Tuesday 29 April 2014 by FIIG Research Legacy

Good value Qantas bond appears on retail radar

Key points

  1. Opportunity to diversify into the broader Australian corporate sector
  2. Backed by an ‘asset rich’ company
  3. Offers a strong 6.50% running yield (and 6.50% yield to maturity)

This week the Qantas fixed rate bonds maturing in April 2020 became available to retail clients. Currently, this bond offers a strong running yield of 6.50% and a yield to maturity of 6.50%. Qantas joins Silver Chef and Mackay Sugar, other bonds which recently became available to retail investors but outperforms both on current yield to maturity comparisons. The bonds, which mature in April 2020, provide retail investors with the ability to enhance their fixed income portfolio on several fronts due to their high fixed rate return, diversification benefits and strong asset backing.

On a relative value basis, Qantas offers compelling value with a trading margin of 2.73%, similar to the margin available from Silver Chef and Mackay Sugar, however from a significantly larger company. The next nearest bond in terms of margin on offer is from Bendigo and Adelaide Bank which trades some 0.60% tighter than Qantas.

Given the outright return opportunity provided by Qantas, retail investors should strongly consider adding the 2020 bonds to their portfolios.

The strength of the Qantas credit lies in the significant asset base of the company (including the frequent flyer business which remains a valuable, and easily saleable business), the market capitalisation of the business (at over $2.6bn at the time of writing), the value of the Qantas brand (one of Australia’s best known brands internationally) and the central place Qantas plays in the broader Australian economy, both through its position as the largest supplier of domestic flights and the central position it holds in the Australian tourism industry.

Notwithstanding the recent well publicised half year loss of the company, Qantas remains an Australian icon and has shown a commitment to make the tough decisions to turn around the business through a three year, $2bn cost cutting program. The program includes: route rationalisation, capital expense management, staff reductions and further alliances.

Please speak to your FIIG representative if you are interested in any of these bonds.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.