Income Report / Income Report; Two new income opportunities – Axsesstoday (AXL) listed Bond paying ~7% & the Viva Energy IPO

By Market Matters 27 June 18

Income Report; Two new income opportunities – Axsesstoday (AXL) listed Bond paying ~7% & the Viva Energy IPO

Market Matters Income Report 27th June 2018

As discussed this morning, US stocks are starting to show signs of ‘losing steam’ and we have taken a more defensive stance in the Market Matters Platinum Portfolio. In terms of the Market Matters Income Portfolio, the current weightings towards listed income securities such as Hybrids provide some sort of cushion for likely market volatility so we’re comfortable with our stance at this stage but our fingers are firmly on the pulse.  

In today’s report we’ll cover two new listings, one new listed bond and one new equity IPO – both look interesting although are very different opportunities in their own right.

In terms of the MM Income Portfolio, it was up 0.40% over the past week while the ASX200 added 1.56%. Since inception (5/7/17), the portfolio is tracking above its benchmark, up 6.03% versus benchmark (RBA + 4%) of 5.36%. Cash currently sits at 3.5%.

Axcesstoday ASX listed Bond  – expected to pay ~7% floating

Axcesstoday  (AXL) is an ASX listed equipment finance business that offers financing for hospitality, catering, material handling, transport and logistics leasing – they have a market capitalisation of around $146m on forecast revenue in FY18 of $51m with the expectation of doing $86m in FY19. They’re likely to make a net profit after tax in FY18 of $7.3m jumping to $12.4m in FY19 and $23m in FY20 according to the Shaw Analysts Jono Higgins (I’m doing a video with Jono next week I hope). Yesterday they launched a bond offer that will be listed on the ASX under code AXLHA and will pay a floating rate of between 7.02% and 7.32% based on the 90 day bank bill rate of 2.12% - or in other words, they’ll pay  a margin of between 4.90% and 5.20% over the 90 day bank bill rate depending on demand for the issue. It’s only early days however demand has been strong to date and we’d expect the lower end of the range.

Some key points

Given the size of this company this is a higher risk bond, however being listed on the ASX means disclosure and transparency is high. They’re expecting to raise a minimum of $50m however we’d expect them to print slightly more if demand is there – somewhere around the $70m would be our expectation. We like the simplicity of this instrument and believe the yield compensates for the risks involved.

The bond is unsubordinated and unsecured meaning that it sits below secured debt in the capital structure as shown below. One of the risks is that if this issue is a successful one they may do more in the future to support growth, and more debt theoretically makes this current issue more risky. To offset that risk the company must maintain a debt to receivables ratio of no greater than 85% and a cover ratio not less than 2.0x so those will work to ensure that there is not a huge uptick in future debt of the company, unless they have the financial metrics to back it up.  

Capital structure

The other aspect that is appealing is the spread of customers (or borrowers). They have over 10,000 equipment finance customers which spreads the default risk and that is shown through a very low 1.6% portfolio credit loss figure in 1H18.

More than 50% of the loan book is initiated with balances less than 50k

When lending money, which is essentially what bond holders do, we want diversification in customers in terms of  number, but also geography. For instance, if we were providing finance to one area the risk that some economic factor could impact that region is high. In this case, they are skewed to NSW (37% of book) which is performing well, however they do have diversification across the country.   

We also want enough ‘fat’ in the operation so that if things turn sour, the equipment being financed plus the equity in the business is enough to cover the lenders, both secured and unsecured (bond holders). This is always a moving thought however at this stage, we believe that’s the case.

Details

Duration; 5 years maturing 20th July 2023

Listed; under code AXLHA

Margin; Floating interest rate with the margin to be determined in the bookbuild, interest payable quarterly in arrears 

Face Value; $100 per bond

More information; Review the presentation by clicking here

To bid

Via James Gerrish & his team at Shaw and Partners – an account will need to be established to settle the transaction. [email protected] or 02 9238 1561. Alternatively, the bond can be purchased through any broker after listing, would be held on a HIN as per a normal share with the usual settlement terms.

Please note; Shaw and Partners, a shareholder in Market Matters has been appointed Joint Lead Manager to the offer along with Evans Dixon.

Market Matters will be adding AXLHA to the Market Matters Income Portfolio with a 5% weighting. With 3.5% currently in cash, the portfolio will look to liquidate an existing holding to make room

Viva Energy (VEA) IPO

The Dutch owed company that has more than 900 Shell branded service stations plus a refinery in Geelong (one of only four refineries in Australia) is set to test the markets appetite for ‘old school’ stocks as the company looks  set to become the biggest float  since Medibank Private in 2014. With an expected market capitalisation of $4-$5bn on forecasted FY19 EBITDA of $649 million, the float looks interesting + there is a good comparable in Caltex (CTX) already on the boards.

To give some background,  Viva currently owns 1165 petrol stations across Australia, including around 1000 under the Shell brand. Of these, 713 are operated as Coles Express while it also operates Liberty Oil petrol stations – with 50% equity in that business.  They supply about a quarter of Australia’s total fuel consumption which is big – about 14 billion litres annually.  Key metrics of the offer include;

 

Looking at the above metrics relative to current numbers of Caltex shows some clear similarity. Viva (VEA) expects to list on around 13.5x at the midpoint of the range based on FY19 figures, with Caltex currently trading on 13.7 FY19 numbers, however Viva looks more attractive from an income perspective with a forecast yield in the mid 4’s. relative to the mid 3’s expected from Caltex.

Net debt is the big difference with Caltex running about $900m while Viva is running around $80m however that number is a bit misleading. A lot of the Viva debt sits in the Viva REIT (VVR) which VEA owns a large chunk of (38%) so debt exposure is higher.  .

In terms of Caltex, a cloud over its head in the last 2 years was the proposed sale of Woolworths petrol business (which CTX supplies) to BP. That sale would have resulted in the loss of Caltex’s whole-sale supply contract to WOW, approximating 3.6 Billion litres of petrol & diesel p.a. and around A$150m of EBIT. That is no longer going ahead, and the stock has bounced. Caltex is a more fully-integrated retailer and its refinery in Brisbane requires less capital expenditure however Viva has a better retail business which should generate higher returns off a lower capital base +  its refinery is better positioned.  

Both CTX and VEA look cheap even at the top of the guided range, the only real negative we can see in the nearer term is some escrowed shares coming out after 12 months while longer term bears on petrol consumption will sight the growth in electric vehicles, however, in terms of VEO Petrol is only 25% of sales – the remaining 75% is diesel sold for heavy vehicles, into the marine sector, and aviation fuel. Also worth noting that a typical service station these days generates about 65% of sales from fuel with 35% of sales generated in the convenience store, with the profitability split evenly.

All up – VEA looks a well priced income opportunity with some growth potential, although stock may be difficult to secure in the IPO. Merrill Lynch, Deutsche Bank and UBS are on the ticket for this one  

Conclusion (s)

Both investment opportunities look reasonable on their own merits

We are adding the Axcesstoday ASX listed Bond to the MM Income Portfolio with a 5% weighting

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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