Sunday, 23 August 2015

Aspial Retail Bonds - 5.25% 5 years



Aspial announced that it is offering 75m worth of bonds with the following terms:
  • Interest rate: 5.25% per annum
  • Tenure: 5 years
  • Maturity : August 2020
  • Amount for retail investors: Originally $50m, reduced to $25m but can be upsized to $100m if retail demand is strong. (See announcement here)
  • Minimum subscription for retail: $2,000
  • Amount for institutional investors: Originally $25m but upsized to $50m (See report here and the subsequent clarification by Company)
  • Minimum subscription for placement: $100,000
  • Interest payable on: 28 Feb and 28 Aug each year
  • Closing: 26 August 2015 - 12pm
  • CPF: Cannot apply or invest after listing
  • SRS: Cannot apply but may invest after listing
  • Listing date: 31 August 2015
The product highlight sheet is here. I would strongly recommend that you read through the product highlight sheet and this was mandated by MAS in recent years, knowing how investors do not read the prospectus or offering circular. iFast has also done a write up here. Do read it.

The time table of key events is listed below for your information. Key date will be 26 August 12pm where the public offer will close. 

Time Table of Key Events


Sponsor and Issuer Corporate Structure

This is the corporate structure of Aspial and Aspial Corporation is guaranteeing the obligations.


As you can see for the structure, there are a few main business - property development, jewelry retail, pawn broking and the acquisition of LCD development.

In deciding whether to apply for the corporate bonds bearing 5.25%, it is important to analyze the financial performance and balance sheet of Aspial, hoping that it will not fail!

Financial Performance


One of my concerns was the poor 1H performance of Aspial Corporation. This was explained in the first half performance review. The first half results is enclosed for your reference.


I would say that the first half results is horrible. Aspial explained that they would have made a profit if not for the following costs amounting to S$16.7 million for HY2015:
  • foreign exchange loss of S$6.5 million (largely unrealised) due to the decline in Australian and Malaysian currencies;
  • sales and marketing expenditure of S$8.9 million for the global launch of Australia 108 and Avant in Melbourne and the building of a sales gallery and the preparation of marketing materials for the Nova 8 project in Cairns, and marketing expenditure for Waterfront@Faber and City Gate in Singapore; and
  • a one-off cost of about S$1.3 million relating to the voluntary conditional cash offer for the shares in LCD through its 50 per cent.-owned joint venture company, AF Global Pte. Ltd. ("AFG").
Excluding the above costs, the Guarantor Group's profit before tax would have been S$18.3 million in HY2015. Given the major issuance of debt is to fund the real estate business, let's look at the prospect of the real estate business.

Real Estate and Business Prospects

The real estate business is the biggest revenue driver and the key reason for the high leverage of the Company. It is expected to contribute significantly to the revenue and profitability for the following reasons:

  • based on the units sold in its property development projects as at 6 August 2015, the Guarantor Group has locked in total revenue of about S$620 million in Singapore which will be progressively recognised using the percentage of completion method. 
  • the Guarantor Group has locked in more than A$1,050 million of sales revenue from the Australia 108 and Avant projects as at 6 August 2015. The revenue will be recognised upon the completion of the projects. 
  • at current market prices, the potential sales revenue from the Guarantor Group's remaining local and overseas property development projects is estimated to be in excess of S$2.0 billion as at 6 August 2015. 
For the above reasons, i am cautiously optimistic that the Company will be able meet its obligations when they fall due. I have looked at the different debt ratios but felt that given the lumpiness of the revenue and profit, it may not paint a full and meaningful picture.

Existing obligations
The list below is the unsecured obligations under the MTN (medium term notes) programme. You can see that the interest range from 4.5% to 5.5%. The retail bond is likely to be the Series 5 notes due 2020.


Net Asset Value

The picture below is the balance sheets as of 1H 2015.


Based on the balance sheet as of 30 June 2015, there is a "equity buffer" of S$183m for the bond holders given that it is ranked higher than equity holders. However, this does not take away the fact that the balance sheet is highly geared.

How existing bonds of Aspial are trading?


My bond prices are a bit dated at 28 July 2015 (sorry i have deleted the latest copy) but it shows that the existing bonds of Aspial are still trading well but it may make sense of accredited investors to compare the 5.5% bond that expires in Nov 2018 against this issuance to see which bond offers better value. For retail investors, there is no choice for you as the above bonds are traded in tranches of $250,000.

Who is suited to buy Aspial bonds?

Please note that bond investment is not for everyone, and especially not appropriate for investors who have short term liquidity needs. You should only buy bonds with your spare cash and better still, if you intend to hold it till maturity.


Mr IPO's views

While i do have concerns of the Company's balance sheet being overstretched, the Company has been launching interesting property projects in Singapore and Australia - such as Citigate and Australia 108. The likely listing of the overseas property arm on Catalist will also ease concerns on it being over levered as it can then raise new equity

I like the Aspial bonds for the following reasons:
  • Good demand from Institutions and accredited investors at 3x subscribed. This should spur the demand from the retail tranche.
  • 5.25% is a decent yield and will provide a good buffer against future rate increases
  • 5 year is a "just about right" and you can reinvest the proceeds should interest rate rise in future
  • This is not a first time issuance and it is good that the Company has expanded its pool of investors to retail
Although the bonds are unrated, i believe it is worth having an allocation in my portfolio as it provides regular income stream for the next 5 years. I will apply for some and do note that I intend to hold till maturity.

Saturday, 22 August 2015

Retail Bonds Offering



There had been an "overwhelming" response on my FaceBook page when i asked if i should starting writing up on Retail Bonds. Let me first do an introductory post before i write on the actual Aspial Bonds. There is a moneysense post on bonds here and you should read it if you are interested to invest in bonds. 

What is a bond?

Bond is a debt instrument where investors lend money to corporate or government entities for a defined period of time in return for a fixed or variable interest rate. Depending on where it sits in the capital structure, the yield also varies. The picture below shows a typical capital structure of a Company that borrows for its business. It ranges from Senior to Junior to Mezzanine then Equity. As you can see from the picture, the higher the protection it offers to investors, the lower the yield.


Bonds will be affected by prevailing interest rate

Besides the credit worthiness of the issuer (internal factor), one external factor affecting the yield and bond trading prices will be the risk-free rate. The upcoming Singapore Saving Bonds is offering investors with a 10 year time horizon a risk free rate of 2.4% (see the link). This means that the "benchmark" has been set for investors with this time horizon and if a corporate wants to issue a 10 year bond, it will need to include a "risk premium" to attract investors to invest in its bonds instead of the Singapore Saving Bonds.

Bonds like to dirty dance?

In case you are not aware, in bonds, there is a clean and a dirty price. I will copy and paste the definition below and the prices quoted on SGX are 'dirty" while most of the bonds traded OTC are "clean prices". Those traded on OTC are in tranches of $250,000. Dirty or Clean is just an definition - just note that the Buyer will always need to "pay the accrued interest" to the seller.



Bond Pricing

Bond is always priced at par or a slight premium of 100.25 at IPO to account for commission for brokers. Secondary bond prices are always quoted against the par value. If a bond yields 5% and trades at 100, it means that if you invest $1,000, you will get $50 as interest per year. If it trades at 95, it means that your capital outlay is $950 when you buy it in the secondary market place, you will get $50 interest per year and get back $1,000 at maturity

The bonds of many Oil & Gas companies listed here are trading at huge discounts of 50-60 cents in recent months due to oil price volatility and this reflects investors' confidence in these companies and bond price movement is usually an early warning signal that equity prices will follow suit as it will be worthless if the debt cannot be refinanced or paid. If the Company has a strong balance sheet, it will buy back the bonds from the market. If it has a weak balance sheet, as in Ezra's case (see here), it will need to get new capital injection to redeem or refinance the bonds.

Must a bond be rated?

A bond can be rated or unrated. An rated bond means that it is rated by rating agencies such as Standard & Poors or Moodys and an investment grade bond means that it is rated as BBB or better. For example, a bond issued by Temasek, will be rated AAA and is considered by the rating agencies to have a very low risk of default. Anything below BBB is considered non-investment grade or better known as "junk bonds". 

How the rich became richer

You may think that the rich is not interested in bonds if the yield is too low. It's is actually not true. This is how the rich will play the bond. 

Assuming an investment grade bond is offering 4%, the private bank is willing to lend money (say up to 50% of the value) to the rich using the bonds as collateral at an interest rate of 1%. In this way, the capital outlay is reduced by half and after deducting for the 1% interest expenses, the rich actually gets a levered return way above the 4% yield (say 7% for simplicity). Leverage is like fire. It is good if you use it well or disastrous otherwise.

MAS is trying to level the playing field to attract more retail bond offering

It is quite frustrating to see that the rich are getting to invest in a wide variety of bond instruments while retail investors are limited by what it can invest in. For a start, if you are a corporate, there is no frankly incentive for you to engage retail investors if you are bound by higher disclosure requirements vis-a-vis the accredited investors. (not to mention you have to incur higher distribution and marketing costs). 

MAS has been trying to make it easier for retail investors to access bonds but it is still a work in progress and we are seeing encouraging signs. Fraser Centrepoint listed a 7 year $500m bond in May this year offering retail and institutional investors a yield of 3.65%. The report is here. This is followed by Aspial 5 year bonds offering 5.25%. Announcement is here. I will do up the Aspial retail bond later today.

How Mr. IPO view bonds

First of all, I must tell you that i am a "greenhorn" in Bonds as i have never considered this asset class when i was younger. Probably also due to the fact that i view the returns too low but more likely that I can't afford the $250,000 size lot.

As in many things, as i grow older and moved through different stages of my life cycle, the taste bud changes as well and i am starting to get more interested in this asset class.

To me, bonds is worth a second look as an asset class if it can achieve the following objectives for me
  • It provides diversification to my current equity only portfolio
  • It have a lower volatility vis-a-vis stocks (let you sleep more peacefully at night)
  • It should provide a steady stream of income (provides sustainable passive income)
  • It should return the principal at the end of the maturity (preserves wealth for future consumption)
I will be starting to cover retail bonds going forward and may include them in my SRS portfolio if they are deemed suitable but those have to be bought from the secondary market. 

Happy Bonding with me ^_^

Saturday, 15 August 2015

Soo Kee Group



Soo Kee Group is offering 112.5m shares of which 103.5m is for placement and 9m for public offer at $0.30 each for a listing on Catalist. The IPO will close on 12pm on 18 August 2015. The market cap of the company will be $168.8m

The Company is a leading and established jeweller based in Singapore with more than 60 retail stores in Singapore and Malaysia. It's vision is to bring high quality jewellery products to customers. The milestones of the Company is listed below.


They have different brands targeted at different customers profiles and the brands in the portfolio include:
Financial Highlights


The revenue has been hovering around $129-143m for the last 3 years but the Company was able to improve its net margin in 2014 due to lower rental costs. Seems like the revenue is stagnant. Based on the EPS of 1.9 cents per share, the Company is being priced at 15.8x. Not exactly attractive and fairly valued as its bigger local peer Aspial (see below).

The Company intends to pay 20% of its net profit for FY2015 and FY2016 as dividends. Assuming EPS remains the same, the dividend will be around 1.9 x 0.2 = 0.38. That will translate into a yield of ~1.28%, also nothing to shout about.

Use of Proceeds

The Company is using the proceeds to move into a new HQ and for repayment of loan. Hopefully this can help streamline and reduce rental costs further.

What I like about the Company
  • High recognizable brands in Singapore with over 20 years of history
  • Experienced management team in this industry
  • Large network of 60 retail stores strategically located in prime shopping malls
  • Increasing profits for the last 3 years
Some of my concerns
  • Changing consumer patterns and challenges from offline stores
  • Limited and saturated growth in Singapore and Malaysia
  • Stagnating revenue - This is after all a consumption play. While disposable income in Singapore and Malaysia will likely to rise over the coming years, the economies are facing uncertainties currently
  • Share placement is huge at 103.5m. I understand the Company has done the majority of the placement themselves (except for the headcount) and i am not privy as to who they have placed the shares to.
  • Low NAV of only 7 cents per share versus the IPO price of 30c. It will create a big windfall for the founders but you can argue that it is "deserving" given they have build up this business over 20 years but i thought they should have left something on the table for investors by pricing it lower.
  • 80% of the company will still be held by the the Lim family of siblings (Lim Yong Guan, Lim Yong Sheng and Lim Liang Eng).
  • Depreciation of MYR against SGD will be detrimental to the financials and affects the buying power since diamonds are sourced from overseas. Having said that, it derives ~14% of the revenue from Malaysia.
Listed Peers Valuation - Aspial

The ratios of Aspial is listed below but looking at the first half performance of Aspial, it doesn't seem very encouraging for the industry.


Mr IPO's ratings

I will give this a 1 chilli rating just to support our local brand who dare to launch its IPO during the ghost month. hahaha but given the bearish sentiments and valuation of Soo Kee, it may be a good idea to stay on the sidelines unless you are privy to who they placed out the shares to.

Happy IPO glittering.

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