StockCo is an attractive potential short to medium term investment option for investors at current yield to worst of 5.94%pa. The bond is available to both wholesale and retail investors
Background
StockCo is a niche provider financing the ‘finishing’ phase of livestock growth. This financing funds the purchase price of livestock for a defined period of time, typically between two and twelve months. The finance facilities are available for pasture and feedlot based cattle and sheep producers and the company is now the largest specialist livestock financier in both Australia and New Zealand.
FIIG Credit Research recently published an update, which includes commentary associated with NSW droughts and have maintained its ‘Market Perform’ recommendation on the bond.
At the current price, the StockCo bond has yield to worst of just under 6%pa, which is calculated to the next call date in October 2019 when the bond is callable at a capital price of $103.00. The company has noted its intention to call this bond at the next call date, reducing credit risk. We believe that the current price offers a good entry level for investors looking to park funds for the short term.
Rationale for investors
Many of our clients are looking at reinvestment options for their maturing bonds including Cash Converters maturing in September 2018 and Downer maturing in November 2018. However, there is a particular shortage of reinvestment options for retail clients.
Although StockCo operates within the agricultural industry, we regard it more as a non-bank financial institution as it is providing financing for the purchase of livestock. Consequently, in terms of comparative names, within the unrated (sub investment grade) bonds sector, we compared StockCo with Moneytech, Axsess, CCV, CML and ZipMoney.
Initially it looks like Axsess, CCV and ZipMoney all offer better value, this is largely a function of the securities trading below or around the levels at which the bond can be called, or in the case of Cash Converters, the bond is about to mature making any comparison to other securities difficult.
StockCo has expressed its intention to call the bond at the first available opportunity in October 2019, in part tied to its current plan to establish a securitisation structure aimed at lowering its funding cost. The call price at this date is 103.00. Although this is not a certainty, we view this intention as a clear sign that the company is working on an early refinancing plan. Any delay would likely be largely immaterial as the notes would still have three years to go until maturity date in 2022, with the ability for the bond to be called each month. Nevertheless, we believe it is likely the bond will be called in October 2019.
Risks and mitigating factors
Like any unrated bond, there is always the risk that the company may find it hard to refinance. However, we believe that this is partially mitigated by the company already having a refinancing plan in place as evidenced by the amended corporate restructure that was approved a few months ago.
There are also risks around the financial performance and the FIIG Credit Research report acknowledges that the business growth outlook is likely to be more subdued for fiscal 2019 as a result of the drought. However, we believe this is largely mitigated by the business conditions outside of NSW operating well and that externalities such as drought are more felt by famers rearing younger livestock, whereas StockCo operates in the later ‘finishing’ phase.
Additionally, the Credit Research team’s forecasts are for an improvement in EBIT cover, representing EBIT divided by interest expense, in part due to a result of the restructure and the establishment of the securitisation trust.
Conclusion
We believe StockCo represents good value with a yield to its next call of 5.94%pa (October 2019 at 103.00) and a yield to maturity if not called above 6.50%pa.
There is supply of the bond currently available which we believe will be exhausted as other bonds mature.
Please speak to your Relationship Manager to discuss these or any other investment opportunities or contact the Investment Strategy Group at ISG@fiig.com.au.
Links
Click here to access the StockCo Holdings latest Research.
Click here to download the StockCo 2022 Factsheet.