Analysts upgraded Hyflux’s ratings despite its power strategy: Defence

SINGAPORE – By scrutinising the March 2011 project announcement for the Tuaspring desalination plant, financial analysts could work out that Hyflux would need to sell a large part of excess power generated to the grid to meet profit targets.

Nonetheless, most analysts maintained or upgraded their outlook on Hyflux’s share price based on bullish financial projections, which were published in reports that investors could access.

On Sept 10, these reports formed a key plank of the defence’s case in the

criminal trial involving former Hyflux chief executive Olivia Lum

.

She is facing charges of non-disclosure of material information in the March 2011 announcement, as well as in the issue of preference shares the following month, relating to Hyflux’s entry into power generation.

To illustrate his point, Senior Counsel Davinder Singh drew on five research reports from DBS Bank, Kim Eng, Credit Suisse, JP Morgan and Indian financial services company IIFL, all released within days of the announcement.

He was continuing his cross-examination of the prosecution’s second witness, Ms Winnifred Heap, who used to head corporate communications and investor relations at the defunct water treatment provider. Before joining Hyflux in 2009, Ms Heap was head of Singapore research at JP Morgan.

He began by asking Ms Heap what information an analyst covering Hyflux would need to determine the excess electricity capacity of a plant like Tuaspring, and to project the impact of the sale of electricity on both revenues and profits.

“The math can only be done if you consult a water desalination specialist who can tell you the typical (electricity) consumption of such a plant,” Ms Heap said.

However, in response to a follow-up question from Mr Singh, she acknowledged that consulting such an expert is not required if the information is publicly available.

Assumptions on the potential demand, supply and resulting price of electricity would also be required for the analysis, she noted.

Afterwards, Mr Singh asked her the extent of industry knowledge an analyst covering Hyflux could be expected to have, as well as the role of an analyst in investment research.

“How do analysts compete with each other? In other words, if I were an analyst in Company A and there’s another analyst in Company B both covering Hyflux, what gives us the competitive edge?” he asked.

To this, Ms Heap said key to this is the ability to “scrub the financials” to understand the visibility and certainty of cash flow, as well as verifying technical details with industry experts for the analysis.

Mr Singh then cited the report from IIFL, in which an analyst estimated that Hyflux would have to sell at least 65 per cent of the excess power not used in desalination to achieve a “low-teen” equity internal rate of return of between 10 per cent and 14 per cent.

The internal rate of return is a key measure of profitability.

In a report targeting institutional investors, the IIFL analyst raised the target price for Hyflux from $1.60 to $1.79, but maintained a “Sell” recommendation due to concerns over Hyflux’s future order book.

The target price is the estimated value of a given stock for optimal returns.

The other four analysts had cited the Tuaspring order win as a basis for maintaining or improving their calls – which ranged from “Outperform” to “Buy” – despite a large order in Libya remaining in limbo.

The JP Morgan analyst had also estimated that the portion to be sold to the grid would account for half of the project value.

Asked if the name of the IIFL analyst – who had called Ms Heap and whom she had sent an e-mail about to Lum and former chief financial officer Cho Wee Peng – rang a bell, Ms Heap said the company and analyst’s names were both unfamiliar, and not known to cover Hyflux regularly.

She also could not recall if the analyst had been invited for a briefing on the Tuaspring project.

Mr Singh said: “Despite them not being one of (the analysts) you see regularly... they were able to come out with the report (the) same day.”

Mr Thong Chee Kun from Rajah & Tann, who represents former chief financial officer Cho, cross-examined Ms Heap afterwards.

He sought confirmation from Ms Heap that she previously reported to Cho’s predecessor as chief financial officer, Mr Sam Ong.

In reply to follow-up questions from Mr Thong, Ms Heap said Mr Ong would be involved in the discussions of the Tuaspring announcement, but she could not recall the extent of his involvement.

She also said Cho was involved in discussions on the draft announcement to confirm the details on funding and project financing.

Ms Heap was also cross-examined by Mr David Chan from Shook Lin & Bok, who represents four other independent directors who were also charged.

Mr Chan sought to confirm that Cho had made presentations on the proposal to generate power on-site and sell the excess electricity at board meetings on Nov 4, 2010 and Feb 10, 2011, and that the proposal for power generation stemmed from an earlier industry study Hyflux commissioned energy consultants for.

Ms Heap responded in the affirmative.

In her re-examination by Deputy Chief Prosecutor Christopher Ong, Ms Heap again reiterated that Lum and Cho had given input to “play down” key details about the energy component of the Tuaspring project.

The prosecution asked her if playing down the energy component of the project in early drafts of a news release about Hyflux winning the Tuaspring project was consistent with its investor relations strategy.

She replied: “The investor relations strategy is about integrated strategy, and power is the new bench strength.”

Ms Heap had repeatedly said in her cross-examination by Mr Singh that Hyflux’s strategy was to focus on being a growth company – rather than a utilities company – to get better market valuations.

“But if it was never part of the investor relations strategy to play down energy, then why did you say ‘The key is to play down energy’?” Mr Ong asked, referring to a Feb 8, 2011 e-mail Ms Heap had sent to Lum, Cho and others when Hyflux was drafting the March 7, 2011 news release.

Ms Heap replied: “It is in reference to the announcement of the desalination project.”

“But did ‘playing down energy’ have to do with the way the announcement was drafted?” the prosecution asked. Ms Heap said she “cannot recall exactly what was changed”.

When asked if the draft announcement mentioned selling electricity, and whose instructions she received to “play down energy”, Ms Heap said: “No... (The instructions) would be from the investment team, Wee Peng, Olivia and Camille, following input from Olivia and Wee Peng.”

Separately, Mr Ong asked Ms Heap why the IIFL report featured a disclaimer that the report was for the personal information of authorised recipients only, and not for public distribution.

Mr Singh objected, but Principal District Judge Toh Han Li allowed the question. Ms Heap then said such research reports would generally be made available for clients of securities firms.

Mr Ong went on to ask if any investor could obtain such reports, which Mr Singh again objected to, saying it was something Mr Ong should have asked before the re-examination.

However, the judge said the court found questions on the distribution of research reports, which Mr Singh had just introduced to evidence earlier that day, to be relevant.

Answering, Ms Heap said that obtaining such reports back then would have been hard, unless someone has “friends, or are part of the network”, though this has changed today with technology such as ChatGPT.

The trial continues. A PUB officer is expected to take the stand next, but in private for national security reasons.