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.
|Profit before tax||= $57.1M|
|- 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|
|Total finance cost||= $44.8M|
|Earnings Coverage||= $24.1M / $44.8M|
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|
The stock value ratio of 0.881 is lower than the minimum stock value ratio of 1 for industrial companies.