Stephen Goh

Extract From Business Time.

WHY INVEST IN HYFLUX WATER TRUST IS GOOD?

AS the entire market eagerly awaits the impending Fed announcement on interest rates, many are still second guessing the exact amount of sub-prime writedowns suffered by the major financial institutions worldwide. In recent weeks, the market has been extremely volatile mainly due to ongoing concern over the global credit crunch.

In such times of uncertainty, what types of investments should investors turn to? A relatively new asset class of investments in the local market, collectively named as 'business trusts' might be something worth a look.

Understanding the structure of a business trust

Business trusts are basically business enterprises set up as trusts, instead of companies. Assets are first acquired or injected by a sponsor and put under the management of a trustee manager. The funds to acquire assets for the trust can be raised through IPOs from investors like you and me. Once one purchases a business trust unit, he becomes a unitholder and he beneficially and economically owns the assets and income of the trust.

As a unitholder of the business trust, one receives a regular income flow generated by the operation of the underlying assets. This is why a business trust structure is more suited for businesses with stable growth, cash flow and steady income-generating assets such as utilities and vehicle leases.

In times of uncertainties, business trusts offer a safe harbour due to its potential yield play and stability. The trusts generally have higher yields compared to general equities.

Essentially, unitholders provide financing to the trust. In turn, the trust uses these funds to invest in assets which will then provide a return. For example, in shipping trusts, the principal income-generating activity is the lease payments received when the trust leases out its ships to lessee companies for a certain defined period at a fixed rate, thus securing the income flow for that particular period.

The concept of a listed business trust is relatively new here, though similar structures have been present in other markets for many years and have been doing exceptionally well. One type would be the Master Limited Partnerships (MLPs) listed in the US which employ the same structure as that of business trusts.

How can investors leverage on business trusts?

In times of uncertainties, business trusts offer a safe harbour due to its potential yield play and stability. The trusts generally have higher yields compared to general equities. Locally-listed business trusts yield an average of 8 per cent, with the shipping trusts giving a relatively higher yield of 9-11 per cent. This is significantly higher than the average dividend yield of the STI component stocks.

Such high income yield serves as a cushion should the trust suffer a significant loss in its stock price. However, business trusts have historically been more stable and less volatile than general equities. This is due to the nature of the underlying core businesses which are mainly in industries where income flow is regular and stable such as utilities and shipping.

Further, business trusts have a more flexible payout policy than companies. While companies are restricted to paying dividends out of accounting profits, business trusts make distributions out of operating cash flows. This enables it to maintain its yield policy.

Indeed, in the uncertain times ahead, a fresh understanding of business trusts might pay dividend in the long run.

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