Top Bond Ideas

May - Jun 2017
Bond Ideas to Grow Your Wealth

As stocks and bonds typically do not move in the same direction, investing in both protects your portfolio against volatility.

Bonds diversify your portfolio and provide a steady stream of income. We suggest that you diversify your bond holdings to mitigate the risk of a single bond.

This publication is a distillation of the top bond recommendations from our research team.

Emerging Markets Fixed Income has been at the forefront of our investment offering and the fixed income research group is at the cornerstone of this effort.

The fixed income research group covers roughly 200 credits globally from its base in Singapore. The focus is on bottom-up fundamental analysis, meeting with management teams at company headquarters and conferences around the world.

The team of seven analysts has an average of more than ten years of research experience, ranging from 3 years to 25 years individually.

We hope you will find this publication useful and glean some useful insights from it.

BreadTalk Group Ltd

Singapore Dollar Bond

Improving credit metrics should keep BreadTalk’s outlook buoyant

BreadTalk Group Ltd (BGL) experienced a 4.5 per cent dip in revenue in 1Q2017 as it continued to consolidate the number of outlets in its Food Atrium segment and also culled underperforming franchises in China under its Bakery segment. That said, overall operating performance remains relatively buoyant with its core Food and Beverage segment delivering a 32 per cent growth in earnings before interest, tax, depreciation and amortization (EBITDA). This was largely driven by a turnaround in the performance of its Food Atrium segment due to its streamlining efforts. On the liability-side of the balance sheet, credit metrics have also improved with reported Net Debt/EBITDA declining from 0.69x in FY2016 to 0.54x in 1Q2017. Also, net gearing fell to 0.41x in 1Q2017 from 0.47x a quarter ago. We expect the company’s financial leverage to decrease further when BGL receives the proceeds from its SGD26.5 million divestment of TripleOne Somerset. The potential remains for BGL to unlock more value from its strategic investments as it also owns stakes in CHIJMES, AXA Tower and Beijing TongZhou Development. Although we see material improvements in the credit profile, we maintain BGL at a Neutral for its issuer profile due to its small size.

About the bond
Coupon Rate
4.6% per annum
Maturity
1 April 2019
Bloomberg Ticker
SG6ZJ4000009
S&P/Moody’s/Fitch rating
Unrated
Product Risk Category*
High Risk
About the company

Listed in Singapore on 6 March 2003, BreadTalk Group Ltd (BGL) is a household F&B brand owner. Since 2003, the company has expanded beyond Singapore and currently operates 951 outlets in China, Singapore, Thailand and other parts of Asia and Middle East. BGL classifies its businesses into 3 main segments: Bakery (eg BreadTalk, Toast Box), Food Atrium (eg Food Republic) and Restaurant (eg Din Tai Fung).

Key downside risks: increased competition within the F&B sector, structural changes to consumer preferences.

Credit standing
FY2015
FY2016
FY2017
Revenue (S$m)
624.1
615.0
147.6
EBITDA (S$m)
61.2
49.8
11.0
Profit before Tax (S$m)
25.4
29.7
10.7
Net Debt to EBITDA (x)
1.8
1.2
1.3
Gross Debt to Equity (x)
1.38
1.20
1.0
Gross Debt/Total Capitalisation (%)
58.0
54.5
50.4

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.
Revenue breakdown by Segment - 1Q2017 (S$m)
FY2016 - Revenue breakdown by segment

Source: OCBC Treasury Research & Strategy

OUE Limited

Singapore Dollar Bond

Robust income from development and investment properties

OUE Ltd reported a strong set of results in 1Q2017 with revenue surging 60.3 per cent year-on-year to S$196.3 million. Earnings were driven mostly by the company’s development properties segment which saw healthy sales of units at the Twin Peaks condominium. 411 units out of the available 463 were sold as at the end of 1Q2017. In addition, OUE had transferred 22 units out of the balance to its investment properties portfolio with the intention to hold them for capital appreciation purposes. Investment properties also yielded good returns for the company, with revenue rising 5.8 per cent year-on-year, supported by increases in portfolio occupancy in the properties held by OUE-Commercial REIT (OUE-CT). While top-line figures were robust, expenses also increased during the quarter driven in part by sales commission on units of Twin Peaks sold and a variety of other transaction costs. Still, net profit saw a healthy 38.8 per cent year-on-year increase to S$21.2 million. The company’s total borrowings increased by S$248.7 million year-on-year largely due to the acquisition of International Healthway Corp (IHC), a healthcare services and facilities provider. This was partially offset by an S$150 million equity placement raised at the OUE-CT level. As such, net gearing worsened only slightly from 57 per cent a quarter ago to about 60 per cent in 1Q2017.

About the bond
Coupon Rate
3.8% per annum
Maturity
15 April 2020
Bloomberg Ticker
SG6WF5000003
Moody’s/Fitch rating
Unrated
Product Risk Category*
High Risk
About the company

OUE Limited operates as a diversified real estate owner, developer, and operator with a portfolio of assets in prime locations in Singapore. The company focuses its business in the commercial, hospitality, retail and residential sectors.

Key downside risks: Key risks include aggressive acquisition of land bank for residential development, secular headwinds pressuring its retail property assets as well as integration risks relating to the International Healthway Corporation acquisition.

Credit standing
FY2015
FY2016
1Q2017
Revenue (S$m)
431.5
884.2
196.3
EBITDA (S$m)
54.2
255.0
29.2
Profit Before Tax (S$m)
201.1
212.6
28.3
Net Debt to Equity (x)
0.58
0.57
0.60
Cash/Current Borrowings (x)
1.1
0.4
0.9
EBITDA/Gross Interest (x)
0.6
1.8
0.9

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.
Revenue breakdown by Segment - FY2016
Net Debt to Equity

Source: OCBC Treasury Research & Strategy

Wing Tai Properties Limited

Singapore Dollar Bond

Strong recurring income and healthy balance sheet bode well for WTP

Wing Tai Properties Limited (WTP) owns a portfolio of investment properties from which they derive a steady stream of recurring income. The company recorded a healthy set of figures in FY2016, enjoying a 9.3 per cent year-on-year uptick in revenue and 15 per cent year-on-year increase in core net profit before tax, largely driven by stronger property sales and higher project management income. In particular, Wing Tai saw a 3.6 per cent rise in rental and property management income from a year ago, anchored by robust performance from the company’s investment properties in Hong Kong. In addition, the company’s flagship Grade A office property - Landmark East - secured 30 per cent upward rental reversion for leases renewed in 2016. This should help mitigate potential revenue pressures arising from higher competition as more office supply come on stream. Meanwhile, a successful bid for a plot of prime land at Castle Peak Road in Hong Kong raised net gearing to 14 per cent, up 7 per cent from a year ago. Despite the rise in gearing, we believe the company’s balance sheet remains healthy. This, coupled with an evidently strong recurring income stream of HKD737.2m in FY16 from its investment properties, should position the company well to navigate through a largely uncertain environment.

About the bond
Coupon Rate
4.25% per annum
Maturity
29 November 2022
Bloomberg Ticker
XS0859438045
S&P/Moody’s/Fitch rating
Unrated
Product Risk Category*
High Risk
About the company

Wing Tai Properties Limited invests in and manages real estate mainly in Hong Kong, China and South East Asia. The company invests in residential and commercial properties, serviced apartments and boutique hotels. The company is 34.6 per cent owned by Wing Tai Holdings and 13.7 per cent owned by Sun Hung Kai Properties.

Key downside risks: Increasing competition from a rise in Hong Kong office supply, downturn in Hong Kong residential property market.

Credit standing
FY2014
FY2015
FY2016
Revenue (HK$m)
1,783.5
1,009.2
1,103.3
EBITDA (HK$m)
611.3
432.8
487.0
Net profit (HK$m)
1,943.6
1,099.1
1,146.5
Gross debt to EBITDA (x)
6.3
8.7
10.6
Net Debt/EBITDA (x)
3.7
3.9
0.14
Net Debt to Equity (x)
0.10
0.07
0.14

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.
Revenue breakdown by Geography - FY2016 (HK$m)
Revenue breakdown

Source: OCBC Treasury Research & Strategy

CK Hutchison Holdings Limited

U.S. Dollar Bond

Diversified business segments and good credit profile bode well for CK Hutchison

CK Hutchison reported a decent set of earnings in FY2016. Earnings before interest, taxes, depreciation and amortization (EBITDA) ended flat year-on-year at HK$92 million even as revenue declined 6 per cent from a year ago, pressured by weaker earnings from Husky Energy and Hutchison Telecommunications’ Hong Kong segment. Nevertheless, revenue from the company’s retail and 3 Group Europe segments were able to support top-line earnings, offsetting the downside from other segments. Moving forward, we expect the retail and 3 Group Europe segments to continue to drive earnings growth. Meanwhile, the company continues to enjoy a healthy credit profile with plenty of cash at its disposal. As at end of FY2016, the company had amassed a cash balance of HK$156.3 million, which covered its total current liabilities of HK$157.3 million. The increase in cash brought down net gearing to a conservative 0.27x from 0.33x a year earlier. Its leverage is also well-supported by strong operating cash flow generated from a diversified portfolio of businesses. Going forward, we do not expect any material deterioration of the company’s credit metrics including its net gearing and net debt/EBITDA ratios, in-keeping with our constructive view on the company’s credit profile.

About the bond
Coupon Rate
4.0% per annum
Maturity
Perpetual
Bloomberg Ticker
USG2176GAA97
S&P/Moody’s/Fitch rating
BBB/Baa2e/BBB
Product Risk Category*
Very High Risk
About the company

CK Hutchison Holdings Limited is an investment holding company that operates in ports and related services, retail, infrastructure, energy, and telecommunications businesses worldwide. It currently operates across more than 50 countries and employs more than 270,000 people, with a total asset size and market capitalization of US$130 billion and US$48.1 billion respectively.

Key downside risks: Slowdown in trade activity may hurt the company’s port services business. Volatility in oil prices may hurt earnings from the energy business segment as well.

Credit standing
2H2014
FY2015
FY2016
Revenue (HK$m)
208,202
396,087
372,686
EBITDA (HK$m)
45,549
92,093
91,980
Net Income (HK$m)
8,562
31,168
33,008
Interest Coverage (x)
6.7
7.3
7.5
Net Debt to Equity (x)
0.21
0.31
0.26
Total Debt/LTM EBITDA (x)
2.8
3.3
3.3

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.
Business segment breakdown - FY 2016
Revenue - FY2016

Source: Bank of Singapore

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