Australian Income Securities Research Monthly Review May 2013

Transcription

1 Australian Income Securities Research Monthly Review May 2013 Income Security Best Ideas 2 Rate Sheet at 31 May Recommendation Changes since Last Month 4 Exchange Traded Government Bonds 4 New Issues, Maturities and Resets 6 Outlook - Official Cash Rate 6 Bank Capital Securities 7 Non-financial Corporates 8 Glossary 9 1

2 Income Security Best Ideas ASX Code Name Recommendation Risk Gross Running Yield ANZPB ANZ CPS Accumulate Low 5.43% ANZ CPS (ASX Code: ANZPB) was issued in September 2008 at a spread of 2.50% over three-month BBSW. It has been a stable performer during the past few years and we are confident that it will be called at its June 2014 mandatory conversion date. This security is included in Best Ideas as we believe there is value in short-dated tier 1 securities relative to newly issued Basel III compliant tier 1 securities. CBAPA PERLS V Accumulate Low 6.30% Commonwealth Bank s PERLS V (ASX Code: CBAPA) was issued in October 2009 at a spread of 3.40% over three-month BBSW. It has performed broadly in line with expectations, with some capital upside as credit spreads have tightened. We expect this security to be called on its October 2014 conversion date. This security is included in Best Ideas as we believe there is value in short-dated tier 1 securities relative to newly issued Basel III compliant tier 1 securities. WBCPB WBC SPS II Accumulate Low 6.68% Westpac SPS II (ASX Code: WBCPB) was issued at the height of the financial crisis in March 2009 at a spread of 3.80% over three-month BBSW. It has performed well during the past few years and we are confident that it will be called at its September 2014 mandatory conversion date. This security is included in Best Ideas as we believe there is value in short-dated tier 1 securities relative to newly issued Basel III compliant tier 1 securities. GMPPA Goodman PLUS II Accumulate Medium 7.09% Goodman PLUS II are an amended version of Goodman PLUS securities issued by Goodman Group (GMG) with a face value of AUD 100. GMPPA holders have a redemption date of 31 December 2073 with an issuer remarketing date on 31 December They pay non-cumulative, unfranked distributions at a 3.90% margin above 90-day BBSW. They are currently trading below our fair value estimate and offer a gross running yield of 7.09% and 7.56% yield to reset. 2

3 Rate Sheet at 31 May 2013 Code Recommendation Price (AUD) Issuer Issue Size (AUD m) Years To Maturity Trading Margin Running Yield Yield to Reset inc Fr ex Fr inc Fr ex Fr Dist (AUD) Ex Date AGKHA HOLD AGK % 6.64% 6.64% 6.30% 6.30% /08/2013 ANZHA HOLD ANZ % 5.53% 5.53% 4.85% 4.85% /06/2013 ANZPA ACCUMULATE ANZ % 6.05% 4.23% 5.91% 4.09% /08/2013 ANZPB ACCUMULATE ANZ % 5.43% 3.80% 5.14% 3.55% /08/2013 ANZPC ACCUMULATE ANZ % 6.02% 4.21% 6.13% 4.19% /08/2013 AQHHA ACCUMULATE APA % 7.29% 7.29% 6.65% 6.65% /06/2013 CBAHA ACCUMULATE CBA % 3.95% 3.95% 4.13% 4.13% /07/2013 CBAPA ACCUMULATE CBA % 6.30% 4.41% 5.38% 3.34% /07/2013 CBAPC HOLD CBA % 6.46% 4.52% 5.67% 3.68% /06/2013 CNGHA ACCUMULATE CNG % 6.09% 6.09% 5.55% 5.55% /06/2013 CTXHA HOLD CTX % 7.05% 7.05% 5.66% 5.66% /06/2013 CWNHA ACCUMULATE CWN % 7.63% 7.63% 6.69% 6.69% /08/2013 GMPPA ACCUMULATE GMG % 7.09% 7.09% 7.56% 7.56% /06/2013 IAGPC HOLD IAG % 6.78% 4.74% 6.30% 4.19% /10/2013 IANG ACCUMULATE IAG % 6.66% 4.66% 5.98% 3.93% /06/2013 MBLHB ACCUMULATE MQG % 6.39% 6.39% /06/2013 MQCPA HOLD MQG % 11.45% 9.44% 9.44% /06/2013 NABHA ACCUMULATE NAB % 5.73% 5.73% /07/2013 NABHB HOLD NAB % 5.45% 5.45% 4.41% 4.41% /06/2013 NABPA ACCUMULATE NAB % 6.18% 4.32% 6.15% 4.28% /08/2013 ORGHA HOLD ORG % 7.04% 7.04% 7.10% 7.10% /06/2013 PCAPA ACCUMULATE CBA % 4.22% 2.96% 6.69% 5.34% /06/2013 RHCPA HOLD RHC % 7.49% 5.24% /09/2013 SBKPB HOLD SUN % 4.27% /05/2013 SUNPC ACCUMULATE SUN % 7.38% 5.16% % % /06/2013 SVWPA HOLD SVW % 6.22% 8.95% 6.26% %- % /11/2013 TAHHA HOLD TAH % 7.14% 7.14% 4.97% 4.97% /07/2013 TAHHB HOLD TAH % 6.95% 6.95% 6.72% 6.72% /06/2013 TTSHA ACCUMULATE TTS % 5.77% 5.77% 5.06% 5.06% /06/2013 WBCHA HOLD WBC % 5.52% 5.52% 4.83% 4.83% /08/2013 WBCPA ACCUMULATE WBC % 5.33% 3.73% 5.27% 2.69% /06/2013 WBCPB ACCUMULATE WBC % 6.68% 4.68% 5.35% 3.04% /06/2013 WBCPC ACCUMULATE WBC % 6.14% 4.30% 6.17% 4.23% /09/2013 WBCPD ACCUMULATE WBC % 6.18% 4.32% 6.18% 4.30% /08/2013 WCTPA ACCUMULATE WBC % 4.20% 2.94% 6.65% 5.32% /06/2013 WOWHC HOLD WOW % 5.90% 5.90% 4.56% 4.56% /08/2013 Source: Morningstar (yields) and ASX (prices and ex-dates) - Yields and trading margins above 30% are not displayed. Ex-dates and distributions are the latest reported by the ASX at the 31 May

4 Recommendation Changes since Last Month On 23 May 2013 we confirmed our recommendations on Westpac SPS and Westpac SPS II. Westpac s recent interim results reinforced our credit opinion of Westpac Banking Corporation (Westpac). We consider the AUD 10 cent special dividend a modest credit negative, but it was not unexpected given the amount of excess capital. Both WBCPA and WBCPB are considered to be conservative investments over fairly short time horizons. We maintain our recommendation of accumulate on both. On 3 May 2013 Suncorp announced that in accordance with the reinvestment offer for Suncorp CPS (SBKPB) it expects the last day of trading for CPS to be 30 May The reinvestment offer gave holders of SBKPB the opportunity to reinvest their capital proceeds into the new Suncorp Subordinated Notes. This is not a like-for-like offering. We recommend investors look at the new security on its own merit. SBKPB is a tier 1 security issued by the Suncorp Bank with arguably a lower risk profile than the overall group. The new offer is a tier 2 security which means it is higher in the capital structure and distributions are not discretionary. Some of the details have changed for holders of SBKPB (ex dividend 31 May 2013, record date 6 June 2013, maturity and final dividend 14 June 2013). On 7 May 2013 Standard & Poor s released revised criteria for rating insurers. Although this new methodology was important, the changes have had no significant effect on Suncorp, Challenger, Insurance Australia Group or QBE Insurance. The most affected is IAG Reset Exchangeable Securities (ASX code: IANG), but even for this security there is no change to our investment view. On 30 May 2013 New Zealand issuer Genesis Energy announced it was changing the terms of its Capital Bonds as a direct result of the change in equity credit attributed to it by Standard & Poor s. We understand that Genesis is trimming the issue by AUD 75 million, extending the first optional call date and reducing the interest margin to be commensurate with the current conditions (note that trading margins have compressed significantly during the past year). Genesis stated that the bonds "are no longer a cost-effective form of equity content". This does not have an immediate impact on ASX-listed securities, but this precedent does slightly increase the chance that the terms of AGKHA, ORGHA and TAHHB will also be altered. The methodology changes were negative for holders of these securities. Exchange Traded Government Bonds On 21 May 2013 Australian Government Bonds (AGBs), also known as Commonwealth Government Securities (CGS) or Treasury Bonds (TBs) commenced trading on the Australian Securities Exchange (ASX). These are debt securities issued by the Commonwealth of Australia which pay coupon interest payments every six months (or quarterly for inflation-linked bonds) at a fixed coupon rate. Institutional investors have historically held these securities for a number of reasons such as liquidity, duration positioning and income, but it is important for retail investors to understand their use before implementing them as part of their investment strategy. The physical AGBs are not traded on the ASX and are typically traded in large parcels, putting them beyond the reach of many retail investors. However, legislation passed in November 2012 means the rights to these physical bonds can be traded on the ASX as a Chess Depositary Receipt. These depositary receipts are to be known as exchange-traded treasury bonds (etb s) and exchangetraded treasury-indexed bonds (etib s). These securities have the appeal and convenience of being electronically traded and settled through the ASX in small or large parcels. They will offer a convenient and readily accessible way for investors to invest in Australian Government Bonds. For more information please see The Australian Government Bond Handbook, published on Morningstar Adviser Research Centre and Morningstar.com.au. 4

5 Table 1. Exchange Traded Treasury Bonds ASX Code Coupon Maturity Face Yield Valuation Next Ex- Next date value Price date Payment Date GSBW % 15/12/ % /06/ /06/2013 GSBK % 15/06/ % /06/ /06/2013 GSBS % 21/10/ % /10/ /10/2013 GSBG % 15/04/ % /10/ /10/2013 GSBS % 21/10/ % /10/ /10/2013 GSBK % 15/06/ % /06/ /06/2013 GSBC % 15/02/ % /08/ /08/2013 GSBM % 21/07/ % /07/ /07/2013 GSBA % 21/01/ % /07/ /07/2013 GSBE % 15/03/ % /09/ /09/2013 GSBG % 15/04/ % /10/ /10/2013 GSBI % 15/05/ % /11/ /11/2013 GSBM % 15/07/ % /07/ /07/2013 GSBG % 21/04/ % /10/ /10/2013 GSBG % 21/04/ % /10/ /10/2013 GSBG % 21/04/ % 09/10/ /10/2013 GSBG % 21/04/ % /10/ /10/2013 GSBG % 21/04/ % /10/ /10/2013 Table 2. Exchange Traded Treasury Indexed Bonds ASX Code Coupon Maturity Face Yield Valuation Next Ex- Next date value Price date Payment Date GSIO % 20/08/ % /08/ /08/2013 GSIO % 20/08/ % /08/ /08/2013 GSIC % 21/02/ % /08/ /08/2013 GSIQ % 20/09/ % /06/ /06/2013 GSIQ % 20/09/ % /06/ /06/2013 5

6 New Issues, Maturities and Resets On 23 May 2013 Suncorp s SUNPD commenced trading on the ASX. Turnover has been in line with our expectations with the trading margin tightening slightly to 2.69% as at 31 May On 14 May 2013, Macquarie Group Limited announced the bookbuild results for the new regulatory capital issue to be named Macquarie Capital Notes (proposed ASX Code: MQGPA). MQG successfully raised AUD 580 million at a spread of 4.0% over 90- day BBSW. On 14 May 2013 Macquarie also announced it had issued a resale notice for holders of MQCPA. Holders had the option to participate in the reinvestment offer or receive AUD 100 at the 1 July 2013 resale date. Outlook - Official Cash Rate On 8 May 2013 the Reserve Bank of Australia (RBA) announced a 25 basis points cut in the official cash rate to 2.75%. This is broadly in line with our previously stated opinion that monetary policy easing would be justified in the current macroeconomic environment, with either a deteriorating labour market and/or a slowdown in inflation. This was confirmed by the RBA minutes stating the Board had considered that the inflation outlook provided scope to ease monetary policy further, should that be necessary to support demand. As we said last month, recent economic data is showing some signs of improvement in the housing sector, but remains soft in the business sector and the RBA is likely to take the opportunity to stimulate the economy if we see further easing in inflation. Inflation data in the March quarter was lower than expected, primarily driven by falls in the prices of tradable goods. However, inflation in nontradable goods increased slightly on the year. Overall, the RBA s forecast remained for inflation to be consistent with the target during the next couple of years. Since the rate cut the trade weighted index has fallen from 77.8 to This relieves only some of the pressure on the RBA to lower the cash rate further, as the Australian dollar remains historically high and a drag on trade-exposed parts of the economy. The interest rate futures market continues to price in a small chance (around a 28% chance of a move in June) but almost guarantees another cut by year end. Figure 1.0 Australian Dollar Swap Rates Annualised 6

7 Bank Capital Securities Bank capital securities were stable on the month with WBCPA skewing the average down due to its very short time to expected maturity. As we have previously stated we believe bank capital securities are fully valued at present and a new round of new issuance would likely see some weakness in the secondary market for existing securities. Over the past month the major banks have started to announce capital initiatives in order to reduce the amount of excess capital on balance sheet. WBC announced a small special dividend and both ANZ and NAB announced common stock buybacks to neutralize their dividend reinvestment plans. These are credit negatives for the issuers but were expected and hence have n impact on the overall assessment of the issuer. Over the last quarter wholesale bond issuance by Australian banks has remained relatively subdued, reflecting their preference for deposit funding. According to the Reserve Bank approximately AUD 18 billion of bank bonds have been issued over the past quarter representing a net decline of approximately AUD 11 billion. Of this new issuance approximately two-thirds has been in offshore markets. Figure 2.0 Major Bank Capital Securities Trading Margins ( on Month) Source: Morningstar 7

8 Non-financial Corporates Non-financial corporates were relatively during over the month, with the bigger underperformer being SUNPC. This security sold off as a direct result of the pricing of the new Suncorp Subordinated Notes. These are less risky and hence provided transparency on where the capital structure should be priced. Figure 3.0 Floating Rate Income Securities Trading Margins Source: Morningstar 8

9 Glossary BBSW Conversion Conversion Discount Conversion Number Convexity Cumulative Dividend Yield Duration Exchange Face Value Gross Margin Market Rate Mandatory Conversion Net Reference Rate Reset Running Yield Step-up Tax Deferred Time to Maturity/Reset The Bank Bill Swap Rate (BBSW) is the average mid rate for Australian dollar bills of exchange accepted by an approved bank, having a tenor with a designated maturity that appears on an approved information vendor s service (e.g., Reuters Screen BBSW page). Under certain circumstances, the hybrid security may be converted into a number of ordinary shares of the underlying stock at a specified conversion number, subject to terms, conditions and corporate events, including conversion discount, conversion date and triggers. A discount in percentage applied to the underlying stock price into which the hybrid security may be converted. Also referred to as exchange discount. The number of ordinary shares of the underlying stock into which the hybrid security may be able to convert. For certain hybrid securities, there may be a minimum and/or a maximum conversion number applied. The conversion number is generally calculated based on a formula: Conversion Number = Face Value / [VWAP х (1 Conversion Discount)] A measure for bonds used in conjunction with modified duration in order to measure how the bond's price will change as interest rates change. It is equal to the opposite of the second derivative of the bond's price relative to its yield, divided by its price. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive. Depending on the hybrid security, the dividend, distribution or coupon paid may or may not be cumulative. If the dividend, distribution or coupon is cumulative and if the issuer defers the payment of the dividend, distribution or coupon on any payment date, then additional dividend, distribution or coupon will accrue at the prevailing distribution rate. Expressed as a percentage, dividend yield is the company s annual dividend payments divided by its market cap, or the dividend per share divided by price per share. The change in the value of a fixed-income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a five-year duration means the bond will decrease in value by 5% if interest rates rise 1% and will increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Exchange means the conversion, redemption, buy-back or cancellation of the hybrid security. The face value of the security is the issue price typically being AUD 100 per security. Yield expressed, inclusive of any available franking credits or tax-deferred benefits. Expressed as a percentage per annum, the margin offered by the hybrid security over a reference rate. The initial margin is typically determined by a bidding process within a prescribed margin range known as bookbuild. For certain hybrid securities, the margin may be increased (refer to Step-up) at a predetermined date. See Reference Rate. Some securities include a mandatory conversion condition, which forces conversion if the underlying stock price is above some threshold level and the issuer chooses not to redeem the security for face value. Yield expressed, exclusive of any available franking credits or tax-deferred benefits. Typically a floating reference rate (e.g., 90-day BBSW) used to reference the periodic coupon payment of a hybrid security. The reference rate is generally applied at the beginning of a distribution period for the upcoming distribution. Also referred to as the market rate. For certain hybrid securities, on a reset date, the issuer may reset certain terms including the next reset date, the dividend/distribution rate, the conversion discount and the timing of frequency of dividend/distribution payments. Resets may mean significant change to the terms of the hybrid security and as a result investors may or may not accept such new terms. Further, the issuer may elect to redeem or to exchange the hybrid security. As such, Morningstar has a conservative approach to treating resets and considers it as a probable maturity. In tables and abbreviations, we use Reset to refer to any step-up, mandatory conversion, call or other pseudomaturity event. The hybrid's annual coupon payments expressed as a percentage of the market value of the security. For certain hybrid securities, the margin above the reference rate may be increased or stepped-up at a predetermined date upon the occurrence or non-occurrence of a certain event (e.g., non-conversion at a specified date). The distribution of certain hybrid securities may have a tax-deferred component (may be less than 100%), which allows the distributions to be tax deferred over a certain period. The tax-deferred distributions are not assessable to Australian income tax upon receipt for most investors, but instead reduce the cost base of the security for capital gains tax purposes and as a result defer tax until the disposal of the security. Securities offering a tax-deferred component may give rise to tax benefits. Changes to tax legislation may have the effect of reducing the taxdeferred component of distributions. Investors should seek professional taxation advice in relation to dealing in these securities and their individual situation. The time expressed in number of years from now to a reset date, conversion date, step-up date and/or maturity date, where on such date, either the terms of the security may change or the security may be repurchased, 9

10 Trading Margin VWAP Volatility Yield to Reset/Maturity (YTR/YTM) pcp p.a. Capex YoY HoH QoQ redeemed, exchanged or converted. In simple terms if an issuer already had securities on issue, they could expect any new securities with $100 face value to trade close to the trading margin. The Trading Margin of a security s is the effective margin at which s trades; it is the margin which a new security n with face value of AUD 100 would need so the sum of the discounted cash flows of n equal the discounted cash flows of s assuming redemption of both s and n at the pseudo-maturity date of s. The calculation is grossed up for franking where appropriate. The average of the daily volume weighted average sale price of ordinary shares sold on ASX during the relevant period subject to specific terms and adjustments of the relevant hybrid security offer. The degree to which the price of a security tends to fluctuate. The hybrid's internal rate of return to reset, step-up or other pseudo-maturity event. previous corresponding period per annum Capital expenditure Year on Year Half on Half Quarter on Quarter 10