Tuesday 17 February 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: Unemployment figures hit a 12 year high; RBA Governor Glenn Stevens addressed the Standing Economics Committee; and we provide a wrap up of the results season.

Economic wrap

Last Wednesday, Australian employment data was released with unemployment hitting a 12 year high of 6.4%, up from 6.1% in the previous month. The economy lost 28,000 full time jobs over the month with part-time positions increasing by 16,000 to absorb some of the losses. The labour force participation rate remained at 64.8%.

On Friday, just over a week after the Reserve Bank of Australia (RBA) lowered the official cash rate to 2.25% its Governor, Glenn Stevens spoke before a parliamentary committee. Stevens referenced the latest unemployment figure and stated that he expects it to creep higher over coming months. Also of interest from Stevens was that he questions the capacity of rate cuts to spur investment due to a lack of confidence in the business community. The theme of the address was suggestive of further rate cuts, which was consistent with yesterday’s RBA minutes. The minutes maintained the same theme of deteriorating market conditions, low inflation and a need for a lower AUD - all in support of further easing.

Bonds had another good week last week, with yields down. The five year Commonwealth Government Bond fell by nine basis points in yield for the week to finish at 1.965%. The ten year fell by five basis points to 2.501%.

The AUD traded relatively flat against the USD over the week, finishing at around 77.6 US cents. We did, however, see a dip down to 76.5 US cents after the weaker than expected unemployment figure was released.

Flows

There was plenty of activity in the USD space, including large volumes in the Newcrest Mining 2041 fixed rate bond. While this bond clearly will be very sensitive to interest rate movements in the US and hence exhibit volatile pricing, it has struck a chord with many investors and is in good supply at an indicative yield to maturirty of more than 6%.

There continues to be activity in popular AUD issues including the following offered at indicative yield to maturities:

  • Qantas 20 – 5.10% (retail and wholesale investors)
  • Qantas 21 – 5.34% (wholesale investors only)
  • Qantas 22 – 5.44% (wholesale investors only)
  • Sydney Airport ILB 20 – 5.02% (retail and wholesale investors)
  • Sydney Airport ILB 30 - 5.52% (retail and wholesale investors)
  • MPC Funding IAB 25 – 4.10% (wholesale investors only)
  • MPC Funding IAB 33 – 4.72% (wholesale investors only)

Results season

Below we have provided a snapshot of recent results from key issuers. To obtain full commentary on an issuer’s financial results, please contact your FIIG representative.

Newcrest – 1H15 results snapshot (by Alen Golubovic)

  • Statutory profits were up 400% versus 1H14 to $200m
  • Positive free cash flow of $268m (an approximate $500m turnaround from the prior half year), which facilitated a US$220m debt repayment over the period
  • All in sustaining cost (AISC) margins were up 16% to US$429 per ounce despite a 4% lower realised USD gold price, reflecting the company’s focus on cost improvements
  • The company also upgraded its full year guidance for gold and copper production and reduced AISC expenditure
  • Bonds are indicatively offered at a 4.85% and 6.23% YTM for the Newcrest 2022s and 2041s respectively

Kinross Gold Corp (KCN) – FY14 results snapshot (by Alen Golubovic)

  • Revenue of US$3.46bn was down 8.3% from US$3.7bn in FY13, while the average realised gold price was down 10% year on year to US$1,263 per ounce
  • Record production of 2.71m ounces, compared with 2.6m ounces in FY13
  • Net operating cash flows of US$858.1m were up from US$796.6m in the prior year. After allowing for capital expenditure, free cash flows in FY14 were a positive at US$226.3m versus negative free cash flow prior
  • AISC of US$973 per ounce, compared with US$1,082 per ounce for FY13
  • Bonds are indicatively offered at a 5.59% YTM for KCN 2024s

Qantas – S&P revises outlook on Qantas from negative to stable (by Alen Golubovic)

  • The removal of S&P’s negative outlook reflects the view of the meaningful improvement in Qantas' operating environment, which we expect to translate to improved credit metrics
  • Underpinning the corporate credit rating on Qantas is its strong domestic market position. However, in S&P’s opinion the international business faces significant challenges
  • While Qantas has been successful in turning around its operating performance in a short space of time, a rating uplift is not likely to be made for at least the next 12 to 18 months and would require evidence of a more robust and versatile operating platform
  • Bonds are indicatively offered at a YTM of 5.10% for the Qantas 2020s, 5.34% for Qantas 2021s and 5.44% Qantas 2022s

Fortescue (FMG) – 1H15 results snapshot (by Alen Golubovic)

  • Profitability was significantly down on the prior period, however we are now in a very different environment for iron ore and so looking ahead will be more important than comparing against prior period performances
  • Fortescue's EBITDA performance of US$1.4bn was ahead of consensus estimates of US$1.35bn, while its net profit of $331m was ahead of a consensus net profit $329.3m
  • FMG had positive net operating cashflow of US$905m and free cash flow of US$469m over 1H15
  • Fortescue has made significant headway in lowering its cost base, and this is expected to continue over the course of FY15. Its quoted guidance is for all in costs of US$45/dry metric tonne over 2H15
  • FMG 2019s bonds are indicatively offered at 9.04% YTM

Leighton Holdings - 1H15 results snapshot (by William Arnold)

  • Underlying NPAT up 6% to $620m. The results were driven by stable revenues ($22.3bn), strong operating cash flows (+26% to A$1.6bn) and assets sales, which were used to sharply reduce net gearing to around zero (from 37% in Jun 14)
  • Significant de risking of the balance sheet including for the first time making a $675m provision relating to receivables on problem projects
  • Good results, much improved credit profile and reliable FY15 guidance of NPAT of $450-520m.
  • 2022 bonds are indicatively offered at 4.30% YTM

Cash Converters (CCV) - 1H15 results snapshot (by William Arnold)

  • Solid results with revenue up 20.5% to $187.7m driven by personal lending and corporate store revenue
  • Normalised EBITDA was strong, up 31.4% to $32.4m, however, the group posted a statutory net loss this half given the previously announced $30.8m purchase of licences from development agents
  • FY14 was impacted by the transition to a new regulatory regime for short-term lending, however, 1H15 results illustrate an ability to grow and improve profitability under the new regulations
  • Bonds are indicatively offered at 4.40% yield to first call (2016)

Mackay Sugar (MSL) - 1H15 results snapshot (by William Arnold)

  • Good financial results mainly driven by favourable weather leading to higher crop yields
  • Operational performance was poor with significant lost crushing opportunity due to equipment and operational failures (total lost hours doubled to 4,680hrs 1H15 – across two mills). In response, the company will conduct an extensive capital and maintenance program to enhance operational performance in the coming year
  • The main credit strengths of this company are its long stable trading history and significant asset backing in marketable, easily divestible assets
  • While one of the lower yielding FIIG originated issues, it is also one of the lowest risk. MSL 2018 bonds are indicatively offered at a 5.28% YTM

G8 Education – FY14 results snapshot (by William Arnold)

  • Underlying revenue and EBIT growth has continued strongly with the acquisition of 203 new centres in FY14
  • The group continues to recognise synergies and focus on cost reduction leading to underlying EBIT margin increasing for the fourth consecutive year ending at a record high of 24% for 2H14
  • As expected, as G8 expands, it is using an increasing proportion of debt to fund acquisitions in order to continue to deliver shareholder growth. While a solid company, its increasing debt is limiting upside to credit fundamentals (noting covenants limit G8 and protect bondholders in this regard)
  • However, interest cover remains strong at 8.9x and G8’s financing footing is manageable
  • G8 fixed is indicatively offered at 4.18% to the August 2016 call date (5.76% to maturity), and the floating rate note is indicatively offered at BBSW+3.19% (5.40% to maturity)

Genworth - Full Year results to 31 December 2014 (by Justin McCarthy)

  • Strong result with underlying NPAT of $279.4m for FY14, up 26.5% on FY13 and beating consensus forecasts
  • Lowest delinquency rate since 2007, reflecting low interest rates and solid property fundamentals
  • Improved capital position with prescribed capital amount (PCA) coverage ratio up from 1.50 times at December 2013 to 1.59 times at December 2014
  • The only negative was the announcement of a special dividend (to increase repatriations to the US parent which still holds circa 70% of the equity). This will reduce the PCA but this is considered acceptable
  • 2016 bonds are indicatively offered at a BBSW+1.11% or 3.25% YTM

Suncorp full year results to 31 December 2014 (by Justin McCarthy)

  • Headline NPAT was $631m, despite a $250m hit from the Brisbane hail storm in late 2014. While the results were slightly below consensus estimates, they were up 15.1% on 1H14
  • For bond investors, the results were a continuation of a run of solid half yearly figures and the maintenance of relatively strong capitalisation levels across both the insurance and banking divisions
  • We remain comfortable with Suncorp Bank and Suncorp Insurance (aka Vero or AAI) credit risk. Further, we continue to expect Suncorp to call all “old style” subordinated bonds with a step-up margin, including the 2025 (callable 2015) and 2026 (callable 2016) bonds and believe these bonds are fairly priced at current levels

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. For more information, please call your FIIG representative or our general line 1800 01 01 81.

Disclaimer 

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

The information has been prepared solely for informational purposes only and does not constitute or form part of any offer for sale or subscription of, or solicitations or any offer to buy or subscribe for, or any invitation to subscribe for or purchase any securities and nothing contained herein shall form the basis of any contract or commitment whatsoever. The information is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. No action has been taken to permit the public distribution of the information in any jurisdiction and the information should not be distributed to any person or entity in any jurisdiction where such distribution would be contrary to applicable law.

The information has not been lodged with Australian Securities and Investments Commission or any other authority. The information is intended for distribution only to financial institutions and professional investors whose ordinary business includes the buying or selling of securities in circumstances where disclosure is not required under Chapter 6D.2 or Chapter 7 of the Corporations Act 2001 of Australia (the “Corporations Act”) and only in such other circumstances as may be permitted by applicable law. Any securities that may be offered by the Issuer in, or into, Australia are offered only as an offer that would not require disclosure to investors under Part 6D.2 or 7.9 of the Corporations Act. This information is directed only to persons to whom disclosure is not required under Part 6D.2 or 7.9 of the Corporations Act. The information is a summary only and does not purport to be complete. It does not amount to an express or implied recommendation or a statement of opinion (or a report or either of those things) with respect to any investment in the Issuer nor does it constitute a financial product or financial advice. The information does not take into account the investment objectives, financial situation or needs of any particular investor. FIIG does not provide accounting, tax or legal advice. Prospective investors are required to make their own independent investigation and appraisal of the business and financial condition of the Issuer and the nature of any securities that may be issued by the Issuer. By accepting receipt of the information the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial securities discussed herein.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the Issuer which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Any offering of any security or other financial instrument that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation (“Offering Documents”) and in such case the information will be superseded in its entirety by any such Offering Documents in its final form. In addition, because the information is a summary only, it may not contain all material terms and the information in and of itself should not form the basis for any investment decision. Any decision to purchase securities in the context of a proposed offering of securities, if any, should be made solely on the basis of information contained in the Offering Documents published in relation to such an offering.

Neither FIIG nor the Issuer shall have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG or the Issuer be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG has been engaged by the Issuer to arrange the issue and sale of the Notes by the company and will receive fees from the issuer of the Notes. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. FIIG’s AFS Licence does not authorise it to give personal advice. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that all of the views expressed in this document accurately reflects their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG.