Some background info, Aspial started as a traditional jeweler but now owns brands such as Lee Hwa Jewellery, Goldheart Jewellery, World Class Land and owns a 81% stake in Maxi-Cash (from Maxi-Cash 2014 Annual Report). It currently has a total market cap of over $600 million (just to note, the bond issue is hoped to raise $72.8 million).
So to start the analysis of this bond, I'll look at the financial statements of the company. The earnings for the company in 2014 look ok, pre-tax is $61.7 million but looking slightly deeper, around half of its profits before tax come from other income which in turn is made up mostly of net fair value gains on its property. This doesn't seem too good as Singapore's residential property (which makes up the bulk of its developments) is looking towards a decline and removing the fair value gains would only lead us to a pre-tax profit of $31.7 million. It has an interest coverage ratio of around 2.8 with the fair value gains removed, which I don't think is particularly good nor bad.
But if we look at its first half of this year, its pre-tax profit has dropped by 96% yoy, one of the reasons cited was lower progress recognition of sales from ongoing projects. There is also a drop in sales in its jewelry business and higher sales and marketing costs in its real estate business. Maybe this is just the start as the real estate business slows in Singapore, a point for worry here in my opinion.
Looking at the balance sheet (for the 1H15 financial statements), the company has a debt to equity ratio of 3.34 provides little comfort to the declining profit. The money raised in this bond issue is intended to refinance borrowings, increase working capital and fund future business investments so its debt to equity ratio may remain the same after this issue due to the first reason. Around half of their assets are in development properties, which when looking at their 2014 annual report, is mostly in Singapore and with the slowdown in the housing market in Singapore, these assets may have to be devalued at a later point.
The cash flow statement does not inspire much more confidence. For the past 2 years, they have had quite high outflow of cash due to operating activities and investing activities (due to purchase of investment securities). More cash is needed to fund these through borrowing so with its already high debt to equity ratio, the company may face a risk of running out of cash.
That's all for the analysis of the company. Now to look at the interest rate environment. The Fed interest rate hike is now debatable, but there is still a risk of it happening. While this does not affect the coupon rate of the bond, it will affect the market value and the comparative interest rates that you could be getting if you waited for the interest rate hike. I'm not really sure of the chances of the interest rate hike now, but the only news that can come out from this is either bad or neutral for the investors in this bond (interest rates unlikely to drop further).
To conclude my analysis of this bond, I think it may be quite risky due to the high debt to equity ratio and the unfavourable business environment for its real estate business which is reflected in its declining profits for the first half this year. I think this may be a better issue for the high-yield bond funds than for the individual investor who may not have enough money to spread across high-yield issues (especially with the very few retail bonds and high investment needed for corporate bonds), which may explain the institutional interest in this issue
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