Saturday 9 March 2019

Hyflux Impairment of S$916Mil for Tuaspring- Does it make sense?

I actually do not want to post any more topic on Hyflux as this subject has become very sensitive lately and stir up much negative feelings with the upcoming voting on creditor restructuring. But being an ex-auditor, I seriously think that our Singapore Authorities should re-look into the asset valuation framework and standard for all Singapore Companies listed on SGX so as to better protect retail investors. 

In June 2018, Tuaspring carrying book value was SGD 1.47 Billion. This plummeted by SGD 916Mil within half a year for the results released as at 30 September 2018. The key question is how can the valuation of Tuaspring just nosedive overnight? The weakness over the electrical tariff is a recurring issue since day one of Tuaspring operation. So, why was there no major impairment then but only took a big bath at this juncture?

According to the accounting standard, an impairment arises if the carrying value of an asset is less than its recoverable value. The recoverable value, in turn, needs to be assessed based on the higher of (i) fair value less cost to sell or (ii) Value in Use.

(i) Fair Value Less Cost to Sell
The fair value concept is basically the market price of similar assets less off transaction cost to sell. In Tuaspring case, this is not likely to be used as there are not many comparable deals. This is unlike say trading in quoted equities.

(ii) Value in Use
This is the present value of the future cash flows expected to be derived from Tuaspring. Based on future cash flows projection and poor market pricing of electricity, this value in use will be a lot lower than the carrying amount of Tuaspring. This lowered "value in use" should give rise to an extremely low "recoverable value" against the actual carrying value. While the value in use projection is subject to numerous assumptions and judgments, there should be stress tests with different scenarios drawn up for proper assessment. I cannot comprehend why no major impairment had been recognized in the previous financial years of Hyflux and that for FY2018 results announced in 2019, an impairment of SGD916 Mil for Tuaspring suddenly materialized. 

Hyflux had replied that it intended to appoint a further valuation to be undertaken by a different valuer for the purpose of finalizing its 2018 full-year financial results. As you can see, the business of valuation is an extremely tricky and messy affair. But saying that, my personal thought is that it does not make sense for an infrastructure asset to plunge in its value by 60% overnight.  

Final Thoughts
Hyflux has just announced a better package to appease unsecured retail investors after the submission of an alternative proposal by SIAS. Hopefully, things turn out well for the upcoming meeting and Hyflux can survive the current crisis.

Pls see other posts on Hyflux
(i) White Knights Charging Forward To Save Hyflux And Tuaspring
(ii) Government Should Bail Out Hyflux And Don't Put All Your Eggs Into One Basket

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