Income Report / Income Note: Focussing on areas of pain in the portfolio (NBI, SGP, CBAPG)

By Market Matters 25 March 20

Income Note: Focussing on areas of pain in the portfolio (NBI, SGP, CBAPG)

Market Matters Income Report 25th March 2020

The market opened with a bang this morning hitting an early high above 5000 although it has tapered off somewhat. Some huge moves early on with Afterpay up +45% near open before settling +25% higher while the likes of Magellan (MFG) +21%, Qantas (QAN) +21% & Sydney Airports (SYD) +10% are also seeing strong interest. The stocks that have been beaten the most, tend to bounce the most and we’re certainly seeing that in the market today.

Qantas (QAN) is actually an interesting one today with all the uncertainty in the market they’ve managed to buck the trend this morning in what seems to be a pretty incredible result accessing further debt & liquidity.

·        QAN has secured $1.05Bn in additional debt against unencumbered aircraft (bought using cash).

·        Tenure is for 10 years at an interest rate of 2.75% (that’s right 2.75%)

·        Flagging ability and willingness of lenders to potentially offer up further flexible financing against assets.

Qantas and other travel companies are obviously the hardest hit groups within the market, with a zero-revenue line and leverage against costs.  Although still early stage and in its infancy its positive in my view to be seeing banks & other lenders extending funding within this environment to large and small businesses. The co-ordinated move from regulators, government and reserve banks is geared towards providing liquidity to the system and guaranteeing continued capital flows. All these measures are showing banks are prepared to give a holiday, provide more liquidity and perhaps credit markets will start to normalise.

Also, some good buying across the hybrid market today, a topic we cover below highlighting 3 top picks in the sector.

Overall, the ASX 200 is currently trading up +167points / +3.52% at 4902.

ASX 200 Chart

The Income Portfolio had a tough week down -11.25%, a soft result given the composition of the portfolio with the ASX200 Accumulation Index down over 13%. IVE Group (IGL) the biggest drag while Stockland (SGP) also felt some pain, a stock we cover below. Performance for the current financial year is now -20.43% versus its absolute return benchmark of +3.52%. Since inception, the portfolio ticked into negative territory down -8.23% vs the benchmark of +14.44% - clearly some work to do.

Focussing on areas of pain in the portfolio

The market has been brutal towards some stocks along with a lot of the income focused listed investment trusts (LITs) which have also been hit hard. The Hybrid market has been sold into and in terms of our own income portfolio, the relative value bond fund XARO has really been the only true defensive position, along with Metcash (MTS). We discuss a few of these ‘pain points’ today and the opportunities that now exist.  

1 Corporate Bonds 

Firstly, some context. This market decline has been broad based and aggressive, the most aggressive I’ve seen. It seems to be a liquidation event where money moved squarely into cash over and above anything else, that led to a ~13% rally in the US Dollar Index as an obvious flight to safety   however some of the more traditional safe havens like US Treasuries have also been sold off, pushing yields higher.

The first chart below looks at the risk premium the market is now demanding to lend to non-investment grade borrowers, the cost of this borrowing has more than doubled for companies tapping this market

The difference between non-investment grade / high yield bonds & US Treasuries

This sort of trend has also been obvious in more secure investment grade credit, the cost of that has increased markedly. We’ve written about the market’s inability to price this event and this has clearly been obvious in the credit markets.

The difference between investment grade bonds & US Treasuries Chart

This theme has hurt our position in NBI which is trading ~$1.25 versus underlying NTA which sits at $1.47, as holders rushed for the exists irrespective of price.  While the security is up 17% today, spreads in the charts outlined above need to contract before NBI will make a sustained recovery.

Given we reduced our weighting to this security at $2.10, we remain comfortable holders of a smaller position, seeing value at current prices.

Nb Global Corporate Income Fund (NBI) Chart

2 Stockland (SGP) $2.16

SGP have been hit very hard in recent weeks falling from ~$5.40 to a ~$1.80 low. They withdrew their FY20 guidance, most property stocks have, blaming uncertainties around COVID-19. SGP’s earnings (EBIT)  are made up of 38% retail and 35% residential, obviously the retail component is under immense pressure while the residential component is a risk if the virus lingers, unemployment stays high and we enter a protracted recession, while that’s a possibility it’s not our thinking at the moment.

Gearing in SGP sits at a fairly conservative 26% and they have undrawn facilities of $850m with no debt to refinance this year. They will need to provide rent relief to tenants in their retail division while you’d expect some defaults in terms of lot settlements. It’s going to be a tough time for SGP however we’d argue this is being priced at current levels trading on a Est P/E of just 6x while yielding more than 12% unfranked. 

That will change given earnings downgrades to come, however there is a lot of fat in those multiples.

MM is bullish SGP from current levels  

Stockland (SGP) Chart

3 Hybrids

Hybrid securities have been sold on the back of widening credit spreads and liquidity - Hybrids are now offering yield to call above 8%. This is clearly attractive although given on market liquidity we would expect a sharp bounce back from current levels.

MM is generally bullish tier 1 bank hybrid securities  

The below table looks at yield to call and running yield. Yield to call covers income +/- any capital gain or loss.

Our 3 top major bank hybrids of varying call dates are:

2 years: ANZPE

4 years: CBAPH

5 years: CBAPG  

Source: Shaw and Partners

Major bank hybrids price, all trading below $100 face value

Source: Shaw and Partners

CBAPG Chart

Conclusion (s)

We are bullish SGP at current levels

We are comfortable holding NBI despite the decline in price

We are positive hybrids at current levels

Have a great day!

James / Harry & the Market Matters Team

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