Wednesday 22 August 2018 by At FIIG

BondCast - Reporting season, upsides and downsides

Cut your reading time and listen to a podcast instead. This week's BondCast looks at the results coming out of reporting season

Learn more about which bonds are on the move with this weekly podcast. Deep into reporting season, our senior relationship managers Jake Koundakjian and Stephen Mackie discuss results with Media & Communications Assistant, Sophie Kessler. While JC Penney's financials were weak, other bonds such as Elanor and Hertz outperformed our expectations. See the transcript below.

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Jake Koundjakin-spaceJake Koundakjian 
Director, Fixed Income Sales

Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.

Stephen Mackie - spaceStephen Mackie
Director – Fixed Income

Stephen Mackie is based in the firm's Brisbane office, managing investments for clients, ranging from individuals to institutions.

Stephen has over 25 years' experience in global markets, including his most recent role at QIC where he was a Director - Investment Specialist in the Global Multi-Asset team. Prior to this, he has held a variety of senior roles as a trader and portfolio manager with RBC Capital Markets, Citi, Kapstream Capital and the Commonwealth Bank.


[00:00:00] Sophie Kessler: Welcome to another edition of Bondcast. My name is Sophie Kessler. I'm the Media & Communications Assistant here at FIIG and I'm stepping in for Elizabeth Moran today to discuss the reporting season. With me, I have Steve Mackie and Jake Koundakjian. Good afternoon.

[00:00:14] Both: Hey Sophie.

[00:00:14] Sophie Kessler: So today we're going to talk about the reporting season, which we're deep into at the moment. We have had a number of annual and quarterly results come through. There are a few of particular note. One that springs to mind is JC Penney. Jake, could you tell us what's happening with JC Penney at the moment?

[00:00:31] Jake Koundakjian: Sure. As you said, we're deep into reporting season. In the US, they're starting to wind down. The numbers are coming at us very frequently. It's good to have a great and big research team here at FIIG to help us keep across them. But yeah, JC Penney was a bit of a shocker on the downside. You know, sometimes a rising tide doesn't lift all boats.

In this case, JC Penney, looking at the retail sector in the US, you're seeing some very good gains that are Walmart, Macy's, Target, Lululemon.... Like all these retail type brands have been improving quite a bit. Now that's off the back of a GDP number that's, I guess approaching the 5%, unemployment rate under 4%. You've got a large amount of population that's employed, has money in their pocket. That's consumer, discretionary spending. And listen to the analysts, one of the top analysts out of New York, Matt Boss, he's said it's the best season he's seen for, could be, a decade or two.

But hey, it didn't affect JC Penney in a positive manner unfortunately. They found a way to lose money, in a pretty spectacular way. Sales were down about 7.5%. They're mostly off the back of store closures and quarter on quarter is down about 0.3%. They guided their forward guidance pretty negatively as well. Shares took a hit, as did bonds as well. So a negative surprise for the market place and unfortunately that story is not turning around like the rest of the sector is.

[00:02:00] Sophie Kessler: So what do you think that'll mean for their future, what does it look like for them?

[00:02:01] Jake Koundakjian: Markets don't like question marks and there are a few question marks over them. They lost their excellent CEO, Marv Ellison, a few months back who unfortunately moved across to Lowe’s. So they don't have a CEO right now, that seat is empty, and they're looking to fill that. And they're looking to turn around their overall business and try to find a direction. So a bit waterless, given that theme of rising tides and boats, it's a bit rudderless right now for the company. So the market would really like to see, well I would like to see, some kind of solid direction on hiring a good CEO that has vision and actually gets things going.

It wasn't all negative though. I mean they have a good amount of liquidity. I would deem it as good liquidity - 2.2 billion lines of credit that are available to them, about 180 million of cash. They don't have a large amount of maturities coming up in the short term. They're not burning through a lot of cash either.

So, you know survivability still seems quite good, for quite a long time, but they need direction and that's what I'd like to see.

[00:03:10] Sophie Kessler: Yes, and on the other hand we had some really good results coming out of Elanor. They outperformed our expectations, didn't they Steve?

[00:03:17] Stephen Mackie: That's right, Sophie. So we've got Elanor, at the moment, as a market perform at FIIG and we're looking at the credit as being stable over the next 12 months. So the results were a combination of a couple of factors. Primarily, their fund is under management. So Elanor is a funds management business and in the funds management business, it is very competitive. So the aim is to continually grow that asset base which is what Elanor has managed to do. So they grew their funds under management by about 58%. So that contributed to their bottom line.

Also, they disposed of an asset. They bought the John Cootes Furniture business, which is a well known NSW retailer. It has been around for many years. They disposed of that asset. And the primary reason why they did that was they bought it for the property itself. So, it's sitting on a pretty good piece of real estate down in Sydney and they saw value in just buying it. They were looking at selling the business but it was a bit of a loss maker, given how competitive the furniture retail sector is. So they took the decision to wind that down. So that generated about 10 million to the bottom line and a profit of about 1.3 million. So I think, those two combined factors are why we like the Elanor Group. It's got a very strong management that's been in the business for a long time. You know it's an attractive yielding bond as well.

[00:04:47] Jake Koundakjian: Yeah, it does look very well priced right now.

[00:04:49] Stephen Mackie: Yeah, you know, it's 6.6% yield to worst for four years. You'd be hard pressed to find a property fund in this sort of environment that is going to pay that sort of return.

[00:05:02] Jake Koundakjian: The numbers did look very, very good to me. Reaction in the share markets has been pretty muted from what I've seen so far and the bond hasn't really budged at all. But the numbers coming out looked pretty impressive to me. I didn't really see anything that was of any concern and I was pretty impressed with that.

And in the same kind of vein, we've seen Sunland come out, Sydney Airport, Barminco, QBE, it is a huge number. Keeping on top of that is a full time job and like I said at the beginning, glad to have a team of researchers, an excellent research team to back us up.

[00:05:40] Stephen Mackie: And I think the good one as well, Jake, is that this company just has a stable amount of debt. They've got about 60 million worth of debt on their balance sheet. But they've got a pretty strong balance sheet. It's been around that sort of 160, 150 mark for some time. So that gives investors a bit of confidence that they've got the cash flows coming through from their properties. And they've got the strong balance sheet to back up the debt that they're carrying for FIIG investors.

So, overall I think it has been a pretty good journey for Elanor investors so far. I think it's pretty stable, the property sector that they're in. They're not in residential property. Very much commercial, hotel, leisure style properties and spread around as well. They've got properties in New Zealand, they've got properties in NSW and Canberra etc. So a little bit of geographic diversification there for investors.

[00:06:30] Jake Koundakjian: Yeah and the management team is, like Bill Moss, he is an impressive fellow. So definitely on board with that name as well. Coming back to JC Penney, we’ve got a tale of two cities and Elanor seems to be doing quite well. JC Penney, based on the numbers, I have to reassess whether this is something I want to hold on to and the instinct is to find an exit at a better time to sell. Usually, the initial reaction in markets can be exaggerated, especially share markets. I'm looking for an exit eventually. Unless I see signs that they can actually get their act together.

[00:07:08] Sophie Kessler: And Jake, were there any others that surprised you as well, in terms of their results?

[00:07:11] Stephen Mackie: Yeah I think Hertz definitely was a surprise to the upside. That's a bond that some of our investors hold. You know, the company had been punished quite badly for embarking on a CAPEX program to upgrade their fleet. It's a pretty large, competitive industry. You are getting attacked on one side from Uber and on the other side it's that car rental generally is a declining market. But I think the market digested the results and said that it's better than expected. I mean the stock was down at about $14 but along with their fixed income, they've bounced quite well. You know, the bonds are trading, the shorter dated bonds are back over par again.

[00:08:02] Jake Koundakjian: Just around that. Yeah, so I think also, I did like the numbers coming of Barminco but that was overshadowed by the potential Ausdrill takeover and the QBE results were, I guess it's good to see some positives come from that company. It shows their efforts are coming through well. So some good, positive numbers have come through and there have been some negatives but you know, JC Penney, I think, will survive. I believe for quite a few more years. They've been through much worse over decades ago but based on what I see in the future, it looks like I want to be moving away from it at a better price and Elanor, on the other side, I want to be buying.

[00:08:45] Sophie Kessler: Yeah, thanks guys. And with these reports that we're getting, coming in from the research team, our listeners can access them on the FIIG Website as well. And if they have any questions about the bonds we have discussed today, they can also call their relationship managers. I think that winds up another edition of Bondcast.

[00:09:01] Both: Thanks Sophie.

[00:09:01] Sophie Kessler: Thank you.