Occasionally we release views on stock listed on the New Zealand and/or Australian share markets. We reproduce old ones here for your information.
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This publication has been provided for general information only. While every effort has been made to ensure its contents are accurate they should not be relied upon or used as the sole basis for purchasing or selling investments described herein or any other investment. As investment and other financial information referred to has been prepared without taking into account the financial situation, objectives or needs of any reader, they are not personal recommendations by members of the Investment Research Group Limited nor its subsidiaries to any particular person.
Neither Investment Research Group Limited,its subsidiaries nor any person involved in this publication accepts any liability whatsoever for any loss or damage, which may directly or indirectly result from any opinion, information, representation or omission whether negligent or otherwise, contained within this publication. The Directors and staff ofInvestment Research Group Limited and its subsidiaries may purchase or hold investments referred to in this document. This document is for information purposes only and it is only a brief summary of the key facts.
CREDIT AGRICOLE SA - PERPETUAL NOTES (CASHA)
In December 2007, France's third largest banking group Credit Agricole issued subordinated notes on the NZDX carrying an interest rate of 10.035%. The rate is to be set every five years at the sum of the five year swap rate plus the margin of 1.9%, with the first call date on the notes in December 2017 by which they would be paid back at face value. Standard & Poor's issued a credit rating on the notes of 'A'.
Over the last year the notes have been oversold for the risk involved due to the bank's exposure to the European periphery. The notes are currently extremely weak in trading due to a Standard and Poor's downgrade of the bank last month, when the ratings agency lowered its credit rating for the bank to A+ (strong) from AA-. Credit Agricole currently has very little exposure to government debt in Portugal (805 million Euros), Greece (631 million Euros) and Ireland (77 million Euros). Instead, the problem lies in its Greek subsidiary Emporiki bank which has a loan book of 21.1 billion Euros and is significantly leveraged to the Greek economy. However, Emporiki bank's loan book represents 1.2% of Credit Agricole's overall loan book. Last week, Credit Agricole cut its profit estimates for Emporiki and said it would write down the value of its ownership stake by 400 million Euros. It said that Emporiki would return to profit in 2012 and that its net loss for 2010 for Emporiki wo uld be 750 million Euros. It had previously forecast a loss of 300 million to 350 million for the bank. There is no doubt that Greece's sovereign debt problems could put a strain on its financial profile, given its exposure to the troubled Greek economy, mostly through its subsidiary Emporiki.
The financial profile of Credit Agricole still remains strong with tier one capital (a measure of a banks financial strength) at 50.8 billion Euros making it the 13th strongest bank in the world by this measure. Therefore, any default on their New Zealand issued notes seems unlikely. The notes have been heavily oversold and are currently trading at $0.78 on the dollar, giving them a yield of 12.9%. If the coupon on these were to be reset today the yield would still be 8.5%. Analysts believe that due to its size and strong capital resources that it would be able to withstand any capital restructuring or the softer option of extending maturities on Greek debt, while they also believe that the sell off in French banks has been overdone as they have already made provisions for their exposure to the private sector saying that a restructuring would have little impact on tier one capital ratios taking into account the slowdown in econo mic growth post restructuring.
These notes are relatively high risk in comparison to other bank fixed interest listed on the NZDX, but the capital resources and strength of Credit Agricole regardless of what happens in Greece means that any default on their NZ debt is unlikely and the guaranteed return of 12.9% at these levels is too good to pass up.
RECOMMENDATION: BUY
12 month price chart for CASHA
CAVALIER CORPORATION (CAV)
Shares in New Zealand's leading carpet manufacturer have ranged from $2.33-$4.00, today hitting their highest point in the last five years. Much of this has been buoyed buy the potential uplift in sales that are expected from the Christchurch earthquake rebuild. Also Cavalier is in negotiations to purchase the business of New Zealand Wool (WSI), which is the country's second largest scourer with a 33% market share. This would mean that Cavalier would become the only wool scourer in the country, giving it a dominant market share.
This is not a done deal but under the terms it would pay $40 million for the company, which it technically in receivership as receivers hold 64% of the company. The acquisition will no doubt improve the profitability of its scouring business which is currently generating NZ$4-5m annually. It will give it scale and enhance pricing power. Cavalier is also targeting global markets outside of New Zealand and Australia which account for about 3-4% revenue, by targeting the Chinese and North American markets. As shown by other New Zealand businesses this remains a risky proposition as penetration is always tough and more competitive than domestic markets.
Cavalier has provided no specific guidance in terms of earnings estimates, only saying that earnings for FY11 will be similar to FY10. Building and construction markets remain fragile in both Australia and New Zealand which has been shown by recent housing consent statistics throughout this year, meaning that earnings are likely to disappoint and not recover in the second half of the year. Furthermore, aftershocks have pushed out the reconstruction of Christchurch further and many Christchurch residents may opt for cheaper alternatives, particularly from China as they may not be covered by insurance. In any case Christchurch only accounts for about 10% of total revenue on an annual basis so the sales uplift could be muted.
Cavalier has had a great run over the last year and a lot of optimism has been built into the share price at these levels. Earnings are likely to disappoint to the downside when it reports in August and the shares trade on a P/E of 21 times, which is expensive considering that the company has not really forecast any improvement in earnings and there are downside risks to earnings. I would suggest that clients take profits at these levels as it is likely it will disappoint come August.
RECOMMENDATION: SELL
12 month performance for CAV
ATLAS IRON (AGO)
On the 14th February I wrote about Atlas Iron. I would like to reiterate my buy recommendation on the stock due to impressive 3Q numbers and a muted acquisition which came to market yesterday which has lifted shares 2.5% in early trading today. In the March quarter AGO generated operating cash flow of $120 million, lifting net cash to $300 million. Shipments reached 547,404 tonnes in 3Q11 indicating June quarter guidance of 1.5mt could be exceeded.
Yesterday, Atlas trumped Hong Kong based Wah Nam's offer for Western Australian based iron ore explorer FerrAus in a friendly deal which has enhanced AGO's reputation as a driver of consolidation and a shrewd acquirer in the iron ore sector. This would be AGO's fourth acquisition in two years. In a complicated two-step deal, Atlas would first take a 38 per cent stake in FerrAus in return for giving the junior company a collection of Pilbara assets and just over $24 million in cash. Completion of that deal would trigger Atlas into a full takeover of the enlarged FerrAus, with an offer of one Atlas share for every four FerrAus shares. The deal has been approved by the directors of FerrAus. This deal will give AGO's exploration assets and FerrAus's exploration assets into a critical mass and give the operations greater scale, this means that it will be able to give AGO full capacity at its Port Headland port and on the face of things looks to be another shrewd acquisition by AGO.
AGO is an excellent business with fantastic cash flows, the company has lower cash costs than its rivals. It has shown the ability to make value accretive acquisitions without overpaying and has been able to achieve its ambitious targets. The company has built in contracts with Chinese steel markets which should provide excellent cash flows for the next decade and is leveraged to a buoyant iron price which should stay relatively elevated. Also, its proximity to the larger iron ore players in Western Australia and open share register make it a takeover target.
RECOMMENDATION: BUY
12 month performance for AGO
CONTACT ENERGY (CEN)
On March 24th I wrote about Contact Energy. Since that time the company has released weak operational data, refunded 25,000 customers more than $280,000 after admitting it misled customers about the amount payable for final bills and undertaken a large rights issue. Yesterday Contact made a statement saying that ongoing challenging conditions would weigh on 2H earnings.
The company said that due to high hydrology levels and intense retail competition meant that forecast earnings for the second half of the year would be downgraded. Wholesale electricity prices in May and June reflected above average storage levels and low demand, particularly after the earthquake in Christchurch. Retail customer churn also remains a problem for Contact as in operational data published yesterday the company said that its electricity customer numbers were down 3,000 for the month. Contact Energy has already lost 22,000 customers from this time last year, highlighting the fact that growth will be hard to come by for Contact.
Contact is a perennial favorite for analysts despite the risks involved with the stock, possibly due to the size of the company and the fact that firms have or seek investment banking relationships with the company. It is quite clear that most analysts' forecasts have not been updated for these conditions and investors should brace themselves for analysts' downgrades which could play on the stock in the near term.
In general utilities are low growth propositions which are cash machines driven by predictable earnings and high dividend yields which investors can use in their portfolio as bond like instruments. Although CEN has a history of paying a reliable and consistent dividend yield the stock only yields investors about 6%, this combined with volatile earnings (which is shown in the chart below) means that CEN does not make an attractive investment proposition and upside is probably limited. The shares are basically flat in terms of capital gains since the bottom of the bear market back in 2009.
RECOMMENDATION: SELL
12 month performance for CEN
BOART LONGYEAR (BLY)
Boart Longyear is one of the world´s largest global providers of drilling products and services. Drilling services generates about 60% of total group revenue, targeting the minerals, energy, environmental and infrastructure industries. BLY holds 15-20% marketshare in minerals drilling which makes up a large majority of total drilling revenue. Most work comes from mining companies focused on the exploration and production of base metals. The company operates in more than 40 countries and key customers include blue chip miners such as BHP Billiton, Xstrata, Anglo American, Phelps Dodge and De Beers.
Buoyant quarterly results by global peers this month have lifted expectations for a profit upgrade for BLY. US based Layne Christiansen and Canadian based Major Drilling both lifted revenue growth of 37 and 41% respectively for the quarter. Mining services companies such as BLY are well placed to benefit from unprecedented levels in mining investment, with Morgan Stanley predicting that capital expenditure in the mining sector in Australia alone will rise 71% to $80 billion next year. The strong increase in expenditure from leading resource companies and smaller companies bodes well for a company such as BLY which has the largest scale of any drilling suppliers globally which means that it will benefit from improving pricing power. BLY expects EBITDA at US$300m on revenue of US$1.75bn. This guidance implies EBITDA margins are expected to grow from 15% to 17%. FY10 Drilling Services EBITDA firmed 35% while Products grew by 265%. On all estimates this seems conservative to a nalysts who cover the stock. A survey by Bloomberg said that out of the 10 analysts that cover the stock 9 had a buy recommendation and an average 12 month price target of $5.48 a share. The shares closed yesterday at $4.20 a share.
Unlike most companies involved in the contract mining sector, contract risk is adequately spread as no one customer makes up a substantial amount of revenues. China and India will provide adequate growth for commodities and there aren't many companies with the scale, depth and reputation of BLY. With debt at 20%, BLY has a rock solid balance sheet and is well placed to capitalize on an expansion in mining volumes.
RECOMMENDATION: BUY
12 month performance for BLY
AFRICAN ENERGY RESOURCES (AFR)
AFR is a coal focused exploration company. The company owns the Sese Coal Project in Botswana and has a portfolio of exploration tenements across Botswana and Zambia. AFR discovered the Sese coal deposit in mid 2010. Subsequent drilling has outlined a 2.7 billion tonne coal resource.
AFR's 2.7 billion tonne coal resource at Sese consists of a single seam up to 26m thick, all of it within 80m of the surface. In the last few years power shortages in Southern Africa and the emergence of India as a major importer of thermal coal have put Botswana in a position to develop its massive coal reserves for the first time, with Sese potentially the largest coal project in Botswana and also potentially the lowest unit cost coal project in that country. Initial testing indicates that Sese can potentially produce a thermal coal product suitable for export.
The value in AFR is that the Indian's are circling Africa looking for coal supplies, with the Indian Prime Minister last month announcing that the country would be providing $US5 billion in development funding into Africa. Coal and thermal coal in particular is needed to support its industrialization and urbanization boom. This has been shown when India's Tata Steel decided to hold onto its 26% stake in Riversdale Mining rather than except Rio Tinto's $4 billion offer.
It is expected that apart from its local coal supplies, India will need 150-200 million tones of additional coal supplies by 2025 to meet the electrification demands of its population. Sese is the sort of project that is on their radar. It has major rail and port infrastructure shortcomings to overcome but its potential as a 20-30 million tonne-a-year export project, in addition to regional power supply opportunities, means that AFR for one is confident solutions will be found.
At yesterday's closing price, AFR was being valued at $180 million or less than 8 cents for each current tonne of coal resource. Take a look at a dozen or so southern African coal deals struck in recent times and you will arrive at an average deal price of US34 cents a tonne ($AUD32.2 cents). Apply that to AFR and you get an implied value of more than $3 a share. Take the lowest of the southern coal deals of US14 cents a tonne of coal resource and you get an implied value of more than $1.30 a share.
Shares in AFR have been a star performer on the ASX over the last year, reaching a low of $0.06 in June 2010 before rising to $1.04 in February. Confirmation of the immense reserves at Sese triggered a 'sell the fact' in the stock and it has pulled back to $0.59 at yesterdays close. It is generally not advisable to buy a stock on takeover appeal but on AFR's reserves alone and the potential for it to become a 20-30 million tonne-a-year export project means that the stock is undervalued at these levels and for those that are willing to take a bit of risk, looks like good buying.
RECOMMENDATION: SPECULATIVE BUY
12 month performance for AFR
FLETCHER BUILDING (FBU)
At the beginning of April I suggested that investors should look to reduce their holdings in Fletcher Building as I felt that the share price had got a little bit too ahead of itself. I believed that the shares were no longer good value and a pull back was imminent. That month, FBU shares traded as high as $9.50 and have since pulled back to $8.57 after a -2.1% slide yesterday. Much of this fall may have been from offshore investors taking profit as the $NZD hit $USD 0.825 after hawkish comments from the Reserve Bank.
I feel that now is the right time to start accumulating Fletcher shares as they look good value after their 10% fall in the last couple of months. Fletcher is the largest building materials company in Australasia, the largest listed company in New Zealand and a company with fantastic earnings momentum and I would not be surprised if the shares are trading over $10 in the next 18 months.
Recommendation: BUY
30 day chart for FBU. SOURCE: IRESS
GOLD BULLION ETF (QAU)
Previously I have been bearish on gold equities, particularly due to the strength of the Australian dollar and the translation of the gold price back into Australian dollars. This is as Australian gold equities are un hedged and investors are exposed to movements in the currency as well as the commodity. If we look at the performance of gold bullion since the beginning of 2009, the gold price in US$ appreciated approximately 50%. Over the same period gold prices in quoted in $AUD returned -6% against $AUD strengthened against the $USD. This has been shown in the price of gold equities such as heavyweight Newcrest Mining which has appreciated only 19% and the un hedged $USD backed GOLD ETF which has declined -2.2%.
One way that investors can gain exposure to a rising gold price without currency fluctuations is to buy the newly listed beta shares Gold Bullion ETF which is hedged to the $AUD. This is because if the ETF is hedged, investors can substantially remove the impact of the USD/AUD against the underlying commodity price. This ETF gives an investor pure gold exposure as it tracks the actual market price of the underlying commodity; it is backed by physical gold bullion held in the vault of JP Morgan in London so is a pure play on the price of gold. Gold miners have risks such as mine and execution risk so by buying a security which backs the physical metal you taking away specific company risk.
Gold is the flavor of the month whether it is a fear of rising inflation, the debasement of paper currencies or the demand/supply scenario. By buying a gold ETF which is backed by physical bullion you are removing company risk and as an ETF trades daily like a share you have liquidity which you do not have by buying physical bullion. Many analysts are constructive on the price of gold and while it may be consolidating at present, many feel that the price is up and every portfolio should have some allocation to precious metals.
Recommendation: BUY
30 day chart for QAU. SOURCE: IRESS
ILUKA RESOURCES
On the 4th April this year I wrote about Iluka Resources (ILU) I wrote about how well placed it was to outperform, citing mineral sands demand and the potential for subsequent price rises in Zircon and Titanium. (Please see newsletter from 4/4/2011). Since that time the shares have rallied accordingly and are up from $13.43 to today's price of $16.52 after hitting a high yesterday of $17.66 which is a rise of 23% compared with a -7.5% loss for the ASX200 index.
Much of the movement in the share price has come from reserve upgrades, but importantly in the expectation that pricing of mineral sands would rise significantly in the second half of the year. The market had priced in a rise in the pricing of mineral sands but the average pricing for which the company has said that it has made agreements on delivered to the upside and investors and analysts have scrambled to upgrade their forecasts for the shares. Iluka said yesterday that it expects average prices for its titanium dioxide products to rise as much as 75% in the second half of the year and zircon prices by up to 40% for the coming quarter. It says that it expects titanium dioxide products pricing to average US$770 a metric ton and about US$640 a ton after agreeing pricing with its major titanium dioxide customers. The agreements relate to most of ILU's planned second half high grade titanium dioxide sales, which are predominantly for the pigment market, but also for other markets such as titanium sponge and welding.
ILU said it expects zircon prices to increase for the quarter beginning July 1 35%-40% from about US$1,600 a ton from the prior quarter. More than half of Zircon is used in the production of ceramics, including tiles, sanitary ware and tableware, although it is also used in refractories and foundry applications such as for the casting of jest turbine blades. Goldman Sachs last week wrote in a research report that it was raising its price forecasts for zircon, rutile and synthetic rutile based on the outlook for mineral sands commodities. It said Iluka was well places to capitalize on emerging tightness supply. This is especially that ILU holds 30% of the world's reserves for Zircon and 20% for titanium. They have forecast 3Q pricing for Zircon to be in the range of $2,200 a ton. As a result the broker has a conviction buy on ILU and a price target of $19.50 on a 12 month view. Citigroup have also jumped on the Iluka bandwagon this morning and are even more bullish on the s tock with a price target of $22.00 a share.
With the shares trading sharply lower this afternoon at $16.52, now is an excellent time to accumulate shares in a high quality company. I maintain my BUY recommendation and believe that it will significantly outperform over the next 12 months.
RECOMMENDATION: BUY
12 month performance for ILU
INFRATIL (IFT)
On the 24th March I wrote about Contact Energy and how I felt that it would fail to outperform the market over the next 12 months. Since that time Contact has delivered a return of -1.2% compared to a return of +2.4% for the NZ50 index. I believe the best way to play the electricity generation sector is through Infratil and it's 50.6% shareholding in Trustpower.
The mission of Infratil as an investor is to invest in businesses where it has expertise, can exert control or strong influence and where sector change and growth has the potential to deliver growing returns. Trustpower has been a good fit for Infratil and has successfully been able to do this, since its purchase over the period 1994 to 2005; Infratil has received cash dividends of $385 million against a shareholding cost of $391 million. Since 2000 the growth profile of Trustpower compared to Contact has been far superior which is shown in the table below taken from Infratil's quarterly update.
In 1994 when Infratil acquired its initial stake in TPW, the company had 85,000 customers, generated sufficient electricity for about 20,000 households and produced earnings of $21 million. In 2010 TPW generated 15 time more electricity, had 220,000 customers and earnings of $274 million; 1,200% higher than 1994.
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EBITDAF (NZ$m) |
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TPW |
CEN |
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2010 |
274 |
427 |
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2009 |
261 |
445 |
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2008 |
208 |
567 |
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2007 |
196 |
544 |
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|
2006 |
186 |
557 |
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|
2005 |
173 |
491 |
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|
2004 |
140 |
453 |
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|
2003 |
112 |
359 |
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|
2002 |
38 |
293 |
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|
2001 |
66 |
341 |
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|
2000 |
69 |
247 |
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|
11 year record |
Earnings Growth |
Generation Growth |
Earnings per unit |
||||
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|
|||||||
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Industry |
149% |
25% |
99% |
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Trustpower |
297% |
35% |
195% |
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Contact |
73% |
15% |
51% |
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However, TPW is not the only string that IFT has to its bow as the company is a canny investor with a number of long term strategic investments. Apart from Trustpower its investments include Infratil Energy Australia, Greenstone Energy, NZ Bus, Snapper, Wellington Airport, Glasgow and Kent Airports. Over the past couple of years IFT has divested itself of about $400 million in investments, including stakes in Auckland and Lubeck Airports while its purchase of Greenstone Energy in conjunction with the NZ Super Fund shows that the company is focusing more on energy and fuel distribution.
In purchasing Shell's downstream NZ assets IFT picked up a quality asset at an attractive price. The price paid was at an EBITDA multiple of 4.2 times of the retail and distribution assets. The purchase is expected to be immediately earnings accretive given the low multiple paid with the estimate being at about $20 million accretive to IFT's earnings on an annual basis. Furthermore as part of the transaction it picked up Shell's stake in NZ Refining at about $3.40 a share, whereas NZ Refining now trades at $4.75. The Shell business has the opportunity to add value and extract excess capital as it has been estimated that over a four to five year period the Shell business could see EBITDA lift from around current levels of $140 million to around $200 million to $220 million while $200 million to $250 million of surplus capital could be extracted for further acquisitions in the sector. The investment could deliver in excess of $500 million in capi tal growth and dividends for the joint venture over the next five years.
IFT's Australian energy assets hold significant potential for the group moving forward. IFT has been building its business since 2004 and this year is forecasting earnings of A$45 million. Legacy gas contracts will mean that FY12 earnings will be less than that achieved in FY111, but a marked increase is forecast for FY13, by which time its gas position will be in balance. Its Lumo assets are expected to lift once the NSW state government reviews retail pricing as the government moves from government control to private ownership. NSW is an attractive market for gas and electricity retailers due to the size and composition of its energy market in comparison with other states.
IFT recently updated the market on its FY11 earnings guidance, saying that it is on track to meet previous forecasts with earnings expected to come in at between $415m-$435m vs. FY10$363m while operating cash flow is expected to be strong. IFT is a quality, well managed company with strategic cash generating investments. The shares are trading at about $1.86 a share which is a significant discount to the valuation of its assets which stand at about $2.40 a share which is a discount that is unwarranted. As IFT is able to execute on its investments, particularly Greenstone Energy this gap should narrow.
Recommendation: BUY
12 month performance for IFT
WOODSIDE PETROLEUM (WPL)
Yesterday shares in Australia's largest oil and gas company Woodside Petroleum jumped after a report in a British newspaper that BHP Billiton would launch a takeover bid for the company. This comes after last months news that a large currency trade was made when an institution bought $AUD and sold Euros on the market to the tune of $9 billion which is about the size of the 24% stake that Royal Dutch Shell owns in Woodside which would be the initial purchase made by BHP before launching a full takeover, as a result the shares lifted about 7% to about $50.85 at one point in the day before settling at $48.16. They have rallied 19% in the last month.
However there are a number of reasons to skeptical about a potential acquisition. Firstly, both BHP and Woodside have said that they are unaware of any takeover bid. Secondly, the Premier of Western Australia was quite frank in his admission that he would flatly oppose any takeover for Woodside. Thirdly, BHP is in the process of buying back its shares in Australia and the U.K to the tune of $US 10 billion which begs the question as to why they would buy back shares if they were to launch a takeover bid? According to JP Morgan, BHP will need to assume a A$120/bbl oil long term price and achieve A$3 billion in value to justify a takeover of A$56-65/share. They feel that a 'stock overhang' could be created and that Woodside's credit rating suggests that it could not buy back Shell's 24% stake which is clearly on the block without selling growth assets which would 'severely impair its strategic vision and upside valuation potential.' Furthermore in any absence of a bid I would not be surprised if Woodside has to raise equity to accelerate its Pluto-2 and Browse projects.
The most likely scenario for this is that BHP enters into an off take or JV partnership with Woodside. At these levels Woodside looks pricey and a takeover premium is already in the stock. Clients should take profit and reduce their holdings while maintaining a holding just in case a takeover eventuates. Citigroup and JP Morgan both have sell recommendations on Woodside with a target price of A$43.40-$43.50. Last trade $47.53.
Recommendation: SELL
12 month performance for WPL
VECTOR (VCT)
In November last year I wrote about the regulatory uncertainty facing Vector and its near monopoly like status. It looks as those regulatory uncertainties have reared its ugly head again which could have a negative impact on Vector's earnings and increase uncertainty around the stock.
The Commerce Commission has now changed its tact in terms of its regulatory framework. Last week, the Commerce Commission in a paper made a sudden and fundamental change in its approach on the default price path starting price adjustments for Electricity Distribution Businesses. Under its previous guidelines, firms were able to earn about an 8.7% return on assets after tax before any price adjustments were made. But now the allowable rate of return is 7.7%.
This makes Vector's earnings and the company's proposed capital expenditure program uncertain. The year ending 2013 is when the decision's full effects will be felt and earnings downgrades should follow. Consensus earnings downgrades of forecast reported net profit for the company are in the range of about 5% for 2012 and 14% for the year ending 2013.
Vector is a business with a predictable earnings profile and a solid dividend yield, however with any business such as electricity distribution regulatory risk is always a concern and out of the company's control. This uncertainty is unlikely to go away until after the merits review process is concluded which could be up to two to three years which should weigh on the stock. The shares have delivered capital gains of 14% over the last year and have delivered a dividend yield of about 9.5% which equates to a gross return of 23.5%. With earnings and dividends under threat now is the time to take some money off the table.
Recommendation: SELL
12 month performance for VCT.
GENESIS ENERGY BOND
Genesis Energy has come to the market with a capital bond offer to raise $225 million plus up to $50 million of oversubscriptions. The offer has been well received by the market and has closed over subscribed with no public pool. We have an allocation of these bonds here and are currently taking expressions of interest. Please contact me with your expression of interest.
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Genesis Energy Capital Bond Fact Sheet |
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A NZ Government owned energy company and NZ' Largest Energy Retailer with Operations in Energy Generation and Retailing and Kupe Oil and Gas |
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Issuer |
Genesis Power Limited trading as Genesis Energy |
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Type |
Unsecured, subordinated, redeemable, cumulative, interest bearing capital bonds |
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Interest Rate |
Higher of the Minimum 8.5% p.a. or the 5-year swap rate + the 3.87% p.a. initial Margin |
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Step-up Margin |
3.87% p.a. (initial Margin) + 0.25% (the step-up percentage) |
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Interest Rate Reset |
First reset date is 15 July 2016 and then every five years at the then 5-year Swap Rate + the Step-up Margin |
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Interest Payments |
Quarterly (15 January, 15 April, 15 July and 15 October of each year). Deferred interest payments (for a period up to five years) will continue to accrue interest at the prevailing Interest Rate (no lower than 8.5% p.a.) |
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Maturity |
15 July 2041 (however, the Bonds may be called (repaid early), at their face value, at the election of the Issuer on the first interest Reset Date of 15 July 2016, and then on any subsequent quarterly interest payment date) |
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Issue price |
$1.00 per Capital Bond |
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Size |
$225 million with the option to accept up to $50 million oversubscriptions |
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Listing |
NZDX for early exit option |
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Credit Rating |
BB- for the Bonds by S&P and BBB+ (negative outlook) by S&P for the Issuer |
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Minimum investment |
$5,000 and thereafter in multiples of $1,000 |
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Conversion Option |
No |
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Redemption Option |
By both the Issuer and Bondholders |
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Early bird Interest |
Minimum 8.5% p.a. from the date application is processed and cheque is banked |
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Key Dates |
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Opening |
15 April 2011 |
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Closing |
18 May 2011 |
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Rate Set and Issue |
23 May 2011 |
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Listing |
24 May 2011 (expected) |
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First Interest Payment |
15 July 2011 |
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First Call, Reset and Step-Up |
15 July 2016 |
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Financials: As at 31 December 2010, Genesis Energy Group's assets were $2.59bn and total liabilities were $1.125bn (including total borrowings of $516m and trade and other payables of $237m), leaving total equity of $1.465bn. The total borrowings to assets ratio was 20% and total borrowings to equity of 35%. According to its Pro-Forma statement, if the acquisition of the Tekapo stations had taken place on 31 December 2010, the total borrowings (including Capital Bonds) to assets ratio would have been 40% and total borrowings to equity of 96%. The 5-year annualized growth rates to 30 June 2010 are: operating revenue 4.9%; operating earnings 6.7%; EBIT 1.6%; NPAT 0%; operating cash flow 16.5%; and net assets 1.1% (source: Genesis Energy annual reports). Key Risks: Default, Interest Rate, Call, Deferral of interest payments, Credit rating, and Business |
PROPERTY FOR INDUSTRY (PFI)
Listed industrial property investor PFI yesterday reported a lower distributable profit for the first three months of 2011, reflecting the effects of higher tax and higher cost of credit. This is a theme that will probably resonate through the sector this year. However, the company was able to announce no change to its dividend which for the first quarter will be 1.55 cents per share plus imputation credits of 0.333 cents.
Property rentals for the three months to 31 March 2011 were $400,000 or 4.9 percent lower than the previous period at $7.793 million. This was primarily an outcome of the properties sold by the company since the first quarter of 2010, with the reduction being partially offset by rent reviews carried out during the year. The proceeds from the property sales were applied to reducing bank debt and PFI's gearing which stands at 30.2 percent. Two significant changes had taken effect for PFI on 1 January 2011- the reduction of the company's tax rate to 28 percent and also the removal of the company's ability to depreciate building structures with useful lives of more than 50 years for tax purposes. As a result PFI's tax costs for the first quarter showed a $405,000 increase to $962,000. PFI's net operating profit after tax for distribution for the first quarter was $3.874 million, an $812,000 or 17.3% decrease on the previous corresponding period. Ea rnings per share were 1.79 cents per share compared to 2.18 cents per share. PFI's portfolio of 50 properties has a total value of approximately $343 million.
This was a solid result considering the backdrop that PFI is operating under. However, higher costs of funding could be a problem for PFI moving forward and gearing of 30.2 percent should increase in the near term which is a worry. With the shares trading at $1.17, PFI's current dividend yield of 6% is ahead of its historical average of 6.6% and the sector average of 7.3%, while the stock is trading at a premium of to its net tangible assets of $1.09. The stock is expensive and better value can be found in another industrial property investor Goodman Property Trust which is the lowest risk way to play the large cap property sector and represents a dividend yield of 8.4%.
Recommendation: SELL
12 month performance for PFI.