Frasers Centrepoint's Perpetual Bonds.

A reader sent me a note in FB today, asking me what I thought of this:

FRASERS Centrepoint on Monday is selling Singapore dollar perpetual bonds, the first perpetual deal in 2015. A term sheet seen said that the SGD subordinated Perp NC 5 has an initial price guidance in the low 5 per cent. NC 5 means that the perpetual bonds will not be recalled before year 5.

Source: The Business Times.

Well, I would generally avoid long term bonds especially since I believe that interest rates are more likely to go up than not from here on. With perpetual bonds, there isn't any maturity date. So, they are more long term than long term bonds. There isn't a date when the bond matures and when the principal is returned to the bond holder. Having a maturity date when the principal is returned to the bond holder is a feature that makes bonds safer.

Reader:
What do you think about this, as compared to CPF minimum sum?

So, can we compare this with the CPF which locks up some of our money for a very long time? The expected coupon of 5% is similar to what is being paid on our funds in the CPF-SA, isn't it?

Well, it isn't an apple with apple comparison, actually. One is a bond backed by a business entity while the other has a built in annuity and is backed by a AAA rated sovereign bond. Definitely, they are quite different animals.

As always, whether something is good or not depends on where we stand. Generally, I think this is a good thing for Frasers Centrepoint's shareholders as the company diversify their sources of funding and a 5% coupon might appear quite cheap several years from now (and they only have to keep paying the coupon and not worry about paying the principal).

However, for the bond holders, they could find themselves holding the shorter end of the stick and it could become more apparent as time goes by.

Related posts:
1. Perpetual bonds: Good or bad?
2. Nobody cares more about our money than we do.
3. Bonds, REITs and the instant gratification of yield.

Yongnam: A bad 2014. Could 2015 be better?

When I first invested in Yongnam, it was beginning to reward shareholders by paying dividends and being the biggest outside of Japan in what they do, I decided that they probably had a competitive advantage over smaller players.

Consistent with Yongnam's new direction to invest in infrastructural projects that would generate recurring income, together with two partners, it submitted a tender for the construction and operation of an international airport in Myanmar. I rather liked this new direction.

However, when Yongnam's share price was driven up on speculation that their consortium would clinch the project in Myanmar, I divested most of my investment in the company. Price had gone up not because of some fundamental improvements. It went up based on speculative pressure. As it turned out, Yongnam et. al. was unsuccessful in clinching the project that time.

Subsequently, Yongnam suffered setbacks in its business and its stock price tumbled. I added to my reduced long position when my initial purchase price was hit. Basically, by then, my long position in Yongnam was funded by capital gains from trading its stock as well as the dividends paid by the company.

I was willing to stay invested because I felt that the setbacks were project based and should be temporary. The weaker results were not due to some destructive force which was more enduring in nature. Given time, things should improve again, I thought.

Well, instead of the improvement in results I was expecting, a bigger loss was announced months later. In a blog post in August last year, I said I would not be adding to my investment as Yongnam's attractiveness as an investment for income and growth was undermined. The stock was trading at 22c a share back then and it didn't look like it would be able to pay a dividend. As expected, no dividend was announced in its full year results.

At that time, I said that I would like to see Yongnam's order book improving and if it did not, I might have to trim my exposure. Businesses like Yongnam's need to constantly replenish their order books. As long as Yongnam has new orders, it will have earnings visibility if nothing goes wrong.

In its latest results, Yongnam announced that, as of end December 2014, its order book stood at $405 million. This is an improvement over end December 2013 which saw order book at $340 million. The improvement is a relief for shareholders.

Although Yongnam with its two partners secured the mega project in Myanmar, this still remains a wild card for now. We might remember how Yongnam's stock price rallied briefly when the announcement was made a few months ago. The rally sputtered and the stock price resumed its slide downwards.

This is probably because it remains to be seen what are the details and terms of the public-private partnership agreement with a 30 year concession for the international airport project in Myanmar. In Yongnam's recent full year statement, it is stated that discussion is still underway.

Naturally, the project will require funding and will take time to complete. The Myanmar government will get a US$700 million low interest rate loan from the Japanese government while the consortium will secure about US$520 million in loans from private lenders as well as use internal resources in the construction of the airport. The airport will take about 4 years to complete construction. This project is likely to make material contributions to Yongnam's performance once it gets off the ground.

So, taking everything into consideration plus the fact that I am already holding on to a much reduced long position in Yongnam compared to the time when I was invested in it for income and growth, I decided to increase my long position in Yongnam today after its stock took a beating and price tested an important support level I identified.

Buying in at 16.1c per share represents a 32% discount to Yongnam's NAV and it also marks my first purchase of its stock in quite a while.

Yongnam had a terrible 2014 but could 2015 and beyond be better?

See financial statement: here.

Related posts:
1. Yongnam: Investing in infrastructural development.
2. Portfolio review: Unexpectedly eventful.
3. Managing exposure in AK's investment portfolio.