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.
|Profit before tax, fair value changes & exceptionals||= $955.4M|
|- 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|
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|
The stock value ratio of 0.510 is lower than the minimum stock value ratio of 1 for industrial companies.
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.
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).