Tuesday 09 June 2015 by Lincoln Tragardh Week in review

From the Trading Desk

The RBA keeps rates on hold, Greece defers IMF payments, the yield curve continues to steepen, Adani Abbott Point goes retail, McPherson’s cuts its profit forecast and PAYCE exits a joint venture and sells development rights

Economic wrap 

As expected, the RBA Board left the cash rate on hold this week at 2.00%. However, many were expecting the reintroduction of an explicit easing bias by the RBA, after its absence last month. The statement was accompanied with familiar dovish commentary and without any clear guidance from the RBA, markets are reassessing the likelihood of another rate cut by the end of the year.

Later in the week, we saw some poor data releases domestically, with Australian GDP growing at 0.9% in 1Q15. At face value this was a positive number, up from 0.5% in the previous quarter. However, the composition of the growth revealed weakness, with the quarterly jump being largely accounted for by increased inventories and export volumes while consumption remained weak. We also saw our largest ever trade balance deficit for April of $3.89bn, indicating that more capital than ever is leaving Australia through imports.

Overseas, the Greek Government deferred a €300m payment to the IMF, electing to bundle this with other payments due during the month, to pay them together as a €1.6bn lump sum on 30 June. Although this was expected by markets, it does increase pressure to reach a resolution come month-end, in order to release a final round of emergency funding.

In the US, we saw positive employment data, with 280,000 jobs added in May, coupled with a 0.3% increase in average hourly earnings. This caused yields to spike by around 8 basis points (bps) in the US, as the positive data are perceived to provide the US Federal Reserve with the impetus to hike interest rates this year.

The general steepening of the yield curve continued last week, with more aggressive selling in the long end. The differential between long and short yields is now at around one year highs. Five year government bonds increased in yield by 21 bps over the week to finish at 2.33%, while the 10 year was up 30 bps to 3.04%. In currencies, the AUD finished relatively flat over the week at 76.23 US cents, down only 0.20 of a cent.

Flows

Clients are assessing the recent spike in yields, given opposing views on the future direction of interest rates. Some clients see the recent steepening of the curve as an opportunity to extend duration and lock in higher rates of return.

On the other hand, the recent sell off has spurred some investors to reduce their duration risk and move into shorter dated paper, while also taking the opportunity to consolidate profit on the longer term contraction in yields. As a result, we were very active in Sydney Airports, as holders switched between the 2020 and 2030 maturity dates whilst maintaining exposure to the same name.

We have also come across a recent bout of supply of the JEM Southbank nominal bond, which provides a compelling return for a short dated, high quality investment grade name. The indicative offer yield is below.

JEM-6.637%-28Jun18c                4.05% (retail and wholesale investors)

Another theme we have come across is clients looking to diversify their holdings across multiple high yield issues in order to diversify, while maintaining higher yield exposures. As a result, we were quite active in CBL, Payce and Dicker Data over the last week.

Adani Abbott Point goes retail

FIIG originated bond, Adani Abbott Point has been made available to retail investors. The fixed rate bond matures in May 2020 and has a current yield to maturity of 5.16%. The bond can be bought in minimum face value parcels of $10,000.

For more detail please see related articles below.

McPherson’s cuts profit forecast

McPherson’s (MCP) has released a trading update to the ASX, revising down its FY15 underlying pre-tax profit forecast from $21.7m-$22.8m to  around $15.5m-$16.6m.  While disappointing, the circa $6m reduction in pre-tax profit is manageable and, importantly, the majority of the issues that caused the profit downgrade appear to have been resolved. Ultimately, the reduction in profit was caused by a combination of market conditions and internal failings/over-optimistic management.

For more detail please see the article, McPherson's Ltd releases FY15 profit downgrade.

PAYCE exits joint venture for $100m and sells development rights to its $500m Kirrawee project

Last Friday, PAYCE announced to the market that it had executed an option to sell its 50% share of a development site at Wentworth Point, Sydney for $100m.

PAYCE entered into a joint venture with Japanese developer Sekisui House in June 2013 to develop the precinct. The project, Bay Park, consists of a 2.6ha site in the established Waterfront estate and has concept-plan approval for the project that is expected to include about 680 residential apartments.

A buyer has been drawn in as the entire area becomes a focus for urban regeneration projects. Last year the NSW government announced that about 2300 homes would be built on former industrial land at Wentworth Point.

The Wentworth Point sale will have little impact on PAYCE as it has a pipeline of about 7500 units around Australia.

It was also announced on Tuesday that the group struck a deal to offload the development rights to its $500m Kirrawee Brick Pit residential development in Sydney’s south while maintaining ownership of the land. 

The property has been an excellent investment for PAYCE purchasing it for $61m in August 2013 at which time it carried concept approval for 432 apartments in nine buildings of up to 14 storeys, and more than 15,000 sq m of retail space. In May, PAYCE secured approval for more than 750 units surrounded by almost 1ha of parkland and about 14,000 sqm of retail space.

It has been reported that the total value of the site has climbed as high as $130m, while PAYCE has put the total value of the “South Village” project at more than $500m.

Rates accurate as at 9 June 2015 and are subject to change. 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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