Income Report / Income Note: What the AMP takeover means for our AMP Hybrids (WOW, AMPPB, MQGPD, ABP)

The US market was strong overnight and futures have ticked higher during our time zone today, however for now at least the Australian market is in a holding pattern trading marginally lower as the news coverage of the US election outcome ramps up – an interesting afternoon likely to play out. The risk on trade has found some form today with the likes of Nanosonics (NAN) +8% on a strong update, Corporate Travel (CTD) +3% & Z1P Co (Z1P) +3% being offset by losses in Pendal (PDL) -5% on weaker than expected FY earnings & Fortescue (FMG) -4% on trade concerns with China.

Overall, the ASX 200 is currently trading down 19pts / 0.32% to 6047.

ASX 200 Chart

The Income portfolio saw marginally negative performance over the last week with Smart Group (SIQ) the main drag on the performance, falling a little more than 7%, while the portfolio was down -0.17%. MXT & NBI both paid distributions during the week. The portfolio remains well ahead of its benchmark for the current financial year, up 4.04% vs the RBA + 4% target of 1.46%.

A lot of people’s favourite income stock, Woolworths (WOW) is out this morning with a 1Q 21 trading update confirming that trading remains strong. Danny Younis runs through the numbers here:

- Australian Food life for like (LFL) sales growth at +11.5% vs this time last year– continuing from August commentary that 1st 8 weeks of new FY (July/August) were running at +11.9%.
- Online sales improved +100.0% to $961m (8.0% of sales vs. 6.3% in 4Q20) however as expected, city/CBD stores still impacted (-5.1%) as neighbourhood stores continued to outperform
- NZ Food LFL sales growth +5.8% vs. pcp;
- BIG W LFL sales growth +22.3% vs. pcp – good to see continuing improvement here; and
- Liquor (Endeavour) LFL sales growth +20.0% - strong as per COL 1Q21 result.

Current month of 2Q21?  “In October, Australian Food comparable sales growth was in the high single-digits, moderating over the month. Growth in New Zealand also slowed relative to Q1. Endeavour Drinks and BIG W have continued to perform strongly. Despite the Victorian closures, Hotels was profitable in Q1 but materially down on last year. For the rest of the calendar year, we expect elevated sales and costs to continue as customers spend more time at home, continue to embrace eCommerce and we ensure our stores and DCs remain COVIDSafe.”

A good update from Woolies however the stock has run hard.

MM prefers Wesfarmers (WES) as our retail exposure given strength in Bunnings and its balance sheet optionality

Woolworths (WOW) Chart

Today’s report will be kept fairly succinct as coverage of the US election gathers momentum.

1 AMP Hybrid (AMPPB) $97.38

AMP has received a takeover offer from the US based Ant Group which values the company at ~$6.4bn. The MM Income Portfolio holds the AMP Hybrid (AMPPB) which could be impacted if a change of control event happens. If the takeover does go ahead there is a clause in the prospectus that states that the hybrids will be converted into shares at a rate of $101 if shareholder approval is sort,  however if shareholder approval is not sort then this is at AMP’s discretion, not the holders. Thinking about what this could all look like in practical terms,  for an amicable takeover which we suspect is what they’re after here, then shareholder approval would likely be sort, and therefore the hybrids could be converted into the stock at a rate of $101 per note, or they could also be redeemed (paid out) given conversion can actually mean redemption.

To MM the most likely scenario is redemption however this is far from guaranteed and there is the capacity for the notes to stay on issue. If the notes were left on issue the obvious question, then for holders is around the credit quality of AMP’s prospective owners. In this case, Ant Group has a higher credit rating than AMP meaning this is a net positive for AMPPB. Theoretically however, this could have gone the other way with the acquirer being of lower credit quality and therefore having a negative impact on the quality of the hybrid.

This is a messy situation which could play out in a few ways. Ultimately though, we think the outcomes here will be a net positive for holders and that’s being reflected in a slight uptick in the price of the notes.  

The AMPPB is trading $97.38 offering a yield to first call/maturity of 5.50% grossed for franking with a little over 5 years to run.

MM remains positive on the AMPPB


2 Macquarie Hybrid (MQGPD) $104.95

Staying in the hybrid area, we hold the MQGPD in the MM Income Portfolio which is trading on a yield to first call of 3.78%, with first call date in ~6years. The price has ticked up to ~$105 pushing its current margin down to 3.43%. This compares to recent issues from Bendigo & Bank of QLD paying 3.80% and Challenger Financial at 4.60%. While Challenger is higher risk than Macquarie, we think the regionals are better relative value based on current margins.

We view the MQGPD as expensive and intend to use this as a funding vehicle, assuming we have some clarity around the election result in the coming days. Our intention being to sell our 5% weighting in the MQGPD and allocate into equities, likely split between CBA and NAB. This will change the asset allocation mix of the portfolio closer to 30% in fixed income style securities, which is as aggressive as this portfolio will go.


3 Abacus Property (ABP) $2.97

On Monday this week, Abacus said that it has acquired the remaining 75% of Storage King operating platform that it didn’t already own for $50m. As a side note, they also said they’d bought 4 additional self-storage assets for $45m. The deal is a good one given it now gives ABP control of Storage King which they can expand further.

ABP has been a weak performer in the portfolio since purchase in August of 2019 however we remain bullish on their strategy to move away from office and retail into self-storage. We’re also comforted by their 6.2% unfranked yield.

MM remains bullish Abacus Property (ABP) at current prices  

Abacus Property (ABP) Chart


We’re looking to sell MQGPD to increase equities exposure post-election, most likely adding to CBA & WBC

We like Abacus (ABP) at current prices

Have a great day!

James & the Market Matters Team


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