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.


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.


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