Sunday, 15 November 2015

Does FCL's 3.65% Bond Have Sufficient Margin of Safety?

I realised I had omitted the analysis for Frasers Centrepoint's (FCL) 7-year, 3.65% retail bond when it launched its Initial Public Offering in May. Since FCL announced its latest full-year financial results a week ago, here is the analysis according to Benjamin Graham's criteria of average earnings coverage and stock value ratio.

Earnings Coverage

Profit before tax, fair value changes & exceptionals = $955.4M
Adjusted for:
- Deduct: Share of associates' & joint ventures' results = $279.4M
- Add: Finance cost = $186.2M
Total earnings available for covering fixed charges = $862.1M

Finance cost = $186.2M

Earnings Coverage = $862.1M / $186.2M

= 4.63

The earnings coverage of 4.63 times is above the minimum average earnings coverage of 3 times for industrial companies.

Stock Value Ratio

No. of shares = 2,895.0M
Share price = $1.63
Market value of shares = $4,718.9M

Total borrowings = $9,255.3M

Stock value ratio = $4,718.9M / $9,255.3M

= 0.510

The stock value ratio of 0.510 is lower than the minimum stock value ratio of 1 for industrial companies.

Quantitative Assessment

Thus, FCL's bond meets the earnings coverage criterion but not the stock value ratio criterion. Based on Benjamin Graham's criteria, FCL's 7-year, 3.65% bond does not have sufficient margin of safety.

Other Considerations

Although the focus of the financial assessment should be on the company issuing the bond, we could look towards the parent company if the issuer company does not have adequate financial resources. In the case of FCL, it is the subsidiary of F&N, which is in turn a subsidiary of TCC Assets. If we can be sure that F&N will not completely sell off FCL, then we can assume that F&N will come to the rescue of FCL should it encounter difficulties in paying interest and/or principal.

Thus, for the above reason, I am vested in FCL's 3.65% bond even though it does not meet all of Benjamin Graham's criteria (Note: it is held as an available-for-sale instead of held-to-maturity investment).


  1. Hi Chin Wai,

    Appreciate your help to explain how can I still buy FCL bond now?

    Does it makes sense to still buy the bond now?

    Is the buy and sell of FCL bonds same as buying stocks. Coupon paid pa or half yearly?

    1. Hi Rolf,

      Yes, you can still buy FCL bond. It is listed on SGX. It is the same as buying stocks. Coupons are paid half-yearly. The next ex-dividend date is 4 May.

      Among the 4 retail bonds listed last year, it has the lowest yield, but I think it is also the safest, for reasons explained above.

      Nevertheless, I reduced my exposure to it after last Aug after I realised that liquidity can dry up rather quickly in times of market stress.

    2. Hi Chin Wai,

      Thanks for the reply. Perhaps we will see more retail bond issuance gg forward. I think FCL is a good deal due to the low risk.

      So how much cash % of total portfolio is relevant for u now?

    3. Hi Rolf,

      You're welcome. Yes, we should see more retail bonds coming up in future.

      The cash portion is about 40% currently. I'm trying to reach 45% to be more comfortable.