Transfield offers high yielding US dollar exposure to a well know Australian name. The majority of its earnings come outside of mining from defence, social infrastructure and property, so we believe it makes for a good diversification play for investors looking for a US dollar offering outside of pure mining.
Key Points
- 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 and 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
Summary of 1H15
- Operating revenue is up 6% to $1.895bn
- Underlying EBITDA is up 51% on 1H14 to $112m, with EBITDA margins up from 4.0% to 5.6%.
- EBITDA growth was driven by growth in the defence, social and property sector and the infrastructure sector, offset by weak performances in the mining and oil and gas sectors
- Underlying NPAT is up significantly, from $2.8m to $18.1m
- Gearing is down from 46% to 41%
- Management has reaffirmed its FY15 guidance for an underlying EBITDA of $260-$280m and approximately 90% of 2H15 revenue is already contracted
- No interim dividend was declared
Commentary
Transfield’s 1H15 performance is a strong improvement on 1H14. The company has a high level of recurring revenues, exposure to growing markets, good level of work in hand and strong underlying cash conversion. The group had $38bn of contract leads at December 2014 and prospects and $17bn of identified work opportunities.
The company is targeting conservative credit metrics (25%-35% gearing and <2.0x net debt / EBITDA) with a focus on the balance sheet and cash generation. If the company is able to generate 120% EBITDA cash conversion in 2H15 (which has been implied by management guidance) then, we estimate the company’s net debt / EBITDA ratio could reduce below 2.0x by the end of the reporting year.
Please also note that the Transfield US dollar bond has the following early call provisions:
- Between 15/5/2017 - 14/5/2018: callable @ $104.188
- Between 15/5/2018 – 14/5/2019: callable @ $102.098
- Between 15/5/2019 – maturity: callable @ $100.000
We expect that the likelihood of an early call increases if the bond continues to trade at a premium to call price.