LDHB
What’s Up? … dated Aug 2010
Its latest improved earnings have yet to strengthen its financial footing given its debt ridden balance sheet. The challenging landscape in the domestic steel industry does not help either.
To prevent financial stress, LDHB has restructured US$132 million of foreign exchangeable bonds due for early redemption on Nov 16, 2010. The bonds are exchangeable for shares in Parkson Holdings Bhd at RM8.82 apiece.
The tranche of exchangeable bonds was issued in Nov 2007 with positive sentiment surrounding Parkson, whose shares were then trading above RM8 apiece.
On 27 Aug 2010, the bondholders accepted LDHB’s proposal to raise the coupon rate to 5% from 2.5% payable semi annually. The proposed increment will lift the bond’s gross yield to 9%.
The substantially higher coupon rate seems like a good reason fro bondholders to hold on to the commercial paper until maturity on Nov 15, 2010. On the flip side, interest expenditure will more than double for LDHB. The group incurred total interest expense of RM91 million in FY2010 compared with RM71 million the year before.
Why would LDHB be so generous to its bondholders? Why did not it get a bank loan to pay off the bonds given its modest net gearing of 0.3 times.
The higher coupon rate is Tan Sri William dangled before the bondholders so they would remove the put option. The put option grants bondholders the right of redemption on the third anniversary of the bond issue date of Nov 16, 2010.
By removing it, LDHB will not have to strain its cash flow to redeem the foreign bonds.
To sweeten the deal, LDHB also proposed pro rate partial redemption – this Nov 16, 2010 and Feb 16, 2011 and June 2011. This is probably to replace the put option. Under the pro rate partial redemption scheme, which bondholders have also nodded for it, LDHB will redeem only 25% of the outstanding amount, which is estimated to RM103 million in total of RM34.6 million in each redemption.
With the pro rate partial redemption, LDHB will able to better plan its financial resources since it knows the redemption sum will be no more than RM103 million.
Judging by the Parkson’s current market price (25 Aug 2010), LDHB’s exchangeable bonds may have lost their appeal. For bondholders who had expected to gain from a rising Parkson share price, there would not be any good reason to hold on to their investment if no sweetener is offered. In that, they would have been likely to seek an exit by exercising the put option, and LDHB would need cash to redeem the bonds.
A at June 30, 2010 LDHB had cash reserves of RM203 million or 27.65 sen per share. Total borrowings of RM778 million were several times more than its cash in the bank. The amount comprises shot term debts of RM680 million and long term debts of RM98.5 million, for a net debt position of FM547 million.
LDHB’s financials would be stressed it there had been a big chunk of early redemption.
Following the Lion Group’s restructuring in 2008, steel manufacturing is currently LDHB’s major income earner.
LDHB holds 10% equity interest in Lion Corp Bhd and 21% in Megasteel Sdn Bhd.
KrissAssets
Its Prospects … dated Aug 2010
Property companies are seeing rise in their profits, aided in part by a revaluation of the assets in their books.
KrissAssets Holdings Bhd, for one revalued its flagship property Mid Valley Megamall, resuting in an entry of a RM50 million gain in its income statament for 2Q2010 ended June 30.
But unlike some other property players, KrissAssets’ profits are not just in flared by gains of an asset revaluation. It is also seeing a steady income increase from its core activity – rental income from the Mid Valley Megamall.
The trend of rising rental income and market value of its flagship Assets is evident. In 2009, Mid Valley was revalued twice, once in the quarter ended Sept 30, 2009 and then in the quarter ended Dec 31, 2009, which resulted in gains of RM20 million and Rm30 million respectively. Its operating profits also increased during the periods under review.
In 1H2010 ended June 30, Mid Valley Megamall was valued RM1.85 billion which is 2.78% higher than its valuation of RM1.80 billion as at Dec 31, 2009. During the same period, operating profit also increased by ^% to RM85.66 million from a year earlier. Consolidated net assets per share stood at RM3.56.
This shows that KrissAssets is not only gaining from the rising market value of its property, but also from increasing rental income.
It is important to note that gains from the evaluation of assets is not limited to KrisAssets but also to other property players.
The revaluation exercise by property firms is in line with Financial Reporting Standard 140 to carry investment properties at fair value. Under this accounting regime, investment properties are measured at fair value on each balance sheet date. It is not subject to the approval of regulatory authorities.
Gain or loss from charges in the fair value of investment properties is recognized in the statement of comprehensive income in the period in which it arises. This means that when a property’s market value falls, the company will have to revalue the asset’s value downwards, possibly resulting in a loss in the period under review.
It is thus understands why some companies opt to revalue their properties and recognise the gain or loss in their balance sheet rather than in their income statement. This because when the gain or loss in recognised in its P&L, a company’s profitability can be very volatile.
As such, some companies prefer to recognise any revaluation gain or loss in their balance sheet where it can later be added or subtracted from the company’s reserves.
In KrisAsset’s case, the gain from the revaluation of its flagship asset has always been accompanied by increased operating income. This sets KrisAssets apart from other companies that may see gains from the revaluation of their assets but experience operating losses and negative cash flow.
If the uptrend in the property market can be sustained, property companies such as KrisAssets are expected to continue to gain from the rising values of their assets.
Also notable is that KrisAssets has taken steps to manages its balance sheet by way of refinancing its borrowings with the issuance of convertible bonds that carry lower interest.
The company had, on Aug 23 2010 proposed an issuance of up to Rm300 million convertible bonds. The paper which will mature in seven years carry a coupon rate of 3.5% annually.
TDM
Its Prospects … dated Aug 2010
TDM, mainly known as palm oil player is shopping for healthcare assets to beef up its operations in this sector.
TDB, 53.1% owned by state investor TerengganuIn Sdn Bhd is not new to the healthcare sector. The group already owns several outfits in east Malaysia.
Its healthcare division has recorded double digit growth every year since 2007 as a result of its healthcare programme which started in 2005.
For 1QFY2010, the division achieved 23% revenue grwoth compared with last year. The business model for its hospital will continue to generate sustainable profits.
TDM may have found a sweet spot in running hospitals on the East Coast, given that other bigger healthcare players such as KPJ and Sime Darby are concentrated on the West Coast and Sabah and Sarawak.
Its healthcare division is growing in FY2009 while its palm oil division meanwhile declined. Nevertheless, the plantation division will continue to be TDM’s main earnings driver.
TDM has the best of both world, given that the plantation sector has a high profit margin, as well as the growth from its healthcare play.
At RM1.99, its PER is about 8 times.
In its FY2009 annual report, TDM proposed to pay at least 30% dividend on its net profit, Its management says it wull stick to the 30% dividend payout ratio but does not rule out increasing its dividend payout in the future.