SGD Bond Heads Up : Oh Mustafa, Oh Mustafa…
I heard there was an investor conference with the potential of a new SGD bond issue.
In fact the ticker has been set up on Bloomberg as a teaser already.
Taken from OCBC credit research.
* Limited exposure to rising rental fees: Approximately 78.2% of its total retail space is owned by Mustafa and its majority shareholder. This reduces the company’s reliance on rented premises and mitigates its exposure to the increasing rental fees.
* Experienced management team: Mustafa’s management team has an in-depth knowledge of the retail industry and remains hands-on on its operations. The company’s success can be largely attributed to the contributions of the founder and Managing Director, who continues to be involved in developing the group’s business.
* Stable revenue and profitability: Mustafa offers a wide range of items in almost every category of consumer goods in its store, but it also includes niche products which are not readily available elsewhere in Singapore. It has a “buy and sell at the lowest possible price” strategy through bulk purchases and competitive pricing. Thus, it is less vulnerable to changes in consumer demand and economic trends.
* Modest credit metrics: FY2013 net debt/EBITDA ratio stood at 10.3x while net debt/equity ratio was at 0.67x and EBITDA/gross interest coverage ratio at 3.7x. Mustafa’s leverage ratios may be higher compared to other purely retail players given its strategy of thin margins and reliance on bank borrowings. We note that bulk of its short-term debt and bank credit facilities are secured by the group’s various assets. Mustafa’s land and buildings posted a net book value of S$293.7mn, compared to its outstanding net debt of S$218.9mn.
* Moderate liquidity profile: The group relies on bank borrowings for its short-term funding requirements. FY2013 total short-term debt stood at S$230.9mn, of which S$225.4mn are secured with various assets. Meanwhile, FY2013 FCF turned negative due to increased inventories and receivables due from directors and related parties. With a negative FCF of S$31.2mn and a cash balance of S$40.5mn as of FY2013, Mustafa expects the uncovered amount to be met by a combination of internally generated funds, external debt/refinancing and/or rolled-over by their banks.”
Good, professional stuff.
Things to note :
* Mustafa is going regional ! and expanding their in house brands and increasing their retail space
* Mustafa is a privately owned company which means that accounts are not publicly available
* 98% of their current loans are secured on company assets which subordinates this bond in its standing
* Their MTN programme is for SGD 300 million
* Share capital SGD 13.3 million, retained earnings SGD 138 million and property revaluation reserve SGD 164 million (note that most of the properties have been pledged)
Mustafa is a one man helmed Little India retail titan, opened 24-7 with a hugely simple but profitable business model (even if they have run into negative cashflow recently). I have less qualms about a privately owned company raising debt than a leveraged buy out deal, for example. Yet there are certain risks involved in investing in a private company with less financial transparency which entails having full faith in the management and their plans for succession (yes, it is believed that they would be throwing in a change of control clause for assurances). As such, the “receivables due from directors and related parties” could warrant a closer look.
The property portfolio would be the jewel in the crown but alas, they have been pledged and also revalued to a decent extent, leaving few crumbs on the table.
Thus, it all boils down to the price.
Some have compared Mustafa to Courts Asia which is a fair enough comparison. Courts Asia did a SGD 3Y paper at 4.75% last year. Size-wise in terms of market cap, they are similar in their retail space. Courts has the advantage of regional presence (Malaysia) and their stock market listing.
I suppose they would be exploring a short-ish tenor paper on a higher yield than Courts which is trading under 4%, as I understand.
Personally, I would liken them closer to the Raffles Education 5.8% 2016, which is going at 5.8% last or at least somewhere in between Raffles Education and Freightlinks 4.6% 2017 which is going at 4.9%. Yet, with the greatest of respect for the lead manager, I suspect they will not be short of buyers when the occasion arises.