Bonds are typically boring investment with very little news. However, for the past week, it seems that the market could not get enough of news about bonds. First, there was the start of trading of Perennial's 4.65% bond on the SGX. Next, the second tranche of Singapore Savings Bonds closed with barely more than 20% of the total amount subscribed. Following that, OCBC announced that it would be redeeming its 4.2% preference shares listed on the SGX. Finally, we also have Oxley launching its 4-year, 5% bonds for subscription. Does Oxley's 5% bond have sufficient margin of safety according Benjamin Graham's criteria of minimum earnings coverage and minimum stock value ratio as described in The Lost Art of Bond Investment? Below are the ratios computed based on Oxley's latest financial statements in Jun 2015.
Earnings Coverage
The earnings coverage of 4.38 times is above the minimum average earnings coverage of 3 times for industrial companies.
Stock Value Ratio
The stock value ratio of 0.474 is lower than the minimum stock value ratio of 1 for industrial companies.
Earnings Coverage
| Profit before tax | = $142.7M |
| Adjusted for: | |
| - Add: Non-recurring loss (forex, revaluation, impairment) | = $23.3M |
| - Add: Finance cost | = $41.0M |
| Total earnings available for covering fixed charges | = $207.0M |
| Current finance cost | = $41.0M |
| Add: Interest of proposed bond | = 5.00% x $125.0M |
| = $6.25M | |
| Total finance cost | = $47.3M |
| Earnings Coverage | = $207.0M / $47.3M |
| = 4.38 |
The earnings coverage of 4.38 times is above the minimum average earnings coverage of 3 times for industrial companies.
Stock Value Ratio
| No. of shares | = 2,9448.2M |
| Share price | = $0.42 |
| Market value of shares | = $1,238.3M |
| Current amount of borrowings | = $2,406.0M |
| - Add: Loan advances | = $81.9M |
| - Add: Proposed bond size | = $125.0M |
| Total bond value | = $2,612.9M |
| Stock value ratio | = $1,238.3M / $2,612.9M |
| = 0.474 |
The stock value ratio of 0.474 is lower than the minimum stock value ratio of 1 for industrial companies.
Hi, just want to know where you get your values from? Also, under total earnings available for covering fixed charges, how do you know what to adjust for? Sry newbie here, thanks!
ReplyDeleteHi, the values are from the latest financial statement for the Financial Year ended Jun 2015. You can get the financial statement from the SGX website, under the Company Info -> Company Announcements page.
DeleteAs for what to adjust for, there is a bit of judgment involved. Generally, all non-recurring items should be removed so that they reflect the underlying earnings.
Is Oxley 5% a bond or a perpetual?
ReplyDeleteIt is a 4-year bond.
Deletehow about principal? how do they repay? to issue new bond? a bit of worrying about.
ReplyDeleteAs Oxley is a property developer, it will be able to generate cash when the property is completed and sold. However, property developers tend to start new projects to replace completed projects. The more likely avenue for raising cash is either issuing a new bond or getting a bank loan.
DeleteGenerally speaking, if the business is still good, it should have no problems raising cash in the bond market or getting a new bank loan.