Tuesday 03 March 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: RBA keeps rates unchanged at 2.25%; Yellen’s testimony; G8 FRN becomes a retail DirectBond; Sotheby’s added as a new USD DirectBond (wholesale investors only); plus a host of results updates from the final week of the Australian reporting season (360 Capital, Ausdrill, AXA, Emeco, NEXTDC, PMP, Sydney Airport and Transfield).

Economic wrap

On Tuesday, the RBA kept the official cash rate unchanged at 2.25%. While the cash rate remained unchanged, the RBA hinted that further cuts may be warranted in the months ahead. Further commentary can be found in the article “RBA leaves the cash rate at 2.25%”.

Last week, US Federal Reserve Chair Janet Yellen delivered her Monetary Policy Report to Congress. Her testimony reinforced what was outlined in January’s meeting minutes and further distanced the Fed from providing a date on when it would start to increase interest rates. Citing high unemployment and underemployment, low wage growth and low inflation, Yellen indicated that the near 0% interest rate target remains appropriate for at least the next couple of Committee meetings.

Last week we also saw some mildly positive Chinese manufacturing data and The People’s Bank of China dropped its one year lending rate by 0.25%.

With Yellen’s testimony and some attention on China, the Australian dollar saw some big swings but overall finished flat. Our dollar began the week at 78.46 US cents and finished at 78.08 US cents.

Bonds had a strong week as investors tuned into the Fed testimony and speculated on the RBA rate decision. Our 5 year Government bond yield tightened 10 basis points to 1.90% and our 10 year fell about 12 basis points to 2.46%.

Flows

The foreign currency space was again a standout last week as supply became available in some of our higher yielding USD names. The flurry of activity freed up supply in some of our favourite AUD securities. Indicative offer yields (yield to maturity or YTM) in these names are shown below:

  • Qantas 2020 – 4.74% (retail and wholesale investors)
  • Qantas 2021 – 4.96% (wholesale investors only)
  • Qantas 2022 – 5.03% (wholesale investors only)
  • Sydney Airport ILB 20 – 4.92% (retail and wholesale investors)
  • JEM NSW Schools IAB 31 – 4.72% (retail and wholesale investors)
  • MPC IAB 33 – 4.64% (wholesale investors only)

New DirectBonds

The G8 Education Limited floating rate note (FRN) with a maturity date of 3 March 2018 was added to the retail DirectBonds list yesterday, with minimum face value parcel sizes of $10,000. The FRNs are callable on 3 March 2016 at $103 or 3 March 2017 at $101.50 and are currently indicatively offered at a trading margin of +307bps to maturity or +458bps to first call date. They are available to retail and wholesale investors.

For further information, please see the article "G8 Education FRN available to retail investors".

The latest G8 Education Limited research report is available here.

The Sotheby’s 5.25% USD fixed rate bond with a maturity date of 1 October 2022 has been added as a new foreign currency DirectBond. The bond is available in USD$10,000 minimum parcels. The bond is callable on a sliding scale at $102.625 from 1 October 2017, $101.75 from 1 October 2018, $100.875 from 1 October 2019 or $100 after 1 October 2020 and is indicatively offered at a YTM of 5.01%. This bond is only available to wholesale investors.

Wholesale investors can access further information by clicking here to view the factsheet (login required).

Company results

Below is a snapshot of results from the final week of the Australian reporting season. To obtain full commentary on an issuer’s financial results, please follow the corresponding link.

360 Capital – 1H15 results snapshot (by Alen Golubovic)

  • 360 Capital has delivered a solid 1H15 result, with all key operating metrics improved on the prior period. Total revenue increased by 45% to $12.27m, while operating EBIT and net operating cashflows were up 49% and 168% respectively
  • Statutory profit of $21.9m included the $8.3m value uplift from the Hurstville property sale
  • The company has improved its FY15 guidance for base operating earnings from $14.9m to $15.9m, excluding the profit on the sale of Hurstville
  • Bonds are indicatively offered at a YTM of 5.34% (or 5.37% yield to first call) for wholesale investors

For more information, click here.

Ausdrill – 1H15 results snapshot (by Alen Golubovic)

  • 1H15 revenues were slightly down (2.3%), however, the significant falls in EBITDA (37%) and EBIT (63%) reflect the competitive and tough operating conditions in the mining services sector
  • Importantly from a cash perspective Ausdrill was able to increase its net operating cashflow (up 17%) and slash capital expenditure despite these challenging conditions
  • FY15 outlook is for second half year levels to be broadly in line in with 1H15, which translates to a FY15 EBITDA of around $120m
  • The USD bonds are considered high risk and indicatively offered at a YTM of 13.90% for wholesale investors

For more information, click here.

AXA SA - FY14 results (by Justin McCarthy)

  • Underlying earnings up 8% to €5.1bn and bottom line net income after tax up 12% to €5.0bn (slightly below market consensus). Total revenue up 3% to €92bn
  • Solvency I ratio, a key measure of financial strength and capital levels, was up significantly from 221% at FY13 to 266% at FY14, driven by the impact of lower interest rates and strong contribution from underlying earnings
  • Gearing remained unchanged at a low 24% and strong free cash flow up 9% to €5.5bn
  • AXA’s AUD fixed rate Tier 1 securities with a call date in October 2016 are indicatively offered at a yield to first call of 3.84% and the AUD FRNs with the same call date are indicatively offered at a margin of +162bps (both are wholesale only)

For more information, click here.

EMECO – 1H15 results (by Alen Golubovic)

  • Revenues down 10.6% to $110.7m, while EBITDA was significantly down 56% to $16.2m
  • Negative free cash flow of ($9.0m) versus $76.7m positive free cash flow in 1H14. Net operating cashflows were $13.7m vs $71.2m in 1H14
  • Net debt is up from $302m to $360.7m, largely due to currency translation impacts
  • Written down value of property, plant and equipment is slightly down to $570.4m
  • The USD bonds are considered high risk and indicatively offered at a YTM of 18.93% for wholesale investors

For more information, click here.

NEXTDC – 1H15 results (by Will Arnold)

  • First ever positive EBITDA of $3m 1H15 (loss of $3.4m 1H14), and shrinking net loss of $5.8m ($7.3m 1H14)
  • The company continues to perform strongly beating expectations and again increasing full year forecasts
  • NextDC has good liquidity, low net debt and good asset backing. While continuing to post losses, it is quickly moving to profitability and looks relatively attractive in the AUD space
  • Bonds are indicatively offered at a yield to first call in Dec 16 of 4.80% (or 6.91% YTM), available to wholesale investors only

For more information, click here.

PMP – 1H15 results (by Will Arnold)

  • EBIT was 4.8% lower YoY at $15.7m with higher profits at PMP New Zealand and Griffin Press offset by lower print and distribution revenues at PMP Australia
  • PMP expects to be net debt free by June 2016 and completely debt free by 2017. 1H15 net debt was $40m (down by 51% YoY)
  • With an absence of any acquisition targets, the company will likely consider calling this issue at first opportunity in October 2015 (at $103): it has sufficient cash to do so and the dividend restrictions the bond imposes (50% of NPAT from FY15 onwards) are contrary to the group’s core strategy of returning cash to shareholders
  • Bonds are indicatively offered at a yield to first call in October 2015 of 4.69% (or 6.48% YTM) and are available to retail and wholesale investors

For more information, click here.

Qantas – 1H15 results (by Alen Golubovic)

  • Qantas has returned to profitability as previously guided, delivering an underlying profit before tax of $367m for the half year, up from a $252m loss in 1H14 and overshooting its own forecast in December of a profit between $300m-$350m
  • The result has been ideal from a bondholders' perspective - a return to profitability, all segments EBIT positive, free cash flows and no dividends
  • With further gains expected in 2H15 from lower fuel prices, the company is on track to deliver a full year profit of $1bn
  • Bonds are indicatively offered at a YTM of 4.74% (2020’s – retail and wholesale), 4.96% (2021’s - wholesale), 5.03% (2022’s – wholesale)

For more information, click here.

Sydney Airport – 1H15 results (by Alen Golubovic)

  • Sydney Airport's FY14 results are very strong, with the company delivering 6.1% annual growth in EBITDA to $948m, based on 4.3% revenue growth and 1.7% passenger growth
  • All key business segments performed strongly, with the largest revenue growth in the retail and car parking businesses
  • Cash flow coverage has improved by 0.1 times to 2.3 times interest cost, while the average debt maturity lengthened by 2 years to 2022
  • Capital indexed inflation linked bonds are indicatively offered at a YTM of 4.92% for the 2020 capital index bond (CIB) and 5.44% for the 2030 CIB for retail and wholesale investors

For more information, click here.

Transfield – 1H15 results (by Alen Golubovic)

  • Transfield delivered a robust 1H15 performance, with the focus on cashflow and balance sheet major positives from a credit perspective
  • Operating cashflow is up 70% from 1H14, while net debt is down 11% to $569m. Leverage has significantly improved with net debt to EBTIDA down from 2.9x to 2.2x
  • Management has reaffirmed its FY15 guidance for an underlying EBITDA of $260-$280m and approximately 90% of 2H15 revenue is already contracted
  • The USD bonds are indicatively offered at a YTM of 6.20% for wholesale investors

For more information, click here.

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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