Sunday 18 October 2015

Does Perennial's 4.65% Bond Have Sufficient Margin of Safety?

It has been getting more interesting for retail bond investors recently, with the launch of Aspial's 5.25% bond in Aug, Singapore Savings Bonds in Sep and now Perennial's 4.65% bond. Does Perennial's 3-year, 4.65% bond have sufficient margin of safety according to Benjamin Graham's criteria of minimum earnings coverage and minimum stock value ratio as described in The Lost Art of Bond Investment?

Perennial was listed following the reverse takeover of St James Holdings in Oct 2014. Hence, it did not have financial statement for a full financial year. Based on Perennial's latest financial statement for the year ended Jun 2015, the minimum earnings coverage and minimum stock value ratio are computed as follow.

Earnings Coverage

Profit before tax = $57.1M
Adjusted for:
- Deduct: Non-recurring fair value gain on investment properties = $46.0M
- Deduct: Other non-recurring gains (earn-out, forex) = $11.0M
- Deduct: Share of results of associates = $13.8M
- Add: Finance cost = $37.8M
Total earnings available for covering fixed charges = $24.1M

Current finance cost = $37.8M
Add: Interest of proposed bond = 4.65% x $150.0M

= $7.0M
Total finance cost = $44.8M

Earnings Coverage = $24.1M / $44.8M

= 0.54

The earnings coverage of 0.54 times is way below the minimum average earnings coverage of 3 times for industrial companies.

Stock Value Ratio

No. of shares = 1,652.5M
Share price = $0.975
Market value of shares = $1,611.2M

Current amount of borrowings = $1,678.5M
- Add: Proposed bond size = $150.0M
Total bond value = $1,828.5M

Stock value ratio = $1,611.2M / $1,828.5M

= 0.881

The stock value ratio of 0.881 is lower than the minimum stock value ratio of 1 for industrial companies.

Thus, Perennial's bond does not meet both the earnings coverage criterion as well as the stock value ratio criterion. Based on Benjamin Graham's criteria, Perennial's 3-year, 4.65% bond does not have sufficient margin of safety. Having said that, this does not mean that Perennial will definitely default on this bond, it just means that the risk is higher.


  1. Hi, nice article but what exactly does stock value ratio attempt to calculate?

    1. Hi, when a company makes a loss, the equity portion of the balance sheet will take the hit first, before bonds suffer any loss. The stock value ratio measures the amount of buffer bondholders have before they suffer a loss.

  2. Thanks for this. I was also looking at it from the margin of safety perspective. Your analysis seems to concur with what I feel. However, the "market" seems to think otherwise :).

    1. You're welcome. It shouldn't matter how the market feels; we need to be comfortable with the investment. After all, we're responsible for our own money.

  3. May I ask what is the subscription result since it will start trading tomorrow?

    1. You can refer to the subscription results at the link here. Please note that trading will start next Mon instead.

  4. Hi, what's your take on the oxley 5% bond?

    1. Hi, Thks for your interest. I'll carry out the analysis and post over the weekend.