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.

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.