chasing Sales Target

This is one of the biggest "dilemma" of the financial industry - many employee's KPI is measured against the sales target they bring to their employers. This means having to get new or existing customers to buy new financial products; however, if these financial products offered by banks are that good, why will they even need a sales target in the first place? Consumers would have flock to banks to grow their wealth.

Hence, to me, I can conclude many of these financial employees are pressured to meet sales target, pitching products to their clients, which may not be the best financial option for the consumer but definitely benefical to their employers and them - a conflict of agency interest. This seems prevalent across the financial industry and something has to be done.

That is why the financial blogging circle here have been actively highlighting how there are simple products like term insurance or the SPDR STI EFT which serves the financial consumers better; the irony is that many of us financial bloggers don't get sales commission pitching for these plain vanilla products! And we don't get paid for delivering sound financial advice....

Trust

Given the "sales target" chasing culture of the financial industry, I have not been quite trustful of bank's sales employees whenever they approach me at the branches. I am aware banks are more interested to make money out of you. Until the conflict of agency interest is resolved, it is important for us, ordinary financial consumers, to grow our own level of financial literacy through reading and using our own common sense. After all, no one cares about your money, more than yourself.



Wednesday, 31 August 2016

Transaction Update, Ausgroup, Future of Singapore's O&G

Transaction Update

For the month of August, I have divested the following:

Silverlake Axis - Banking on today's price run, I have taken the profits as I think silverlake is just about fairly valued at 4.8% dividend yield

First Ship Lease Trust -  The MR2 tanker prices have been falling and thus time to sell off.

XMH- Sold off for better utilisation of cash.

Using the cash, I have started accumulating Ezion at 31, 27, 26 and 22 cents. Please see the "Future of Singapore's offshore"

Ausgroup 

Ausgroup's financial results was a disappointment. The group has impaired its assets, resulting in a net loss of close to 100mil. However, one thing stood out.

http://www.agc-ausgroup.com/images/Prelim_announce_Q4_2016_-_29_August_FINAL.pdf

Reading, page 6 & 7 of its full year results, it seems DBS has been actively lending money to it on a short term basis. What stands out is that in Q2, the company was already in bad shape for its balance sheet but in Q3, DBS still lent support. Nevertheless, I still think Ausgroup is in serious trouble and is unlikely to be able to repay its bonds and outstanding bank loans.

Future of Singapore's Offshore

Reading Ausgroup's financials, Krisenergy and Swiber events, to me, it seems DBS is trying to contain the O&G's malaise by extending credit to prevent a contagion effect. However, many of these companies in the O&G sector are over leveraged. In my opinion, there may be further defaults as it is very difficult for our national bank to support all of them.

The outlook is pretty bleak as of now with many oil majors slashing capital expenditure. It is going to be difficult for all companies to tide through when there is a fall in orderbook.

I have started to sieve out companies which are "too big to fail"; and will have a domino effect. One such company sieved is Ezion, whose debts is in the region of 1 billion. It is one of the largest rig charterer in South East Asia. Doing my own research, I have found one of its recent bonds is uniquely structured with DBS supporting it [see here]. However, I will like to warn my own position stake in Ezion is a risky bet because the banks may just give up on Ezion and let the 1+ billion of debt default with domino effect being felt in the ofshore industry.

I highly doubt Swiber and Technics will be the only listed companies we will hear that defaults; despite our national bank's valiant efforts. More default are likely.




Saturday, 20 August 2016

How Perpetual Securities affect Ordinary Shareholders

Perpetual Securities are a class of financial instrument and has in recent times gained popularity due to a low interest environment. Companies such as Ezion, Hyflux and even Mapletree Logistics Trust have issued such instruments to retail investors. This post seeks to cover the basic of Perpetual Securities and how it affects ordinary shareholders

Classifying Perpetual Holders

Perpetual Securities are bond like instruments which gives perpetual holders a fixed dividend payout at each time period. In addition, it has no maturity date to redeem and its dividends are either non-cumulative or cumulative (cumulative means the payment of dividends are accumulated and brought to the next payment date). It is classified under "Equity" in the balance sheet. Below is Hyflux's balance sheet which shows that perpetual securities are classified under the "Equity" section.


Hyflux Balance Sheet
So while Perpetuals do have bond-like payments, it is classified as "equity".

Perpetual Securities where do they rank?

In the event of a liquidation, the proceeds of the companies are distributed in this general order:

1) Secured Lenders
2) Unsecured Lenders
3) Perpetual Holders
4) Ordinary Shareholders

Perpetual holders are behind lenders but ahead of ordinary shareholders when receiving the leftover proceeds from the sale of a company assets.

What it means to Ordinary Shareholders?

As ordinary shareholders who own shares of a company, we are the last in line to: i) Receive dividends/payments or ii) Proceeds from a company's liquidation. Seems quite a lousy deal for us and this is precisely why we should always carefully assess the value of our shares! 

Therefore, while some companies may proclaim that they have a healthy leverage or debt servicing ratio; as investors, it is our due diligence to check the validity of their claims by analyzing for other obligations or preferred shareholders who are ranked ahead of us. Using Hyflux's balance sheet as an example, it can be seen that preference shares contribute to approximately half of the company's equity. 

Quiz time: Usng Hyflux as an example, if Hyflux is liquidated and instead of relaising its full equity value of 1.7 billion,  the company only receives 1 billion as leftover for its equity holders. How much does perpetual holders and ordinary shareholders receive separately? 

Answer: $964 million to perpetual holder & $36 million to ordinary shareholders

Yes, this how it works. Perpetual Holders receive proceeds before ordinary shareholders.


Profit effect to Ordinary Shareholders

That's not all. Let's look at Hyflux's latest profit & loss financial statement




Both snapshots are taken from the same financial document. However there is something strange. On the first page, Hyflux reports a net profit to the owner of the company; but digging deeper, Hyflux in fact made a loss for ordinary shareholders. How is it possible?

This is because the dividends paid to perpetual shareholders was factored. As a result, while Hyflux did report profits for the period, ordinary shareholders of the company faced with a loss. This also means the net asset value of their shares decreased. This is the effect of perpetual securities dividends to ordinary shareholders.


Company's net profit - dividends to perpetual holders =  Eventual Profit to Ordinary                                                                                                     Shareholders

Conclusion

As equity investors, it is important for us to check for the presence of such financial instruments in a company's balance sheet. It tells us a lot of information and will affect our valuation of a company's earnings, cash flow generation ability and proceeds available to ordinary shareholders in the event of a liquidation. 

< The author is neither vested nor shorting Hyflux Stocks, Hyflux is used because it is a good case study and a popular brand name people can associate with in Singapore>

Friday, 19 August 2016

A new addition - Ezion Holdings

Thanks to the roll out of Pokemon Go in Singapore, I have been fairly quiet in the investing realm. However, the achievement of "level 20" milestone has turned my attention back to investing. My recent purchase has been in Ezion holdings in the region of 0.29.

In one sentence, Ezion owns liftboats and charters them out. Its business segment is mainly in South East Asia where many oil wells in SEA are maturing and will require maintenance; this is where the use of liftboats is needed. Its share price has fallen drastically due to Swiber's turn of events and its own recent rights issue. However there are a few positives for the company.

1) Customers

Ezion has a few customers who are national oil companies in the South East Asia region. As these customers are mainly NOC and SOEs, the delinquency rate should be better. However, it is worth noting that Ezion did impair a significant amount of receivables last FY. It is important to note that even despite being national oil companies (NOC), there is still a chance of late payment. One of the most newsworthy article is how Saudi Arabia, a rich oil nation, has delayed payment to its contractors ( see here).

In addition, the company has been trying hard to charter its liftboats as evident by its venture to offshore wind farm support with its partner, a Chinese SOE - Chinese Merchant group.

2) Balance Sheet

The recent rights issue has strengthened Ezion's balance sheet. In addition, Ezion's debt maturity has a long duration. Rolf has provided a good breakdown of Ezion's debt in his blog, which can be found here . A significant portion of Ezion's bonds matures in 2018 to 2021. Hence if liftboat charter rates do not improve in 2018, it will be when I have to reconsider my position.


In addition, one of its debts caught my attention - "Ezion 3.65% 2020". The bond has been uniquely structured in that if Ezion defaults on its s$120 mil bond, DBS will repay on its behalf and convert the amount as loan to Ezion. Details of the bond can be found here . To me, it seems Ezion has the credit support of DBS and this will enable Ezion to get lower interest for its loans. In many business models such as Ezion's, it is important that banks give their backing, otherwise, you will be in for a hard time during tough times like now.

From Ezion's annual report 2015, Ezion's loans are of relative low interest. Furthermore, with the recent rights issue s$140 million, its balance sheet should be strong enough to last till the first tranche of bond due in August 2018.

Ezion's Bank Loans

Worries on Ezion

As a shareholder, Ezion's perpetual securities of 7.0% is a sore thumb. In my opinion, as ordinary shareholders of a company, perpetual securities should be viewed as a debt because 1) perpetual holders are ranked higher than you in an event of liquidation and 2) often, they will have to collect their dividend before you do. I will write more about what perpetual securities are and its effects to ordinary shareholders of a company in a separate article.

Moving back to Ezion. Ezion has perpetual securities which are cumulative and costs 7% per annum. It was issued in 2014 and if the company does not redeem it at the end of 2018, the "interest" will step up to 10% per annum. In my opinion, the company will definitely have to redeem its s$150 million in 2018; this is because "debts" at 10% interest will kill off the company's margin. Hopefully DBS will grant it a loan to redeem its perpetual securities, otherwise another rights issue will happen.

Conclusion

My investment in Ezion is more of a special situation, the company's valuation by Mr Market has been beaten down so much, that there is likely value in it. Post rights, the market is currently pricing Ezion at a market cap of s$551 mil (US$ 410 mil) - valuing Ezion's PPE+ JV+ Associates to be worth 1940mil instead of 2540 mil on its balance sheet. To me, there seems to be a slight mis-pricing, given that its many service rigs are new. However, I do agree that the value of its associates are not worth its 83 million stated because it contains Ausgroup, Charisma Energy and JK tech, which I think are worth much less.