Aspial Corporation Ltd (“Aspial”) is issuing a 3-year SGD senior unsecured bond at a final price guidance of 6.5% payable semi-annually off its S$700m multicurrency debt issuance programme. We provide a quick introduction to the company, highlight its recent financial performance and offer our thoughts on the bond’s pricing.
About Aspial
Established in 1970, Aspial Corporation Ltd started off its business as a traditional jeweller under a stable of household brand names including Aspial, Lee Hwa Jewellery, Goldheart and Citigems. The company has since diversified into other businesses including property development and financial services, with the latter mainly operated through SGX-listed Maxi-Cash Financial Services Corporation Ltd (“Maxi-Cash”). Aspial reports revenue through three business segments namely Jewellery, Financial Service, and Real Estate.
The founding Koh family controls more than 80% of Aspial’s shares. Mr Koh Wee Seng has led the company as CEO since 1994. His sister, Ms Ko Lee Meng sits on the board of directors as a non-executive and non-independent director.
Development pipeline
In 2019, Aspial had been mostly focusing on the development and marketing of Australia 108. Launched in 4Q14, Australia 108 is a residential project with 1,103 luxury apartment units, touted to be Melbourne’s tallest residential building with 101 floors. As at 31 Dec 19, Aspial completed 94% of the development.
As at 1Q19, 88% of units were sold at Australia 108. This figure had fallen from a high of 98% that was reported a year ago in 1Q18, suggesting that buyers had been walking away from their purchase agreements. We observed that Aspial had not disclosed sales progress of its projects from 2Q19 onwards, which raised our concerns that the number of units sold at Australia 108 might have continued to drop.
Other than Australia 108, the group will continue to sell the remaining units at Nova City Tower 1. Launched in 4Q16, Nova City Tower 1 is a residential and commercial mixed-use development project with a total of 196 units. As at 31 Mar 19, 101 units were launched and 40% of these were sold. Strangely, sales have not improved as the percentage of sold units remained constant at 61% (4Q18: 61%), possibly signaling that demand for the property has been weak.
Meanwhile, Aspial operates seven hotels comprising 121 rooms with a total of 72 keys in Penang, Malaysia. Aspial expects its hotel portfolio in Penang to increase to about 280 keys (3Q19: 350 keys) by the end of 2020. While this could potentially provide more recurring income, we understand from management that proceeds from these Penang hotels are a small contributor to group profitability.
2019 Results
Revenue for the year ended 31 Dec 19 stood at S$560.2m, down 37.6% YoY (2018: S$898.5m) mainly due to lower revenue from its property development segment, which has seen fewer project completions in 2019. The drop in topline led to a profit before tax of S$30.4m in 2019, down from S$56.6m in the previous year. Aside from a decrease in revenue, the group booked lower profits due to provisions for impairment losses, allowances for write-down of development properties and a fair value loss amounting to S$8.2m for its assets and properties in Singapore and Malaysia.
During 2019, Aspial’s jewellery business recorded S$139.8m of revenue, up slightly from S$135.8m in 2018 thanks to sales from overseas operations (likely under the Niessing brand, a German jeweller), which helped to offset lower sales from Singapore outlets. Aspial further reduced operating costs for its retail operations in Singapore, and recorded higher share of profits from associates. As a result, pre-tax losses from Aspial’s jewellery division narrowed to S$0.4m (2018: pre-tax loss of S$4.2m).
Meanwhile, revenue from the pawnbroking (Financial Service) business increased by 7.3% YoY to S$218.5m in 2019. According to Aspial, segmental revenue increased on the back of higher sales from retail and trading of jewellery and branded merchandise, and higher interest income from its lending operations. Pre-tax profit for the segment increased 49.2% YoY to S$17.9m over the same period.
While Aspial’s Jewellery and pawnbroking businesses have picked up in recent years, we note that they operate at a smaller scale relative to its property segment. Furthermore in the near term, its Jewellery unit could be affected by falling retail traffic as a result of COVID-19 fears.
As for the property development segment, we note that the group provided allowances for the write-down of development properties of S$1.5m in 2019, indicating that valuations for its property projects may face downward pressure in the short term.
Overall, Aspial’s interest coverage ratio (EBIT over interest) has declined steadily over the years, falling to 1.9x in 2019 from 2.8x in 2018 (2012: 6.9x). At 1.9x, the interest coverage multiple indicated a modestly low capacity to service debt obligations. As we have mentioned previously in our earlier article - “Aspial Corp: Credit Update 20 Jan 2020”, Aspial’s interest coverage ability is unlikely to improve quickly due to the falling sales rate at Australia 108.
Credit Highlights
At the end of December 2019, Aspial’s total debt remained large at S$1.1 billion, which was close to the S$1.2 billion level in 2018 and higher from S$995.8m at 30 Sep 19. Cash and bank balances improved to S$146.2m as at 2019 (2018: S$59.0m). Net gearing subsequently fell to 2.3x from 2.7x over the same period, which is still at an elevated level in our opinion.
Aspial’s financial liquidity looks tight with S$844.4m of debt to be repaid within the next twelve months - a comparatively big sum relative to just S$146.0m of cash and bank balances on hand. Aspial’s refinancing wall is worryingly high even if we exclude the S$243.6m of short-term borrowings at Maxi-Cash, or optimistically assuming that it can roll over S$486.4m of secured short-term debt. To pare down its indebtedness, Aspial will likely have to rely on proceeds to be collected from the sale of units at Australia 108 or external financing.
Bond recommendation
In summary, our pessimism on Aspial’s credit outlook, despite some relief at the sight of improvements from its Jewellery and pawn broking businesses, remain centered on its significant refinancing risk, uncertain sales progress and cash collection ambiguity from Australia 108. In addition to these factors, considering its elevated net gearing profile, we remain negative on the company’s credit outlook.
Table 1: The Aspial bonds
|
Issues |
Ask YTM (%) |
Ask Price |
Z-spread (bps) |
Issue Size (S$m) |
|
6.70 |
99.91 |
581 |
182.3 |
|
|
9.58 |
98.06 |
856 |
150 |
|
|
9.93 |
96.10 |
904 |
50 |
|
|
10.89 |
93.40 |
1018 |
50 |
|
|
Source: Bloomberg Finance L.P., iFAST compilation, data as at 9 Mar 20 |
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At a final price guidance of 6.5%, the newly launched ASPSP 20Mar2023 Corp (SGD) is priced at a spread of 574bps above the 3-year SGD swap rate (as at 9 Mar 20). Against its existing curve (i.e. other ASPSP bonds), the new bond appears unattractive. As a comparison, the ASPSP 5.9% Apr’21s and 6.25% Oct’21s carry an ask yield-to-maturity (“YTM”) of 9.93% and 10.89% respectively.
We can also compare this new ASPSP issue with other real estate credits in the SGD space. The OHLSP 6.500% 28Feb2023 Corp (SGD) offers better value than the new ASPSP Mar’23s. As a reference, the S$75m OHLSP 6.5% ‘23s traded at a spread of 518bps above the 3-year SGD swap on its issue date, and is currently indicating an ask YTM of 6.43% (Z-spread: 573bps), close to the yield of this new ASPSP issue.
Meanwhile, we wish to highlight that in contrast to Aspial, Oxley has better cash flow visibility and a decent pipeline of property projects to support its debt obligations (see article “Oxley launches new 3Y SGD bond at 6.75% IPG”).
There are also other credits within the SGD space that are also offering a better yield than the new 6.5% ASPSP Mar’23s. For example, the S$120m PREHSP 3.900% 12Jan2021 Corp (SGD) with its ask YTM of 9.35% (Z-spread: 845bps) represents a good alternative for high-yield seekers given its relatively healthier credit profile relative to Aspial. PREHSP, or Perennial Real Estate Holdings Ltd had a net gearing of 0.74x and although it is in a similar tight liquidity situation, the company had indicated its intention to sell its 31.2% interest in AXA Tower, which should fetch a good price given the buoyant office market in Singapore.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has principal positions in OHLSP 6.375% 21Apr2021 Corp (USD), OHLSP 5.150% 18May2020 Corp (SGD) – Retail and PREHSP 4.550% 29Apr2020 Corp (SGD) - Retail. The analyst who produced this report hold a NIL position in the abovementioned securities.
