BRC Asia

(17-05-2014, 03:47 PM)valuebuddies Wrote: I don't see any margin squeeze, the gross margin was 10.5% for FY2011, 9.7% for FY2012, 15.2% for FY2013 and 15% for 1H2014 respectively. And in fact the revenue was decreased yoy whether comparing the 1H or 2Q. (are we talking about different company )

What are bothering me is the cheaper steel prices and also the recently announced 5% convertible bonds. Firstly cheaper steel prices mean cheaper cost of sales; or lower revenue? Secondly, what is the real motive of issuing the conv bonds where the existing rates of borrowing are so much lesser.

What is your thought?

Hi,

From what I read somewhere, they sealed the contract before purchasing of steel and produce the finished goods for the buyer. Reason for the lower margin in 2011 and 2012 are due to the sharp increase in steel price compare to the contract price. So rightfully, when steel price drop, their margin should expand, like 2013, rather than maintaining or lowering. This will mean that they could be bidding the contracts at a lower price. If steel price goes up instead of down, then they might be in trouble.


If you compare their Q2 gross profit, last year it was 17.6%, and this year drop to 14.3%. First quarter this year is 15.7%. This is what I mean by margin squeezed.

The convertible bonds sounds really fishy to me. For those convertibles that I heard about, none of them are converting at a price lower than current market price. Yet, they are giving a discount. Its sounds a too good a deal to the buyers. If price goes up, they can convert and take profit, if price goes down, they collect 5% pa. This sound more like a private placement issue, but the investors are not willing to accept the chance of falling share price. This convertible bond will give them the protection. Personally, I don't like it.

I think there must be some sort of benefits to the company or the majority shareholders if the bondholders are 3rd parties. Can we speculate that more businesses would follow after the issuance of the bonds (though it is not common in Singapore but who knows)? Or the majority shareholders would get some benefits from the bondholders in return? Or possibly that bondholders (or the ultimate beneficial owner of these bonds, if different from the legal owners) are related parties. I wonder if the rest of shareholders could do something to stop the company from doing this and to prevent the same things to happen again in future.

Will not this help, by putting a floor on the price i.e. 20 cents?

I mean, the conversion price is 20 cents, so, it is in the interest of the bond holder and the company to make the price rise above 20 cents.

I vaguely recollect that second chance had also given warrants converting at 40 cents, when it was trading at 30 cents odd.

I took that as an indication that potentially the appreciation is 30% from 30 cents to 40 cents.

It is likely that BRC will appreciate above 20 cents to make it worth the while for the bond holder.

Disclosure : I am vested, so, I might be biased in hoping that this may be the case.

(14-07-2014, 01:28 PM)Shrivathsa Wrote: Will not this help, by putting a floor on the price i.e. 20 cents?

I mean, the conversion price is 20 cents, so, it is in the interest of the bond holder and the company to make the price rise above 20 cents.

I vaguely recollect that second chance had also given warrants converting at 40 cents, when it was trading at 30 cents odd.

I took that as an indication that potentially the appreciation is 30% from 30 cents to 40 cents.

It is likely that BRC will appreciate above 20 cents to make it worth the while for the bond holder.

Disclosure : I am vested, so, I might be biased in hoping that this may be the case.

I am ok IF they only issue the bonds now when the conversion price is higher than current price. However, I don't feel right as the bonds were issued when the shares were trading at around 21c. They are giving a discount to the bonds buyers, rather than a premium.

(16-07-2014, 12:55 AM)NTL Wrote: I am ok IF they only issue the bonds now when the conversion price is higher than current price. However, I don't feel right as the bonds were issued when the shares were trading at around 21c. They are giving a discount to the bonds buyers, rather than a premium.

Agree, if I have the choice, I would prefer to invest in the bond than the equity interest. 5% interest is indeed quite expensive in the present economy, and I don't see that the Company is desperately in need of financing. This causes me to believe that more "Fishy" transactions may come.

Is not the 5% lower than the yield of 6.6%? Plus, they have used it to pay off trust receipts.

(17-07-2014, 10:13 AM)Shrivathsa Wrote: Is not the 5% lower than the yield of 6.6%? Plus, they have used it to pay off trust receipts.

The difference is as long as BRC exist and fulfill it's obligation to the bond, the 5% is guaranteed. If the share price rises in the future, the bond holders can convert and sell of the shares at a greater profit. If share price drop, the bondholders will get back their investments.

As a shareholder, we are at risk to the fluctuation of the share price. Bondholders do not. And why is the conversion price set below the share price then? That is my biggest question...

The best example I could find was a NTU research paper, which shows that across size, market etc, convertible bonds are underpriced and offer upto 1.11% excess return.

Am uploading the paper here.

I trust that most of us in this forum understand the difference between convertible bonds and equity, so there is no point to argue on the pros and cons. But if the bond issue is something positive to the shareholders, wouldn't the share price increased after the announcement?

And see below as quoted from the 2013 AR:

Quote:The Group’s exposure to market interest rates arises from its term bank loan which bears interest at 1.35% above SIBOR.

Also considering that it has S$19M cash as of March 2014 and gearing not at excessive high level, why would the company so desperately seeking financing at a rate of more than twice of what it normally pay?

(21-07-2014, 05:23 PM)valuebuddies Wrote: I trust that most of us in this forum understand the difference between convertible bonds and equity, so there is no point to argue on the pros and cons. But if the bond issue is something positive to the shareholders, wouldn't the share price increased after the announcement?

And see below as quoted from the 2013 AR:

Quote:The Group’s exposure to market interest rates arises from its term bank loan which bears interest at 1.35% above SIBOR.

Also considering that it has S$19M cash as of March 2014 and gearing not at excessive high level, why would the company so desperately seeking financing at a rate of more than twice of what it normally pay?

The only answer that I can give is:

There is this group of interested investors, some maybe related to each other or other major shareholders, who like to invest in BRC. However, they are also wary of the current market situation. So, the best way for them to start investing in the company is to issue them convertible bonds, as they refuse to take in the shares. As they are buying in bulk, as usual, the company offer them a discount on the conversion price. So now, the company is happy, as they have some big investors in the company, and the investors are happy that they invested in the company. Win-win for them. So... who are the losers?