Lian Beng Group Ltd - Why borrow to invest in corporate bonds?

23/1/2014 - Lian Beng Group Ltd will book the revenue from its 55%-owned industrial development, M Space at Mandai Estate, during Q3.

The company, a BCA Grade 1 developer, says it is actively tendering for new projects in the public and private sector, without giving specifics.

It just announced earnings for H1 FY14 ended November 30, 2013:

Revenue: +39.6% to S$328.1 mln
Profit: -13.2% to S$16.7 mln
One-off gain: Nil vs S$1.2 mln
Cash flow from operations: S$41.6 mln vs (S$63.9 mln)
Dividend: Nil
Order book: S$1 bln lasting till 2016

Its higher revenue was driven by growth in income across all verticals such as construction, property development and its dormitory business.

However, profit declined due to higher operating costs and marketing expenses related to its own projects and that of its associates.

Lian Beng Group's order book has slipped from S$1.2 bln on August 31 last year.

Analyst Lynette Tan at DMG & Partners Research expects the company's revenue to grow on the back of rising construction demand in Singapore.

But the broker fears the profit may be "dampened" by rising operating costs.

The broker also estimates a higher dividend payout of 3 Singapore cents in FY14, as the company would book profit from its M Space project.

Based on a stable outlook, DMG & Partners Research assigns a BUY rating on the stock with a target price of S$0.70.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How much worth of orders has it tendered for so far?

On the one hand, Lian Beng Group says it is actively tendering for projects in public and private sector.

On the other, its order book has shrunk by S$200 mln during Q2.

Therefore that makes us curious about the potential contracts that it could win in coming days and months.

Also, why did its order book decline by S$200 mln between August 31 and November 30 last year? Was it purely because of revenue recognition? Or were any contracts cancelled?

Question

2. Why borrow to invest in corporate bonds?

During H1, Lian Beng Group made a S$62.7 mln "long term investment in high yield corporate bonds" (refer page 9 of earnings report).

The company justified a S$60 mln increase in bank borrowings saying it was partially to invest in long term corporate bonds.

Therefore that makes us curious about what made it borrow funds to buy the long term corporate bonds.

The bonds raise a number of other important questions:

Question

3. Whose corporate bonds did they buy?

Question

4. What is the yield?

And what is the margin between the yield and the interest on the bank loan?

Question

5. How risky are the bonds?

Only high-risk investments offer high yield.

What credit rating do the corporate bonds have, if any?

(Total number of questions in the full story: 12)

We have sent our questions to the company (lbg@lianbeng.sg) to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

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