Sunday, 27 March 2016

Does Aspial's 5.30% Bond Have Sufficient Margin of Safety?

7 months ago, I blogged about whether Aspial's 5-year, 5.25% bond has sufficient margin of safety. 7 months later, Aspial has launched a new 4-year, 5.30% bond. Since the last blog post 7 months ago, has Aspial's financial strength improved based on the 2 criteria that Benjamin Graham used to analyse bonds, namely, the minimum average earnings coverage and the minimum current stock value ratio? Using Aspial's latest Financial Year's results, the computation of the 2 ratios are as follow.

Earnings Coverage

 Profit before tax = \$13.0M Adjusted for: - Deduct: Share of results of associates = \$1.8M - Add: Non-recurring forex loss = \$10.0M - Add: Finance cost = \$20.4M Total earnings available for covering fixed charges = \$41.5M Current finance cost = \$20.4M Add: Interest of proposed bond = 5.30% x \$75.0M = \$4.0M Total finance cost = \$24.3M Earnings Coverage = \$41.5M / \$24.3M = 1.71

The earnings coverage of 1.71 times is below the minimum average earnings coverage of 3 times for industrial companies.

Stock Value Ratio

 No. of shares = 1,891.6M Share price = \$0.275 Market value of shares = \$520.2M Current amount of borrowings = \$1,305.2M - Add: Proposed bond size = \$75.0M Total bond value = \$1,380.2M Stock value ratio = \$520.2M / \$1,380.2M = 0.377

The stock value ratio of 0.377 is lower than the minimum stock value ratio of 1 for industrial companies.

Thus, based on the above figures, the proposed Aspial's 5.30% bond does not pass both the earnings coverage and stock value ratio criteria. Hence, based on Benjamin Graham's criteria, the bond does not have sufficient margin of safety.

Compared to the figures in the previous blog post (based on 2014 financial statements), both earnings coverage and stock value ratio has dropped. The earnings coverage has reduced from 2.50 times to 1.71 times while the stock value ratio has reduced from 0.548 to 0.377. In fact, all key measures for computing the above 2 figures have weakened.

 2014 2015 Earnings Coverage Total available earnings \$52.6M \$41.5M Total finance cost \$21.0M \$24.3M Earnings Coverage 2.50 1.71 Stock Value Ratio Market value of shares \$   651.9M \$   520.2M Total bond value \$1,190.4M \$1,380.2M Stock Value Ratio 0.548 0.377

This reduction in margin of safety affects not just the newer 5.30% bond, but also the older 5.25% bond.

In conclusion, Aspial's 5.30% bond does not have sufficient margin of safety. The margin of safety of Aspial's 2 retail bonds has reduced since the last blog post 7 months ago.