Hyflux sought to position itself as a growth company instead of utility company to get better valuations
SINGAPORE - Hyflux sought to position itself as a growth company rather than a utility company to get better market valuations, the lead counsel for Olivia Lum told the court on Aug 20.
Building a strong pipeline of projects, including Tuaspring, was one strategy to achieve this, added Senior Counsel Davinder Singh on the fifth day of the criminal trial involving Lum, former chief financial officer Cho Wee Peng and four other former independent directors.
Mr Singh took the prosecution's second witness, Ms Winnifred Heap Ah Lan, through minutes taken during a series of risk management committee meetings, in which managing shareholder confidence was a growing focus. Ms Heap was Hyflux's head of corporate communications and investor relations at the time.
Prior to Hyflux being named
preferred bidder for the Tuaspring project in March 2011, concerns over the water treatment company being rerated from a growth company to a utility company emerged in one such meeting in January 2011.
In one section, Ms Heap had presented on the difference between a growth company and a utilities company.
According to minutes from that meeting, she had said: 'Once a growth company proves that it can deliver results, the market rewards them ahead of time, such an example being Apple Inc. On the other hand, the PE (price to earnings) ratio of a utilities company is comparatively lower and the market only rewards the company when delivery is proven.'
When asked by the prosecution on Aug 19 why concerns emerged over the possibility of Hyflux being rerated, Ms Heap had responded: 'I don't think there was a concern. It's more a fact that as a listed company you need to know how you are positioned and what is your strategy. So I think the idea of this risk management meeting was really to set up some kind of a discipline surrounding that.'
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In his cross-examination on Aug 20, Mr Singh also made reference to this meeting. What was being discussed was the importance of keeping that positioning, so that the market will continue to treat Hyflux as a growth company, he said.
'As far as you were concerned, this was an exercise conducted in good faith, not just in Hyflux but in the interests of its shareholders. And it was an exercise to continue positioning of Hyflux as a growth company truthfully?' he asked.
Ms Heap agreed.
He also asked what she meant by setting up 'some kind of a discipline', to which she responded: 'It's really a process you want to put in place, take feedback from shareholders and stakeholders, and look at their concerns.'
Mr Singh asked if the exercise to put this process in place 'was being conducted honestly and truthfully'. Ms Heap concurred.
She had earlier told the court that the risk management committee discussed the need to grow Hyflux's order book and continue to win new contracts, as existing long-term contracts tend to provide recurring income but 'might not give the delta incremental growth.'
This was a vital difference, Mr Singh pointed out, as the market would value differently a growth company that continues to win new orders and contracts, from a utilities company earning income from long-term contracts.
When asked about whether divestments were part of Hyflux's business model, Ms Heap replied: 'We call that capital recycling. The capital requirements for a water plant can be quite huge. The idea is to recycle assets and get the valuation out of it and reinvest into another water plant. The strength is the company has expertise to originate new water plants.'
Mr Singh asked: 'And the feedback you received from major shareholders and analysts reports led you to present that ... as key shareholders have been increasing their holdings, it is important to continue to position the company as a growth company, and therefore important to continue to do so for the purpose of its valuations?'
Ms Heap replied: 'Correct'.
When questioned on her presentation that 'the company is compromising returns with low bid for Tuas desalination plant. This perception should correct itself with the continued financial performance of the company, Ms Heap explained that the perception refers to the 'relationship between low returns and financial performance of the company.'
The company's 'profitability may be compromised but if it is able to deliver earnings progressively then the perception would be corrected,' she said.
The hearing continues.

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