Short Position


  • Business
  • Saturday, 10 Aug 2019

YNH joins ‘perpetual’ list

INCREASINGLY more companies are using perpetual securities as a means to raise funds. The papers are generally not rated and carry a high coupon rate, which makes it attractive to investors seeking higher yields.

YNH Property Bhd issued a RM263mil perpetual securities issue that comes with a coupon rate of 6.85%. It is for a five-year term and like other perpetual bonds, the company has the option to redeem the papers at the end of the term.

YNH’s perpetual securities are secured over a parcel of land in Kuala Lumpur. The proceeds are to be used for repayment of borrowings, working capital and expansion of the group’s property development business.

YNH is not alone in issuing perpetual debt papers to raise money. MAH SING GROUP BHD, BOUSTEAD HOLDINGS BHD and a subsidiary of YINSON Bhd have issued similar debt papers that carried a high yield with a buyback clause.

If the company does not redeem the papers after the term ends, there is a step-up clause in the coupon rate. Hence, generally companies would buy back the papers if its overall cost of borrowing is less than the coupon rate.

If the overall cost is more than the new coupon rate, which includes the step-up amount, the company would tend to roll over the debt papers.

There are concerns on perpetual bonds as questions arise as to whether the papers will be eventually redeemed by the company.

Deeper scrutiny suggests that the quality of the papers depends on the fundamentals of the company and the underlying asset backing the debt papers. For property companies, they take the view that the sentiments and markets will improve in the next five years and the company would be able to redeem the papers.

Also, the papers are backed by land suitable for development and should fetch a handsome value in the future. Hence, the papers will be redeemed at some point.

However, given the declining interest rates, why should companies issue securities with high coupon rates?

Doing the right thing

HONESTY is the best policy but for many companies in Malaysia, any negative disclosure will be avoided if necessary. The idea is that the bad news will come out and the market will then react.

That is why when Leong Hup International Bhd disclosed yesterday that its second quarter profit would be hit after average selling prices of its products in Malaysia fell significantly, it was unfamiliar ground for corporate Malaysia where such bad news would have kept away from investors until it was time to disclose.Leong Hup’s decision to tell all should in the context of market maturity be applauded. The listing was a big IPO that generated a lot of interest from investors and the markets, and by setting an example, it should be seen as shedding light on the tough conditions in a basic industry that is subject to market volatility.

The company said average selling price of broiler day-old-chicks (DOC) in Malaysia in the second quarter of 2019 was RM1.21 per DOC, representing a decline of 38.6% from RM1.97 per DOC in the same quarter of last year.

It said the selling price of its DOC in Malaysia declined to as low as 90 sen per DOC in the past quarter of 2019 and the lowest selling price of its DOC in the second quarter of 2018 was RM1.60. Also hurting its margins was the average selling price of broiler chicken, which fell 14.7% to RM3.99 per kg in the second quarter from RM4.68 per kg in the same quarter of 2018. The lowest the price of its broiler chicken in the second quarter of 2018 was RM3.90 per kg.

It appears that the fall in prices is over. As at Aug 5, 2019, it said the market prices of broiler DOC and broiler chicken are RM2 per DOC and RM5 per kg respectively, which indicates that prices have rebounded strongly in this third quarter.

Leong Hup said sales volume of the group’s products increased in the second quarter of 2019 from the same quarter in 2018. The total sales volume of livestock feed, broiler DOC, broiler chicken and eggs increased by 13.9%, 8.1%, 10.7% and 5.9% respectively but increased sales could not divert a drop in profit.

Its disclosure will be seen as a barometer for other poultry stocks and more importantly, will other companies that are due to announce their second-quarter financial results this month be making similar warnings? They should in the name of market maturity and transparency.

TH Plantations’ woes

YESTERDAY, TH Plantations Bhd made an unusual filing on the stock exchange. The company said it had suspended its chief financial officer Mohamed Azman Shah Ishak and issued him a show-cause letter. The company said this had arisen from a recent forensic audit that the company had conducted.

Clearly all is not well in TH Plantations. The company made a huge impairment and wrote off half-a-billion ringgit in its accounts for its financial year ended Dec 31, 2018. It also posted a loss in the first quarter ended March 31, 2019.

In August last year, the firm saw the departure of its CEO Datuk Seri Zainal Azwar Zainal Aminuddin, a week after being asked to go on garden leave. He was then replaced by Muzmi Mohamed. Then in December, a police report was lodged against senior management members in Lembaga Tabung Haji (LTH) and TH Plantations Bhd by Trurich Resources Sdn Bhd, a company co-owned by FGV Holdings Bhd and LTH.

The police report was lodged for misleading the company in overpriced acquisitions of oil palm plantations in Indonesia between 2008 and 2009 for US$58mil (RM242.78mil). Five individuals were named in the police report. In 2008, LTH, which at the time was the sole owner of Trurich, had approved the latter’s acquisition of green and brown field oil palm plantations in Kalimantan Utara and Kalimantan Tengah, Trurich had said in a statement.

TH Plantations is 73.84%-owned by LTH. Clearly, a major clean up is taking place in LTH and its companies. Hopefully, the management will get to the bottom of things and determine if there are wrongdoings and the guilty parties taken to task.


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