Is Aspial Corporation Being Overly Aggressive In Growing Its Business?

Last year, Aspial Corporation (SGX: A30) started construction works for its Australia 108 skyscraper project in Melbourne, Australia.

The tower, if completed at the planned date of 2019, will become the tallest tower in the southern hemisphere. The A$900 million project is one of the largest that Aspial has ever attempted.

But, Australia 108 is not the only thing Aspial’s busy developing at the moment. In fact, Aspial has another ongoing project in Melbourne (the 55-level residential tower, Avant) and is planning for another skyscraper project in the Australian city of Brisbane.

Although Aspial has a number of strong projects on its hands right now, should investors be worried that the company has bitten off more than it can chew?

At the end of 2015, Aspial’s balance sheet figures showed that it had a net debt (total debt minus cash) to equity ratio of 311%. Meanwhile, according to data from S&P Global Market Intelligence, its interest coverage ratio (operating income over interest expense) in 2015 is a troubling 0.7. In addition, the company has been generating negative cash flow from operations since 2009 and currently has only S$133 million in cash on hand and S$153 million worth of investment securities.

With such a highly geared balance sheet and without much cash flowing into its coffers, what options might Aspial have if it wants or needs to raise more capital?

Option 1: More debt

One option could be to issue more debt and that’s something Aspial has not shied away from. Last week, the company announced that it’d be launching a new bond offering worth S$75 million. The bonds mature in four years and carry an annual interest of 5.30%.

Of the S$75 million sum, the company had earmarked S$50 million to be offered to the public while S$25 million would be for institutional investors. Last Thursday, the company revealed that the S$25 million tranche that’s meant for institutional investors had successfully closed after being oversubscribed.

But, when looking at the company’s stretched balance sheet with the net-debt to equity ratio of 311%, taking on additional debt may not be the right medicine – it might just expose Aspial to even more financial risk.

Option 2: More equity

The company has already announced a proposal to spin-off its property business in Australia and Malaysia through an initial public offering in the Catalist board in Singapore’s stock market. If successful, it would raise some cash and likely help improve Aspial’s balance sheet.

But, the extent of improvement would depend on the valuation that Aspial is able to obtain for the proposed initial public offering. With more than S$1.3 billion in debt on Aspial’s balance sheet as of 31 December 2015, the company would need a significant influx of cash to move the needle.

Foolish Summary

Aspial has great plans for its property business in Australia. But, the company’s weak balance sheet could be a risk that investors may want to keep in mind when figuring out the firm’s wherewithal in pulling off its huge projects.

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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 writer Stanley Lim does not own shares in any companies mentioned above.