Views at a Glance / Income Report; 3 current holdings in the spotlight (AXLHA, IGL, ALF)

By Market Matters 29 August 18

Income Report; 3 current holdings in the spotlight (AXLHA, IGL, ALF)

Market Matters Income Report 29th August 2018

The ASX 200 is trading marginally higher in the first hour – the Telco’s down 2% however that’s largely a result of Telstra (TLS) trading ex-dividend for 11cps., while the banks and materials are providing much of the support. Building supplier Boral (BLD) is trading up ~9% on a strong result and particularly strong commentary around their Nth American operations, while Bellamy’s (BAL) reported reasonably well however the guidance was soft, the stocks trading down by ~4%. 

 

A fairly subdued week in terms of the MM Income Portfolio with no major movers and only a slight uptick in terms of performance.  For the week, the portfolio increased by 0.02% while the portfolio has added 2.52% for the current financial year, and +8.68% from inception vs the benchmark which is tracking at 0.87%  & 6.31% respectively. As outlined below, we have become more negative on the Axsesstoday bond and pull it back to a hold rather than a buy. We also plan to remove the BENPG from the portfolio making room for the NB Global Corporate Income Trust with a 5% weighting. This will increase cash to 3.50%.

Axsesstoday (AXLHA) – $100.70

We hold the AXLHA in the MM Income Portfolio, which is a simple listed bond that pays a coupon of 4.90% plus the 90 day bank bill rate. Although a recent addition to the portfolio, the bond has traded up from the $100 issue price to a high of $101.25, and at time of writing is trading at $100.70. The head stock (Axsesstoday) reported full year results on Monday and has dropped substantially, down from $2.40 to $1.70 today. Firstly, why the big drop and does it impact our position as lenders to AXL via the bond?

The result itself was messy, but came in line with company guidance for the FY18 year which was upgraded twice during the year. While growth in earnings is important for equity holders, as a bond holder we’re more concerned about the credit quality of the business. In other words, has the internal or external environment changed increasing or decreasing the risk to the business? In that context pushing hard for growth may not necessarily be a positive for debt holders.

As a refresher, AXL is a finance company that provides finance to small and medium size businesses and is focussed in the hospitality and transport sectors.  Without going into too much detail, within a finance company there are two main parts we need to keep a handle on. 1. The quality of credit (bad and doubtful debts) and financing (their ability to source funds to lend out). Looking at the result just released the company is growing profits well and have available liquidity however there was a substantial increase in arrears totalling $12.9m in FY18 versus $1.8m in FY17.

They measure 30+ day arrears and 60+ day arrears and they were pretty much inline with FY17 however the main driver was a large uptick in 90+ day arrears which increased materially to $8.4m (up from about 600k in FY17). There wasn’t a huge amount of explanation about this from the company other than to say they had a change in accounting policy during the period so comparing FY17 and FY18 is not comparing apples with apples. While we think that’s probably the case, we’re also slightly concerned about a change of policy potentially sugar coating underlying issues in the business.

In short, we think the result put a negative slant on the AXL bonds, and we’re now cautious on them. While they’ll remain in the portfolio,  we’ll be very keen to monitor these trends over the next 6 months or so.

MM is neutral AXLHA at current levels

**Please note, the below chart is the equity, not the bond. The bond price has stayed stable**
Axsesstoday (AXL) Chart

IVE Group (IGL) $2.30

IVE group is an interesting business, and while their result last week looked like a meaningful miss, it was more to do with timing than anything more sinister.  As a consequence, our original thesis on the stock still stacks up. As means of a refresher, this is an old school printing business utilising new technologies to dominate a fragmented market. In terms of FY18 results, revenues came in at $695.4m for the year, with this having grown 42% however that was a result of a number of acquisitions through the period. The more pleasing part of that was organic growth of ~6% across both new and traditional IGL assets. While revenue was strong, the actual operating EBITDA came in at the lower end of guidance mainly because fixed costs were higher than expected. Basically, a higher proportion of work was still being done on older, less profitable machines than will be done in FY19 while they also grappled with higher input costs, mainly paper and power.  The pollies are making noise about reducing input costs which is a positive  (we’ll see if anything actually happens) while investment in new machines will bare more fruit in FY19.

Thinking more broadly for a second, we all get bombarded with marketing emails and the majority rarely get opened – their validity / success is on the decline. Printed brochures however are expensive and were generally superseded by more targeted digital forms.

That obviously had an impact on your traditional printer however the tide seems to be turning back to printed & delivered marketing material using the data captured through loyalty programs to make it targeted to the consumer. As it stands this is a very fragmented industry ripe for consolidation but it requires bigger investment in more advanced printing technology to take advantage of the opportunity – simply many smaller operators will be unable to capture the market.  IVE is in a very good position to take advantage of these trends over time and right now the stock is good value.

IVE trades on 8.6x forward earnings while yielding ~6% fully franked  - MM remains bullish at current levels

IVE Group (IGL) Chart

Australian Leaders Fund (ALF) $1.07

ALF is a listed invested company that we hold in the Income Portfolio with a 5% weighting – it’s been there since December 2017 and has done very little, trading 1c higher today than it was then without paying any income – potentially a strange holding in the MM Income  Portfolio however here’s the rationale;

It’s a  listed investment company trading at a ~14% discount to the value of its assets – so it’s cheap. It’s cheap because performance has been weak – we’ve had a strong trending market, they are a market neutral fund so have struggled in 2017 and early 2018 however they’re now improving. The other reason for the weakness in share price was frustration from yield investors – many bought ALF because of its high yield – however they stopped paying dividends in early 2017 so yield investors sold, and that forced the LIC a long way below NTA. That was the catalyst for us to add to the portfolio towards the end of last year.

They stopped dividends because they had no retained profits and therefore were not paying tax (which gave them no franking). Just before we bought it, signs were that retained earnings were building and that would result in dividends re-commencing.

The thesis at the time was that when they did, we’d get dividend flow and that in turn would force the narrowing between NTA and share price plus, they traditionally perform well in weak / volatile markets, and if markets are susceptible to weakness then  these guys are a reasonable bet.

Yesterday they reported their full year results and importantly declared a 2cps full franked dividend – here’s an extract from the release.

The assets of the fund sit at $1.22 while its trades today at $1.075. The reinstatement of the dividend was a piece in our original puzzle and that has now played out. Assuming we see consistency in positive investment results then the share price should move higher from here – albeit we expect a slow grind rather than anything more spectacular.  

MM remains bullish ALF at current levels

Australian Leaders Fund (ALF) Chart

Bendigo Hybrid (BENPG) – removing from the portfolio

While the BENPG remains a good quality regional bank hybrid, it screens on the expensive side given its margin and duration. With 5.8 years till first call date, and a yield to first call of 5.64% this is the obvious candidate to remove from the MM Income Portfolio to make way for the NB Global Corporate Income Trust.

We are removing the BENPG around $102.20 booking a profit of ~5%

Bendigo Hybrid (BENPG) Chart

Income Investment opportunity – NB Global Corporate Income Trust

**The NB Global Corporate Income Trust has now attracted over $250m of demand**

MM plans to add the Neuberger Berman Global Income Trust to the Market Matters Income Portfolio with a 5% weighting, funded by reducing our weighting to the BENPG. The chance of a Labor victory and the removal of cash refunds for franking credits has increased, and therefore we are reducing our weighting to franked hybrids that may be impacted.

Please note, the broker book build closes on Friday

More information is available in last week’s Income Report;  https://www.marketmatters.com.au/blog/post/income-report-dividends-a-plenty-tls-iag-sun-nck/

Subscribers can bid into the IPO through Shaw and Partners, however an account will need to be established with Shaw to facilitate this (no charge). Email [email protected] should you wish to participate

**Please note; Shaw and Partners, a shareholder of Market Matters has been appointed Co-Manager to the offer**

Conclusion (s)

The Axsesstoday result on Monday is a concern and this is a position that needs monitoring
We remain keen on IGL and ALF at current levels
We are removing BENPG from the portfolio to make way for the Neuberger Berman Global Income Trust
Cash will increase by 2% from 1.5% to 3.5%

Have a great day

James / Harry &  the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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