Income Report / Income Report: Tweaking the portfolio (AWC, PPT, EHE, AXLHA)

By Market Matters 10 April 19

Income Report: Tweaking the portfolio (AWC, PPT, EHE, AXLHA)

Market Matters Income Report 10th April 2019

Local stocks are continuing to chop around the 6220 handle today with some profit taking creeping into the ‘hot’ resource sector. Wynn Resorts has pulled the plug on the proposed Crown deal with CWN trading down 8% at around $12.90, losing about half of yesterday’s gains – however it seems clear the market is still factoring in a potential deal. The fact that confidential talks took place implies that Jamie Packer, Crowns largest shareholder is a seller at the right price – at least for half of his holding . That in itself may entice others to the table and we doubt this is the last we hear of a deal.

ASX 200 Chart

The past week saw the Income Portfolio fall by -0.07%, dragged by NAB falling -3% while no other holdings experienced major moves, and no holdings went ex-dividend. In the current financial year, the portfolio is up +4.16% vs the benchmark (RBA + 4%) which is tracking slightly ahead at +4.25%, while the accumulation index has managed just +4.01% in the period. Since inception (5/7/2017) the portfolio is up +11.1%, outperforming its benchmark (RBA Cash plus 4%) at +9.69%.

Alumina (AWC) – headwinds building

Shares in Alumina have been choppy so far this year, trading in a range of over 16%. The price of the underlying commodity Alumina has been supported in more recent times by an outage at a  processing facility in Brazil, as well as US sanctions on Russia constraining global supply. From recent experience in the Iron Ore market we know how important the supply side of the equation is – in the case of Iron Ore, Vale’s 40mtpa that has come out of the market, plus some shorter term supply issues has seen the price of Iron Ore rally by around 60%. In a total seaborne Iron Ore market of around 1.5btpa, that 40mtpa supply side restraint represents less than 3% of the overall market.  

In terms of Alumina, we’re now seeing the sanctions ease, however at this stage a court injunction on the Alunorte facility in Brazil has held production to 50% of capacity, equal to around 3% of global supply. The operator of Alunorte, Norsk Hydro, have reported that the facility is ready to safely resume production at full capacity however it is still waiting on court approval with the next hearing scheduled for this Friday. A positive outcome and the price should come under pressure.

So if we are to believe Norsk, 3% of global supply is just about to come back on stream which will restore balance in the Alumina market. As the deficit is filled prices will come off, and with it Alumina the stock may start to struggle.

For this reason we are selling AWC for a profit of ~10% today ahead of any decision in Brazil.
Alumina (AWC) Chart

Perpetual (PPT) – Reducing overweight bet

Perpetual has been a volatile beast in the last 12 months trading in a ~40% range. Recent buying from $30 was aggressive, on high volume and without associated news flow. As we suggested in the AM note today, PPT now finds itself in a 50/50 sort of region, it’s not excessively cheap relative to some other fund managers in the sector while it also has some exposure to changes in the wealth management space, although it’s easy to argue that they could be a nett beneficiary from the banks exiting / or reducing exposures to wealth. Given the recent rally from the lows, we are ‘trimming’ PPTs weighting in the Income Portfolio from 6% to 4%.

Perpetual (PPT) Chart

Estia Health (EHE) – building a position

We’ve discussed Estia Health (EHE) a number of times recently as the aged care provider traded around the $2.50 handle, however more recently the stock has received a bid tone pushing it to ~$2.80, we ask is it too late to now buy EHE?

EHE shares rallied last month following an announcement by the Federal Government that they will provide over $650m in additional funding for aged care / seniors – not an unusual move in an election year. The company’s half year results showed an increase of revenue but occupancy was lower than expected - however the stock has shrugged off any negativity within the result and surged higher.

The shares currently trade on an Est. P/E for 2019 of 16x while yielding an appealing 5.7% fully franked. In terms of valuations, it’s traded between a peak of 21x when optimism was high about our aging demographic, and a low of 11.8x when the Royal Commission was announced with an average P/E of 16.9x, making it mid-range today.  

While we like EHE  for income, we expect to built to build a position starting with a 3% weighting in the Income Portfolio around current levels

Estia Health (EHE) Chart

Axsesstoday - Enters Voluntary Administration

On Monday, Axcesstoday advised the market that it had appointed a voluntary administrator (Deloitte) and that the company will continue to operate as usual whilst under voluntary administration. This move follows a decision by their senior lenders (Commonwealth Bank & Macquarie) not to extend a series of waivers against banking covenants. The MM Income Portfolio has a position in the Axsesstoday Simple Bond.

Firstly, while the appointment of administrators is rarely a positive, confirmation from the company that they will continue to operate under voluntary administration on a business as usual basis implies that the underlying operation is still performing adequately. The administrator from Deloitte, Vaughan Strawbridge has said “It is business as usual and we expect there will be strong interest from onshore and offshore investors. We will achieve a recapitalisation or sale and will work with the Group’s financial advisors, Moelis Australia to ensure a positive outcome."

Axsesstoday has been suspended from the ASX since September 2018 after breaching a number of loan covenants following a change in accounting standards applied by the company. The initial breaches seemed to be technical in nature, however as time elapsed, the breaches became more widespread and have ultimately lead to the withdrawal of support from their senior lenders. Since being suspended from trade, Axsesstoday had been running a strategic review with a focus on either selling the business  or undertaking a recapitalisation. The administrators have confirmed that this is still on the table,  however clearly negotiating a sale from a position of voluntary administration is less than ideal.

In terms of the capital structure that was disclosed at the time of listing the simple bond, the senior lenders (CBA & MQG) rank highest, followed by a layer of subordinated secured debt and then the senior unsecured debt which are the simple corporate bonds listed under code AXLHA - equity holders then follow. When a company enters administration, the administrator themselves sits at the top of the pile. There is also a securitized warehouse facility which was only settled in 2H18 , however this is secured against the receivables within that facility and has no recourse back to Axsesstoday.

Originally, Axsesstoday was financing its lending activities mainly through senior debt which was provided by CBA and MQG, alongside some secured subordinated notes then equity capital. In May 2018, Macquarie provided a $200m securitized warehouse facility after Axsesstoday raised an additional $20m of equity in the market. In July of 2018 they launched a prospectus to raise $50m via an ASX listed bond and given strong demand they up scaled this to $55m. The bond had a positive rating from a number of external research houses.   

While the stock and bonds have been suspended from the ASX, bond holders have still received interest payments, however post the appointment of administrators interest on the bonds will accrue but will not be paid to holders.

In terms of the administration process, there is a first creditors meeting on Wednesday, 17 April 2019 which runs through the basics like setting out processes and ratifying the administrators if they are deemed appropriate. The next meeting (which is generally within 30 business days after the first) will look at what happens from there. Creditors can vote to return the company back to the Directors, progress through a sale or recapitalization if that can be achieved or put the company into liquidation.  

The first scenario is unlikely, the second scenario depending on price could be positive for bond holders while the third option of liquidation would generally mean that the loan book is put into run off and this may result in a haircut for holders of the bonds. As at the last company announcement it seems (although we are unable to confirm) that the company has approximately $50m in tangible net equity which would act as a buffer before simple bond holders would be impaired – or in other words, lose capital.   

Ultimately, it’s too early to speculate as to the outcome of the process however more information will come to light in the coming weeks and we’ll keep updating when that is available.

Conclusion (s)

We are selling Alumina (AWC) for a profit
We are trimming Perpetual (PPT) from 6% to 4%
We are adding 3% into Estia Health (EHE)  around current levels, and will likely add to the position further if it pulls back

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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