SINGAPORE: It had been another record year for Hyflux, as its founder and group CEO Olivia Lum described in its 2010 annual report.
That was the year when the Singapore-based water treatment specialist saw its market capitalisation peak at an eye-popping S$2.1 billion, while raking up another high in revenue and net profit.
AdvertisementBut fast forward eight years, and the homegrown firm sent ripples through Singapore for a very different reason.
On Tuesday (May 22), Hyflux said it had applied to the High Court to begin a court-supervised process of debt and business reorganisation – an announcement that some market observers told Channel NewsAsia “has been a long time coming”.
The company blamed “prolonged weakness” in the local power market for its financial woes, which has led to “short-term liquidity constraints in recent weeks”.
In a separate letter to stakeholders, Ms Lum, who also holds the position of executive chairman, said the decision will provide the space and time to focus on ongoing discussions with strategic investors and among other things, optimise operations.
AdvertisementAdvertisementThe company is also seeking a 30-day moratorium preventing creditors from taking actions that could hurt its finances.
FROM UPSTART TO ICONIC SUCCESS STORY
Founded in 1989 with S$20,000, Hyflux has grown from a fledgling three-person start-up into a leading player in water and fluid treatment with worldwide presence employing more than 2,500 people.
Its rise was synonymous with its founder’s rags-to-riches story.
Much has been said about Ms Lum’s challenging early life. Abandoned at birth and later adopted by a widow whom she called "grandmother", Lum, a Malaysian, started work from a very young age to support the family.
She was determined to do well in school and later moved to Singapore, where she graduated from the National University of Singapore and found a job as a chemist at Glaxo Pharmaceuticals.
However, she soon decided to strike it out on her own and founded Hydrochem with “a big dream and youthful idealism” to solve the world’s water problems.
The initial years of setting up the business weren’t easy. In various interviews done over the years, Lum shared how she worked 14 hours a day and sold water treatment products and systems by knocking on the doors of factories in Singapore and Malaysia.
The company got its first break in 1992 when it obtained the exclusive rights from a supplier to distribute membranes and membrane filtration plants to industrial customers. This later paved the way for a research and development team in 1999, which aimed to make its own membranes that would set it apart from competitors.
Then came 2001 – the “defining year” when Hyflux, with Hydrochem as its wholly-owned subsidiary, made a splash by becoming the first water treatment company to be listed in Singapore. It also secured its first municipal water treatment project in Singapore to supply and install the process equipment for the Bedok Newater Plant, the country’s first such plant.
Other key projects that followed in the following years included Singapore’s third Newater plant in Seletar and the SingSpring Desalination Plant, the country’s first seawater reverse osmosis desalination plant.
It also began reaching out further beyond the shores of Singapore, with projects in China, India and the Middle East North Africa (MENA) region, which included Oman and Algeria.
In 2011, Lum became the first Singaporean and the first woman to be crowned the Ernst & Young World Entrepreneur of the Year award.
It also secured Singapore’s second and largest seawater desalination project, the Tuaspring Desalination Plant, and proposed incorporating an on-site 411 megawatt combined cycle power plant to produce electricity for the desalination plant and power grid.
MULTIPLYING RISKS
But that also marked the start of the company’s woes, analysts said.
The integration of a water project with a power plant was touted to be a first for Singapore, and was meant to raise efficiency levels and reduce the cost of desalination.
But the S$1.05 billion Tuaspring Integrated Water and Power Project, which marked Hyflux’s foray into the power business, has since proved to be a drag on earnings.
For the full year ended Dec 31, 2016, Tuaspring registered a net loss of S$81.9 million as electricity prices stayed weak below fuel costs in Singapore amid an oversupply.
This contributed in a big way to the company’s first annual loss since listing - a loss of S$116.4 million, compared to a restated profit of S$3.8 million for FY2016.
That trend continued in the three months to March 31 as Hyflux saw a loss of S$22.21 million, widening considerably from a restated loss of S$64,000 a year before.
Excluding Tuaspring, Hyflux earned a net profit of S$1.04 million, down 96 per cent from the corresponding quarter a year before, when it recorded a one-off gain of S$16.5 million from the disposal of its 50 per cent stake in Galaxy Newspring.
But a straining balance sheet and financial covenants coming up may have proven too much. Hyflux has a coupon payment due May 28 on its S$500 million of 6 per cent perpetual securities, which it has said it will not make. It also has S$100 million of 4.25 percent bonds that will mature in September.
“Hyflux seems to have borrowed too much and the debt is a millstone around your neck when the environment becomes adverse,” said Associate Professor Nitin Pangarkar from the National University of Singapore (NUS) Business School.
He cited the ongoing oversupply and deregulation of the electricity market in Singapore, as well as emerging markets and uncertainties in key markets like China among the risks that Hyflux faces. “These different sources of risk will tend to multiply.”
Agreeing, CMC Markets sales trader Oriano Lizza said: “They’ve been facing enormous pressure from rising debt levels and that was incurred, in my view, from over-expansion into additional sectors that they may not be so specialized in.”
Market conditions like an ongoing massive overcapacity in Singapore's power generation industry and the influx of natural gas as an alternative source of energy did not help.
Noting that Hyflux may have overcapitalised too rapidly and spread itself too thin in terms of asset allocation, Mr Lizza said Tuesday's announcement "has been a long time coming".
For credit analyst Ang Chung Yuh of iFast Corp, the latest development has not been a surprise but “the speed at which things went downhill” has exceeded his expectations. He had expected Hyflux to be able to meet its obligations for the next 12 to 18 months.
Mr Ang added that he is also unsure as to why Hyflux opted for a court-driven reorganisation process, instead of first approaching creditors, including bondholders, with a proposal.
“But in any case, if management has crunched the numbers and found that it is impossible for them to come up with the money needed one or two years down the road, we think it is a good thing that management has chosen to bite the bullet now rather than later,” he added.
WHAT ARE ITS OPTIONS?
Observers agreed that the 30-day moratorium will buy the company much-needed time and breathing space.
According to Mr Lizza, the remedies for Hyflux include turning to its investors and shareholders for additional capital injection or speeding up the sale of its existing loss-making assets.
“If they are able to shift these assets for cash in the short term, it will give them continued breathing space until they can balance their books.”
Hyflux said in February last year that it is exploring a partial divestment of Tuaspring, and has also been looking at a potential divestment of the Tianjin Dagang desalination plant.
Alongside the release of its first-quarter financial report earlier this month, it said that divestment discussions for these two projects are in progress with interested parties.
But now, things have changed and Hyflux will have to play its cards carefully.
“The problem is that investors will be circling these assets in hope of a bargain because they know the situation that Hyflux is in,” said Mr Lizza. “They are really in a sticky situation.
“If they sell too little, it won’t get them out of the current situation but if they overvalue and are unwilling to budge on current price, they won’t have any interest from the investors.
“Time is, unfortunately, their enemy and they are walking a thin line at the moment,” he added.
Mr Ang reckons a debt restructuring could be a “virtual certainty”.
“In our opinion, to have some chance of restoring Hyflux’s financial health for the long run, the exercise needs to involve a debt-to-equity conversion of a substantial part of the perpetual securities,” he said, adding that the firm had about S$2.4 billion of debt outstanding at end-March, including the perpetual securities.
“Short of a Government bailout, it is difficult for us to conceive a scenario where a capital injection by external investors could achieve a sustainable capital structure for Hyflux.”
Hyflux on Wednesday morning called for a suspension of trading in all its shares and perpetual securities, which had been halted since Monday, and analysts do not rule out the prospect of heavy selling when it resumes trading.
The restructuring route ahead for Hyflux will not be an easy one, experts added.
Describing the stock trading halt and seeking of court protection as “a broad, open admission of its festering business problems”, NUS Business School's associate professor Lawrence Loh said: “Hyflux’s ongoing reorganisation move is necessary to ensure that any asset divestments will get the best value for its stakeholders, particularly creditors and shareholders.”
“While there were already market expectations for the troubles at Hyflux, the issue has probably brewed for a time much longer than necessary. Hyflux has probably seen this coming and could have been more expeditious and decisive in its restructuring efforts along the way,” he added.
As Ms Lum had forewarned in the company’s latest annual report, “2018 is expected to be another challenging year”. But she noted that with “boldness, entrepreneurial spirit, customer satisfaction focus, and teamwork”, she was confident of overcoming the obstacles ahead.
During a 2016 interview with Channel NewsAsia, the award-winning entrepreneur also described herself as a “more optimistic person”, and that challenges and uncertainties are the norm for any business.
“I still have the hunger in me,” she said. “Every day, I still look forward to more and more exciting business opportunities and persevere to manage the challenges.”
And with that, all eyes will likely be now on the businesswoman to see if her unique brand of tenacity can reverse the fate of one of Singapore Inc’s most-visible success stories.
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