SINGAPORE – By scrutinising the March 2011 project announcement for the Tuaspring desalination plant, financial analysts would be able to 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

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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.

To illustrate his point , Senior Counsel Davinder Singh drew on five research reports from DBS, 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 formerly 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 to 14 per cent.

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

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, in a report targeting institutional investors.

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

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

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.

Mr David Chan from Shook Lin & Bok, who represents the remaining four independent directors, will conduct his cross-examination on Sept 10 afternoon.

After this, the prosecution will do a brief re-examination of Ms Heap.

The hearing continues.

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