Tuesday 29 May 2018 by FIIG Research Company updates

Company updates – Adani, Barminco, Bristow, Cash Converters, Dell, Emeco, JC Penney, Mackay Sugar, Petrobras, Telstra

This week, Adani to sell part of its port operations, Cash Converters fined and in trading halt, Dell looking into potential merger, Fitch upgrades Emeco while S&P downgrades JCP following CEO exit, Mackay Sugar update and Petrobras cuts diesel prices. Results from Barminco and Bristow

Adani seeks Rothschild to sell part of coal port operations

On 23 May 2018, it was reported that Adani Company (Adani) has appointed investment bank Rothschild to sell a stake in its Abbot Point port operations in Queensland. Sources say this move could help the mining company raise funds for the controversial Carmichael coal mine to be built in Queensland’s Galilee Basin.

It is also understood that Adani is looking for a second investment bank to work on the sale, and has asked banks to pitch for it. The Carmichael mine has faced political and environmental opposition while Australia's big lending banks are avoiding the project. Industry observers said selling a stake in its Abbot Point facility could be a shrewd way for Adani to buttress its Carmichael coal mine project.

FIIG Research believes a partial sale (which would likely be through the sale of shares in the terminal’s holding company) would have limited to no impact for the Adani bonds. This is because they have the benefit of a comprehensive covenant package that seeks to insulate the terminal’s financial performance from any actions at the holding company level.

The following Adani bonds all rated BBB- are available to trade:

  • Adani AUD 7.10% May 2020 bond available at YTW – 4.61%pa (at a 1 Dec 2019 redemption date)
  • Adani USD 4.45% December 2022 bond available at YTW – 5.93%pa

Barminco 3Q18 results

On 18 May 2018, Barminco Ltd (Barminco) released its 3Q18 results.

Key points:

  • EBITDA for the quarter came in at USD23.8m, broadly in line with recent quarterly average
  • Year to date EBITDA is about USD7.5m, or 12% ahead of the corresponding period for FY17
  • Cash balances during the quarter increased by USD5.5m to USD60.5m, impacted by a USD20m negative working capital (USD15m payment received in early April)
  • Barminco have confirmed that the Rosebery contract, which expires at the end of June, will transition to an owner-operator model. It is estimated this contract will generate revenue of about USD30m and earnings of about USD6m. Given current expected metrics, this contract loss can be absorbed and its impact is not material
  • The next contract maturity is in 2Q19 (Hindustan Zinc), representing about 1% of revenue and not believed to be a high margin contract. The contract with Independence Group then expires in 3Q19 (about 10% of revenue) followed by Sunrise Dam in 4Q19 (20% of revenue)
  • Liquidity remains solid, with USD60m of cash as well as USD75m available under a revolver

On the rating side:

  • Moody’s Investors Service (Moody’s) continues to maintain a negative outlook on the B1 rating. The threshold to revert to a stable outlook is a debt-equity ratio below 4.25x (as per Moody’s calculation)
  • The S&P rating is B/Stable. S&P focuses on FFO/Debt, with the threshold at 12%. Upside on the S&P rating appears unlikely

The following Barminco bonds are available to trade:

  • Barminco USD 9% June 2018 unrated bond available at YTW – 3.97%pa
  • Barminco USD 6.625% May 2022 bond; rated single B available at YTW – 7.23%pa

Bristow full year results

On 29 May 2018, Bristow reported its full year results (ending 31 March 2018).

Key points:

  • Adjusted EBITDA for the year came in at USD105m, or 48% higher than FY17, noting the prior year was quite weak
  • EBITDA increase was mainly due to cost reduction as revenue was up only about USD40m in the year
  • FY18 was the first year of full ramp up for the 10 year contract with the UK government for Search and Rescue services
  • Free operating cash flow was an inflow of USD77m, positively impacted by the recovery of USD96m against aircraft manufacturers relating to ongoing aircraft issues
  • The company focused on maintaining good liquidity levels, through material reduction in capex (USD46m against USD135m in FY17) as well as refinancing some of its debt.
  • As at 31 March 2018, Bristow had USD380m of cash and entered into a USD75m credit line in early April
  • Lease adjusted debt to EBITDAR came in at about 9x, down from 10.3x in FY17

Outlook for FY19

  • The company provided guidance for FY19 with EBITDA in the USD90m to USD140m range, capex broadly in line with FY18 and interest expense up based on new debt issuance in late FY18
  • At the mid point of the EBITDA range, lease adjusted debt to EBITDAR would drop by about 30bps to 8.7x

The following Bristow bonds are available to trade:

  • Bristow USD 6.25% October 2022; rated B- and available at YTW – 10.25%pa
  • Bristow USD 8.75% March 2023; rated B+ and available at YTW – 7.98%pa

Cash Converters in trading halt pending potential capital raising  

Cash Converters is in a trading halt pending an announcement in relation to a potential capital raising. The Financial Review has reported the company is expected to launch a AUD40m rights issue with the funds to be used to help repay the AUD60m 7.95% notes maturing 19 September 2018.

It was reported that stockbroker Hartleys has been mandated to lead the deal and underwrite it up to AUD21m. A further AUD19m will be underwritten by Cash Converters' biggest shareholder EZCORP, which as a 32% stake in the company.

The raising is expected to be announced on Wednesday. The Financial Review reports that said it would be accompanied by a trading update, where it will tell investors that its second half profit is on track to better its first half result.

This is credit positive, and materially removes refinance risks, noting the report suggests the issue is fully underwritten.

The Cash Converters AUD 7.95% September 2018 bond is available at yield to worst of 7.43%pa.

In other news, on 25 May 2018, it was reported that an ASIC surveillance found that Cash Converters Personal Finance Pty Ltd (CCV) had systematically failed to meet regulatory guidelines on debt collection practices. One of its failures was its way of too frequently contacting consumers, employing policies recommending that consumers be contacted three times per week or ten times per month. These guidelines are based on legislative prohibitions on harassment and coercion.

In response to ASIC's concerns, CCV is outsourcing all debt collection work to a specialist third party debt collector. A licence condition imposed on Cash Converters will require the company to obtain ASIC's consent before returning debt collection activity in-house.

Dell potential deal with DVMT

On 18 May 2018, it was reported that Dell has begun talks with holders of its VMware-tracking stock, DVMT, to gauge their interest on a merger with VMware.  

Dell remains bullish on VMware's future and wants to own as much of the stock as possible. The company also wants to clean up the virtualization pioneer's capital structure, which has been complicated by a series of mergers and partial spin outs.

Currently, Dell owns 82 percent of VMware. Of that portion, 50 percent is held by owners of the tracking stock DVMT. The other 32 percent is held by founder Michael Dell and private equity firm Silver Lake, the owners of Dell's DHI. Michael Dell and Silver Lake took Dell Technologies private in 2013 and later acquired EMC (which owned a big stake in VMware) in 2016. That USD67bn deal still stands as the largest pure technology acquisition ever.

The following Dell bonds all rated BB- are available to trade:

  • Dell USD 4.625% April 2021 bond available at YTW – 3.13%pa
  • Dell USD 7.10% April 2028 bond available at YTW – 5.75%pa
  • Dell USD 6.50% April 2038 bond available at YTW – 6.43%pa

Fitch upgrades Emeco

On 22 May 2018, Fitch Ratings (Fitch) upgraded Australian based Emeco Holdings Limited’s (Emeco) long term issuer default rating to ‘B’ from ‘B-‘. This reflected the rating agency’s view that the company is well positioned to capitalise on its increased fleet size and rising rental yield following a series of acquisitions. The outlook is stable.

Fitch expects the company's business and financial profile to further improve following an April announcement of its planned AUD80m (excluding transaction costs and subject to completion adjustments) equity funded acquisition of Matilda Equipment. The acquisition will be funded by a fully underwritten AUD90m pro rata accelerated non renounceable entitlement offer and is targeted for completion in early July 2018.

On the same day, Emeco announced that it has completed both the institutional and retail entitlement offers and has raised approximately AUD90m. The acquisition provides Emeco with access to Matilda's fleet, bypassing growth capex and freeing cash for continued debt reduction.

The Emeco USD 9.25% July 2022 bond rated B- is available to trade at yield to worst of 7.05%pa.

JC Penney downgraded by S&P

On 23 May 2018, JC Penney (JCP) was downgraded by S&P based on weak performance trends and operational issues. The outlook remains negative.

JCP recently announced weak first quarter results, which included meaningful inventory liquidation in its e-commerce business that resulted in gross margin contraction of 240bps in the quarter, along with the unexpected departure of its now former CEO Marvin Ellison.

The rating agency lowered the corporate credit rating on JCP to 'B' from 'B+', reflecting the increased operational risk resulting from the recent inventory management issues and moderately weaker forecasted credit metrics. The negative outlook reflects S&P’s view that these operational setbacks and Mr. Ellison's resignation will make it harder for JCP to successfully improve operating performance.

The following JCP bonds are available to trade:

  • JCP USD 5.875% July 2023 bond; rated B+ available at YTW – 7.38%pa
  • JCP USD 8.625% March 2025 bond; rated B- available at YTW – 11.53%pa

Mackay Sugar update

On 25 May 2018, Mackay Sugar (MSL) released one of its regular operational updates to growers and shareholders. In summation, MSL expects the start dates for the 2018 crushing seasons as follows:

  • FARLEIGH: 28 May
  • MARIAN: 29/31 May
  • RACECOURSE: 4 June

In setting the start dates, MSL used the following calculations:

  • 5.09Mt crop estimate
  • Targeted a finish in the third week in November
  • ‘Average‘ in season wet weather stops
  • Mill performance estimates (crush rate and reliability) just marginally better than last season

On 28 May 2018, MSL released a circular relating to grower choice marketing arrangements for the crushing season, which can be viewed on its website.

Petrobras cuts diesel price

On 24 May 2018, it was reported that Petrobras Brasileiro SA announced that it has decided to cut the average price of diesel sold at its refineries by 10% (R$0.2335/litre). The company will freeze prices for 15 days to give the government and truck drivers time to negotiate an end to a protest that has crippled the country’s transport logistics. After the freezing period, the company plans to progressively move back to market pricing.

Petrobras management held an impromptu call that day during which it stated that the decision to cut prices was made independently in an effort to get off the defensive and show that it is willing to voluntarily help.

This follows the company’s tender offer on 21 May that targets up to USD4bn aggregate purchase price across two groups of bonds (2021-2023 maturities and 2025-2043 maturities). The premiums being offered are less generous than those in the prior tender offer in March.

The following Petrobras bonds all rated BB- are available to trade:

  • Petrobras GBP 6.25% December 2026 bond available at YTW – 4.87%pa
  • Petrobras USD USLIBOR+2.14% January 2019 bond available at YTW – 2.26%pa
  • Petrobras USD 7.375% January 2027 bond available at YTW – 6.27%pa

Telstra downgraded by S&P

On 28 May 2018, it was reported that Telstra, Australia’s biggest telecommunications provider, was downgraded by S&P Global Ratings (S&P).

The rating agency has lowered Telstra’s long and short term ratings citing Telstra’s strong incumbent position within the Australian telecommunications industry has “diminished”. Competition has intensified across Telstra’s core businesses and the company has had to accept lower margins to protect its dominant market share.

S&P states, “In our opinion, Telstra’s vulnerability to an erosion of its price premium and dominant market share has increased over the past few years despite elevated network investment. Competing mobile network operators have also made large investments in their networks and product offerings”. Furthermore, the likely entry of TPG Telecom as Australia’s fourth mobile network operator will see competition further intensify.

The following Telstra bonds both rated A- are available to trade:

  • Telstra AUD 7.75% July 2020 bond available at YTW – 2.58%pa
  • Telstra USD 4.8% October 2021 bond available at YTW – 3.34%pa