S(t)ocks For Christmas: Santa’s “Naughty” List

Christmas is just around the corner! However, not everyone is jolly during the holiday season. Here are three shares that might miss the Christmas cheer as they’ve made their way into Santa’s “Naughty” list for having poor long-term business performance and/or heavily-leveraged balance sheets.

A dying tiger dream

After clocking losses for three consecutive financial years, Tiger Airways Holdings Limited (SGX: J7X) looks set to extend that record in FY2015 (financial year ending 31 March 2015) as it has already clocked S$247.6 million in losses for the first half of that year.

Other than spilling red ink all over its income statement, the no-frills carrier has also been burning through cash. In FY2014, the company had generated a negative S$447.9 million in free cash flow; for the first half of FY2015, the figure was a negative S$14.9 million.

Tiger Airways’ losses have reduced the equity in its balance sheet to only S$22.6 million as at the end of September 2014. The carrier’s debt to equity ratio is also at a disturbing 15.2 times. The airline has been in business for more than 10 years, yet it is still unable to position itself on a sustainably profitable path. If the company continues to burn through cash, shareholders might just be in for a rough ride in 2015.

A bitter pineapple

Pineapple canning outfit Del Monte Pacific Limited (SGX: D03) had first announced a huge US$1.675 billion acquisition of U.S. based food processor Del Monte Foods (the two companies are not related) back in October 2013. The acquisition was completed in February 2014, but because the purchase was financed mostly by borrowings, Del Monte Pacific’s balance sheet had become heavily leveraged as a result.

As of 31 October 2014, the combined entity of Del Monte Pacific and Del Monte Foods had net debt (total borrowings minus total cash) of US$2.0 billion, and a net debt to equity ratio of 906%. According to the company’s presentation, it has plans to reduce the net debt to equity ratio to between 170% and 180% by April 2015. To do that, Del Monte Pacific intends to raise net proceeds of US$515 million from the issue of both preference shares and rights shares. That sounds highly feasible, but let’s not count our chickens before they hatch.

Investors would have to keep a close watch on Del Monte’s balance sheet going forward.

A lifeline

Previously a construction company in China, Sino Construction Limited (SGX: F3V) had ran into difficulties; as an example, the firm had clocked massive losses of RMB159 million in 2011. In 2013, Sino Construction restructured its business and since early this year, had started to “acquire and hold multiple and diversified mineral and energy resources assets.” The company’s goal is to transform itself into a “mineral and energy resource business.”

The latest play in that transformation involves Sino Construction’s reverse takeover of Guildford Coal Limited, a listed coal mining outfit in Australia. The takeover would see Sino Construction issue 229.64 million new shares of itself to Guildford Coal at a price of S$0.31 each. For some perspective, Sino Construction had 1.317 billion outstanding shares as of 30 September 2014.

Although the acquisition of Guildford Coal might seem like a logical extension of Sino Construction’s transformative goals, in certain ways, the purchase is acting like a lifeline for the former construction outfit. Sino Construction’s equity is nearing zero, pushing its debt to equity ratio to 7.6 times; the company also has had no revenue since 2012. Until the deal is closed, Sino Construction might not be in any mood to celebrate the holidays.

Foolish Summary

Challenges come and go. Some companies can weather storms and emerge stronger while others unfortunately get submerged. Hopefully, these three companies will be in a much better position when the next Christmas rolls along.

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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 companies mention above