Top Bond Ideas

Jan - Feb 2017
Lippo Malls Indonesia Retail Trust

Singapore Dollar Bond

Boosted by growth in Indonesian retail sector

LMRT has a portfolio occupancy of above 90 per cent since its IPO in 2007. Apparently, 3Q2016’s portfolio occupancy of 94.8 per cent outperformed the 84.3 per cent occupancy rate of the retail market in Jakarta. Rental reversions have been healthy since 1Q2011, though the rate of increase has been declining. 3Q2016 results were stable, with revenue and NPI inching up 0.4 per cent to S$47.0m and S$43.3mn respectively, contributed by small gains in the IDR and rental reversion. LMRT benefits from retail growth in Indonesia, with retailers expecting sales to increase by 5.2 per cent y/y in October 2016. Meanwhile, 3Q2016 GDP, which grew by 5.02 per cent, is still firmly in the positive zone, albeit at a slower rate. We view the Indonesian consumer sector in a positive light despite the slowing government spending. While internet retailing is growing, demand for retail space remains strong. We think that FX poses the biggest risk to LMRT, with bonds and loans in SGD while assets are in IDR. Nevertheless, we are not overly worried as the IDR has largely stabilised since 2014. The covenant also limits aggregate leverage at 0.45 times. The IDR needs to depreciate by another 60 per cent against the SGD before wiping out the equity; so far, the IDR has depreciated only 33 per cent in the past 9 years since the IPO.

About the bond
Coupon Rate
4.5% per annum
Maturity
23 November 2018
Bloomberg Ticker
SG6ZJ4000009
S&P/Moody’s/Fitch rating
NA/Baa3/NA (issuer)
Product Risk Category*
Moderate Risk
About the company

Listed on the SGX on 2007, Lippo Malls Indonesia Retail Trust (LMRT) is a retail REIT with a portfolio of 20 retail malls and 7 retail spaces in Indonesia. The malls are mostly located within Greater Jakarta, Bundung, Medan and Palembang, targeted at the middle to upper middle class domestic consumers. LMRT is the largest retail S-REIT by floor space, with an NLA of 841,835 sqm. LMRT is 29.33 per cent owned by its sponsor, Lippo Karawaci (LK), as of 6 December 2016.

Credit standing
FY2014
FY2015
9M2016
Revenue (S$m)
137.0
173.0
139.4
EBITDA (S$m)
117.0
148.1
119.0
Profit before tax (S$m)
89.9
44.3
75.7
Net Debt to Equity (x)
0.45
0.57
0.38
Gross Debt to Equity (x)
0.54
0.64
0.55
Gross debt/total capitalisation (%)
35.2
39.1
35.6

Source: OCBC Treasury Research & Strategy

* Product Risk Categories
Low risk
= the risk of losing your investment is low.
Moderate risk
= it is possible that you could lose at least some of your investment.
High risk
= it is possible that you could lose all of your investment.
Very high risk
= it is possible that you could lose all or more than your investment.
Interest Coverage Ratio (x)
Interest Coverage Ratio (x)

Source: OCBC Treasury Research & Strategy

DBS Group Holdings Limited

U.S. Dollar Bond

Outlook stable despite asset quality concerns

DBS’ earnings performance continues to be resilient. Earnings growth was derived from solid performance in net fee and commission income and other non-interest income. DBS has shored up its capital position to buffer loan book deterioration, issuing US$750 million in Additional tier-1 (AT1) capital in 3Q2016 at the lowest coupon ever for a USD AT1 issue. Asset quality concerns, which rose to prominence when Swiber Holdings filed for liquidation, have continued to build as more offshore names seek to restructure. Moody’s expects ratings on Singapore banks to remain stable over the next 12-18 months despite on-going challenges to asset quality and profitability due to solid underlying fundamentals (liquidity and capital ratios), slowing new problem loan formation, and on-going government support. DBS’ total allowances for credit and other losses have risen materially, with most of the recent allowance being provisions for further unforeseen losses, although specific allowances have also risen materially, mostly in Singapore and Hong Kong. While allowances may need to rise further to cover loan quality issues (and could subsequently dent profit performance), on-going solid earnings generation and strong capital ratios remain a buffer for DBS’ credit profile. As this is an AT-1 Perpetual Capital Securities, it will be subject to the respective loss absorption and trigger events; AT1 securities absorb losses when the capital of the issuing financial institution falls below a supervisor-determined level.

About the bond
Coupon Rate
3.6 % per annum
Maturity
Perpetual (Call date: 7 September 2021 )
Bloomberg Ticker
XS1484844656
Moody’s/Fitch rating
A3/BBB
Product Risk Category*
High Risk
About the company

DBS Group Holdings Limited (DBSH) primarily operates in Singapore and Hong Kong and is a leading financial services group in Asia with a regional network of more than 280 branches across 18 markets. With total assets of S$465bn as at 30 September 2016, it provides diversified services across consumer banking, wealth management institutional banking, and treasury. It is 30 per cent indirectly owned by the government through Temasek Holdings Pte Ltd as of 5 January 2017.

Credit standing
FY2014
FY2015
9M2016
Net Interest Income (S$ m)
6,321
7,100
5,481
Profit Before Tax (S$ m)
4,700
5,158
3,992
Net Income to Common (S$ m)
4,046
4,454
3,325
Total NPLs (S$ m)
2,419
2,612
3,879
NPL Ratio (%)
0.87
0.91
1.32

Source: OCBC Treasury Research & Strategy, as at 31 December

* Product Risk Categories
Low risk
= the risk of losing your investment is low.
Moderate risk
= it is possible that you could lose at least some of your investment.
High risk
= it is possible that you could lose all of your investment.
Very high risk
= it is possible that you could lose all or more than your investment.
Capital Adequacy Ratios
Capital Adequacy Ratios

Source: DBS Bank

Frasers Hospitality Trust

Singapore Dollar Bond

Diversification into Australia a timely development

Frasers Hospitality Trust’s gross revenue improved in FY2016, driven by the full year contribution from the acquisition of Sofitel Sydney Wentworth and Maritim Hotel Dresden and better performance at the ANA Crowne Plaza Kobe and two other properties in Sydney. Taking out the impact from Sofitel Sydney Wentworth and Maritim Hotel Dresden, we estimate that gross revenue improved by 1.4 per cent in FY2016. The REIT has diversified into Australia since its IPO in 2014. In FY2016, Australia overtook Singapore as FHT’s most important NPI contributor at 30 per cent, rising from 18 per cent in the 444 days to 30 September 2015. We see this diversification as a positive development as we expect oversupply in the Singapore market to persist. Based on information from the Singapore Tourism Board, during 1H2016, overall revenue per available room for Singapore has fallen 2.4 per cent y/y, with further downside in 2017. FHT announced the acquisition of its first property in Melbourne’s Central Business District for A$237m, fully funded by equity via a rights issue and completed in October 2016. We estimate that aggregate leverage has improved to 34 per cent and its Adjusted Gross Debt to-Total Asset (taking 50% of the perpetual as debt) has improved to 36 per cent, given the enlarged asset base. The full equity acquisition is credit positive in our view, though unlikely to bring about a credit rating upgrade.

About the bond
Coupon Rate
4.45% per annum
Maturity
Perpetual (callable: 12 May 2021)
Bloomberg Ticker
SG72C6000005
S&P/Moody’s/Fitch rating
NR/Baa2/NR (issuer)
Product Risk Category*
High Risk
About the company

Listed on the SGX in July 2014, Frasers Hospitality Trust (FHT) is a stapled group comprising a REIT and Business Trust. FHT invests in hospitality assets globally (except Thailand) and currently owns 15 properties with more than 3,900 rooms. It is sponsored by Frasers Centrepoint Limited (“FCL”), a major Singapore-based property developer. FCL holds a ~22% stake whilst TCC Hospitality Limited (“THL”) holds ~39%. Both FCL and THL are ultimately controlled by Chareon Sirivadhanabhakdi and Khunying Wanna Sirivadhanabhakdi.

Credit standing
^FY2014
^^FY2015
FY2016
Revenue (S$m)
50.2
78.6
123.6
EBITDA (S$m)
37.5
54.0
90.2
Gross interest expense
6.2
13.4
20.8
Net Debt to Equity (x)
0.62
0.63
0.60
Gross debt/total capitalisation (%)
40.9
40.1
39.4
Cash/current borrowings
1.7
NM
0.5

Source: Source: OCBC Treasury Research & Strategy, as at 30 September 2016 ^FY2014: July - Dec 2014 | ^^FY2015: Jan - Sep 2015
NM: Not meaningful

* Product Risk Categories
Low risk
= the risk of losing your investment is low.
Moderate risk
= it is possible that you could lose at least some of your investment.
High risk
= it is possible that you could lose all of your investment.
Very high risk
= it is possible that you could lose all or more than your investment.
Net Debt to Equity (x)
Net Debt to Equity (x)

Source: OCBC Treasury Research & Strategy

Neptune Orient Lines Limited

Singapore Dollar Bond

Deleveraging plans helping to improve group’s credit profile

Neptune Orient Lines (NOL) became the wholly owned subsidiary of French liner CMA CGM, after an unprecedented wave of liner consolidation that began in 2015. Container freight rates have been on free fall over the past two years, driven by weak global trade and oversupply in container shipping capacity. The Shanghai Containerized Freight Index plunged more than 40 per cent from the beginning of 2015 to the trough at end April 2016. The volatile environment led to stress and bankruptcy for some players, and drove massive industry consolidation. The latter emphasizes the importance of economies of scale in the industry, with liners seeking to reap cost synergies to offset potentially structural declines in sector revenue. Though shipping rates have rallied more than 20 per cent since the trough, the outlook for 2017 remains challenging, as a capacity overhang remains, and the global trade environment remains uncertain. Though NOL’s acquisition has been a drag on both CMA CGM's balance sheet and performance, CMA CGM has been active in deleveraging, having already paid down its acquisition bridge loan via the sale-and-leaseback of vessels. Looking forward, revenue and earnings are likely to remain under pressure given the environment. That said, we expect measures such as the proceeds from the on-going sale of NOL's terminals to further deleverage CMA CGM, improving the group's credit profile.

About the bond
Coupon Rate
5.9% per annum
Maturity
8 November 2019
Bloomberg Ticker
SG6Y06987482
S&P/Moody’s/Fitch rating
Unrated
Product Risk Category*
High Risk
About the company

Neptune Orient Lines Ltd (NOL) is a subsidiary of CMA CGM, the third largest container liner. CMA CGM had completed its acquisition of NOL in mid-June 2016. Going forward, financial results of NOL will be limited. As such, the performance of CMA CGM (the parent) will be used as a proxy for NOL’s performance. It should be noted that CMA CGM has not provided a corporate guarantee for NOL’s existing bonds. However, as a material operating subsidiary of CMA CGM, NOL would likely receive support from CMA CGM.

Credit standing
FY2014
FY2015
9M2016
Revenue (US$m)
16,739.1
15,674.1
11,403.5
EBITDA (US$m)
1,289.8
1,253.5
190.4
Net Profit (US$m)
583.7
566.8
-496.8
Total Assets (US$m)
14,363.1
14,275.2
19,849.3
Gross Debt to Equity (x)
1.10
0.95
1.96
Cash/current borrowings (x)
2.0
1.7
0.5

Source: OCBC Treasury Research & Strategy

* Product Risk Categories
Low risk
= the risk of losing your investment is low.
Moderate risk
= it is possible that you could lose at least some of your investment.
High risk
= it is possible that you could lose all of your investment.
Very high risk
= it is possible that you could lose all or more than your investment.
Financial - Summary
Financial - Summary

Source: OCBC Treasury Research & Strategy

Overseas Education Limited

Singapore Dollar Bond

Larger, new campus likely to assist in attracting students

Overseas Education Limited had reported a weak set of 1H2016 results. Total revenue declined 3.1 per cent yoy to S$48.1 million as a result of lower student enrolments in the junior schools. Tuition fees are a key driver of OEL’s revenues, contributing 97 per cent in total. OEL recently relocated to a new campus in Pasir Ris, which can enrol up to 25 per cent more students compared to its previous campus. OEL’s liquidity profile has remained adequate with cash position at ~S$48.7 million, as matched against total current liabilities of S$29.7 million in 1H2016. Free cash flow is expected to be largely positive over the long run, which should help improve leverage (net debt/EBITDA ~2.2x). Last September, OEL had repurchased S$7 million of the existing SGD bonds, with management indicating that they may opportunistically repurchase the bonds in order to pare down debt obligations. While the OELSP bonds are currently trading inside Raffles Education 5.9% due 2018 (88.6/14.4%) and G8 Education 5.5% due 2019 (98.25/6.24%), unlike both of its peers, OEL does not actively seek acquisitions. Hence, it has little need for future major capex over the next few years. We expect OEL’s revenue growth to remain weak over the medium-term due to lower tuition fees, relocation of its school campus and the net withdrawal of expatriate families from Singapore. OEL’s reputable brand name (long operating history of more than 20 years), combined with the larger school compound, should continue to attract foreign students.

About the bond
Coupon Rate
5.2% per annum
Maturity
17 April 2019
Bloomberg Ticker
SG6PI0000006
S&P/Moody’s/Fitch rating
Unrated
Product Risk Category*
High Risk
About the company

Overseas Education Limited (OEL) is a private foreign school system in Singapore offering the K-12 IB curriculum. The company provides a globalised multi-cultural environment to children aged between 3 and 18 years.

Credit standing
2014
2015
1H2016
Revenue (S$m)
102.12
97.11
24.42
EBITDA (S$m)
40.01
41.47
12.07
Net income (S$m)
21.98
14.93
2.12
Net Debt/LTM EBITDA (x)
0.6
2.2
2.2
Cash & Cash Equivalent (S$m)
125.52
60.4
48.7

Source: Bank of Singapore

* Product Risk Categories
Low risk
= the risk of losing your investment is low.
Moderate risk
= it is possible that you could lose at least some of your investment.
High risk
= it is possible that you could lose all of your investment.
Very high risk
= it is possible that you could lose all or more than your investment.

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