Yongnam Just Raised S$60 Million Very Creatively – But, Is It A Smart Move For Shareholders?

Yongnam Holdings Limited (SGX: Y02) has been seeing its debt level increase over the past year; its net debt to equity ratio had moved up from 46.7% at the end of 2013 to 53.2% at the end of June this year. Over the same period, Yongnam also saw its cash balance decline from S$14.8 million to S$11.35 million. In the first six months of 2014, Yongnam also suffered losses to the tune of S$7.17 million.

All of the above is to say that Yongnam seems to be in a situation where it needs to raise funds to sustain its business. And, Yongnam actually managed to find a creative avenue to do just that.

The fund raiser

Just this morning, Yongnam announced that it would be selling its main plant in Nusajaya, Johor for a sum of RM167.5 million (around S$60.0 million) to the Malaysia-listed Axis Real Estate Investment Trust. With the sale of the property, Yongnam will then lease back the property from Axis REIT for 15 years. Both Yongnam and Axis REIT “will endeavour to complete the Sale Transaction on or before 31 December 2014.”

Is this a smart move?

The positives

The transaction allows Yongnam to raise S$60 million in cash to strengthen its balance sheet. Although a portion of the S$60 million would be used to pay down the property’s mortgage, the company is still expecting a huge profit from its sale.

Based on Yongnam’s number crunching, if the deal had been completed on 31 December 2013, the company’s earnings per share for the whole of that year would have increased from 0.44 cents to 3.13 cents. Furthermore, Yongnam’s net tangible asset per share would also be boosted by more than 10% from 24.98 cents to 27.66 cents.

Thus, the property sale would bode well for Yongnam’s bottom-line and balance sheet for the whole of 2014 (if the deal’s completed by 31 December 2014).

The negatives

A sale and lease-back transaction is often thought of as an off-balance sheet financing option for an organisation. As per the deal, Yongnam would have to pay an annual rent of S$4.54 million (around RM969,313 per month) to use the property.

The annual rent which Yongnam has to pay is thus about 7.5% of the property’s selling price of S$60 million – this gives Axis REIT a yield of 7.5% on the property (without leverage).

For such a sale and lease-back agreement, we can see it as Yongnam issuing S$60 million worth of perpetual bonds which carry an annual interest rate of 7.5%. Under this context, the “interest rate” Yongnam’s paying seems to be slightly on the higher end of things given that the mortgage rate in Malaysia is now only around 4% to 5%. That said, a 7.5% “interest rate” is still not excessive.

Foolish Summary

Yongnam has actually raised money through very creative means (the sale and lease-back arrangement). Although the company might be paying a theoretical interest rate of 7.5% (which isn’t low) on the deal, shareholders may still be reasonably well-rewarded in the long-run if Yongnam manages to put the capital to good use, earning returns higher than the 7.5% “interest” it is paying.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any company mentioned above