Income Report / Income Report: Thinking about the changing nature of property businesses & update on AXLHA (CSR, ABP, GMG)

By Market Matters 13 November 19

Income Report: Thinking about the changing nature of property businesses & update on AXLHA (CSR, ABP, GMG)

Market Matters Income Report 13th November 2019

Another similar trend playing out today with early strength being sold into as a lack of conviction fails to push the market out of its recent trading range. Tech doing well currently trading up the 0.94% while the reflationary trade, the resources, energy and financials are all lagging.

Overall, the ASX 200 is currently trading down -15pts or -0.22% to 6738.

ASX 200 Chart

The Income Portfolio was up strongly during the week, adding 1.14% which was about in line with the ASX200 Accumulation index which traded up 1.18%. The big movers came from Genworth (GMA) and Perpetual (PPT) which added 9.11% and 4.43% respectively. An 80c fully franked dividend was paid by Westpac (WBC), while we picked up a total of 14c at 50% franked on Friday from CSR before selling the holding yesterday. The portfolio is tracking above the benchmarks, currently up +4.20% financial year to date, versus its absolute return benchmark of +1.81%. Since inception the portfolio is up +21.95% vs the benchmark of +12.73%.

CSR Limited (CSR) $4.59

Yesterday we cut CSR from the MM Income Portfolio taking a nice ~40% profit along the way. The position was added to the portfolio in May 2019 and at the time we said: Building products company CSR trades on an Est P/E below 10x and an expected yield above ~8%, clearly priced for ongoing headwinds in the local construction market. This morning they reported FY19 results booking a 14% decline in profit from continuing operations to $181.7m and a final dividend of 13cps franked at 50%, taking the full year dividend to 26cps. The market is clearly expecting very little from the company and while todays result was weak, it was within 2% of downbeat market expectations. At the top line, revenue was up 4% across the group with growth in all businesses.

Since then, the share price rallied strongly as the market turned ‘sort of’ more positive or at least less bearish on building products. In more recent times, the share price has enjoyed rumours of a potential takeover from GFG Alliance.

We remain buyers of weakness rather than strength in cyclical exposures, hence the sale of CSR during the week

CSR Limited (CSR) Chart

Thinking about the changing nature of property businesses

The MM income portfolio has two specific property positions, being Stockland (SGP) and Abacus (ABP). Stockland is the well-known diversified property business that provided a more optimistic update a few weeks ago and rallied on the back of it  - we originally bought this on valuation grounds while Abacus (ABP) is more skewed towards commercial and self-storage assets which makes sense. The move into self-storage is a sensible one given the increasing density of inner city housing with reduced floor space, a theme that will only build momentum. Reduced floor space means increasing demand for storage facilities as an extension of a residence, therefore, storage facilities need to be well located. ABP is increasing scale in this segment.

MM remains bullish Abacus Property (ABP)

Abacus (ABP) Chart

While we don’t hold Goodman Group (GMG), which is now the largest listed property company in Australia, they provided a quarterly update yesterday, reaffirming FY20 operating earnings guidance for 9% growth on last year which was as expected, however this is not the main story. This is an interesting business on a number of fronts but specifically around the rise in online shopping and what it means for property assets around the country.

The shift towards online shopping and the demand for speed of delivery means that warehouse facilities need to be closer to customers. GMG believe that supply chain re-engineering in Australia lags behind the United States by 5 to 7 years, and that reengineering will lead to more opportunity for Goodman over that time period. While GMG itself is not a specific income opportunity given it yields ~2%, it has become such a successful operator by identifying and executing on changing trends, clearly a big trend is online retailing and as a consequence, the logistics network that underpins it.

While we haven’t done specific work on this part of the property sector for yield (we will do), we have been conscious of the impact this has on traditional retail assets since Frank Lowy exited at the top for strip and mall retail.

MM remains neutral GMG here however they have highlighted a trend we should do more work on

Goodman Group (GMG) Chart

Suncorp Hybrid Reinvestment

On Monday, Suncorp launched a reinvestment offer for an existing SUN security, being the SUNPE. The relatively small offer ($250m) is being done on a tight margin, guiding to 3-3.2% over bank bill however it will likely to be done at the 3% handle. The offer is for Capital Notes  which are perpetual, convertible, subordinated, unsecured notes to be issued by Suncorp which will be quoted on ASX, this is the same structure as recent issues.  The Optional Exchange Date is 17 June 2026 and Mandatory Conversion Date is 17 June 2028, meaning that to compare this security against existing, we need to look at that sort of duration.

The chart below compares longer dated issues by a number of banks along with the current SUN hybrids on issue. The most recent comparable is CBA which issued a hybrid with similar duration at a 3% margin CBA is a better exposure on that sort of margin.

MM is lukewarm on the new SUN Hybrid  

Yield to first call & Margin over swap for Suncorp and other similar hybrids

 Investors can access the Prospectus here.

Gryphon Capital Income Trust – (GCI) – Capital Raise

We covered this last week however we’ve had some questions on the entitlement offer since then so worth revisiting. CGI have launched a1 for 3 entitlement offer at $2.01 a share, around about where the trust is currently trading. The trust invests in residential mortgage backed securities (RMBS), which in simple terms is a security that is underpinned by a bunch of housing loans. Gryphon is a specialist in the area, managing over $2b in total in the space for both institutional and retail money. The trust targets an income return of RBA Cash + 3.50% (net of fees), Management cost of 0.96% with no performance and has thus far achieved what it has set out to do since the IPO of the fund in May last year, paying dividends in each month since June 2018.

The deal aims to raise around $100m for the fund, with new shares listing in December they will not be eligible for the November distribution.

What we like:  A good portfolio diversifier generally only available in unlisted managed funds. 

What we don’t:  Exposure to residential mortgages when the bulk of local investors are already very long banks and domestic property

Update: Axsesstoday Simple Bond AXLHA

The MM Income Portfolio has a position in the Axsesstoday Simple Bond which we’ve covered in various income notes over the past 18 months. As means of background, on the 14th September 2018, AXLHA was suspended from trade and subsequent to that administrators were appointed to the company. A sale process is ongoing and it looks likely that early next year, holders will receive $34-$35 per bond held. We estimate that this will have a negative ~3.25% impact on portfolio performance. This security has not traded since September 14th 2018, hence has been unable to be bought or sold since that date.

As a holder of the bond the outcome here is both disappointing and baffling. I find it simply extraordinary the company received approval for a $200m securitization warehouse facility from Macquarie in May 2018, issued under prospectus an ‘upscaled’ $55m simple corporate bond on the ASX in July 2018 and lodged audited financial accounts on the 27th August 2018 stating in the ASX release “Axsesstoday demonstrated continued strong performance in FY18 across all key metrics and is well-positioned to maintain this trend into the next financial year”. In terms of guidance at that time for FY19 they said “the Company continues to experience strong trading conditions and, based on its current financial plan for FY19, expects to see continued strong financial performance”. The company forecast 80% growth in NPAT across FY19 to $12.5-13.0m. Less than 3 weeks later, on September 14 2018, the securities were suspended from trade and did not return.

Administrators were appointed on the 7th April 2019 and a sale process took place. An agreement was struck and under the terms of that sale agreement, simple bond holders are to receive approximately 34-35c per dollar invested in the bond with no accrued interest being paid. In my time in the markets, I have not seen such a swift deterioration in a company following a staged capital raising process and the issuance of audited accounts. A class action seems likely and warranted. If any subscriber would like to discuss this further, please get in touch with me directly on (02) 9238 1561

Conclusion(s)

·         We are thinking more about the long term dynamics in property

-       We are not excited about the SUN hybrid reinvestment

Have a great day!

James & 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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