CONSUMER CYCLICALS
- Looks like PostNL will get the IDS (NR/BBB Neg) treatment here; IDS28s priced a 5Y last year at MS+210 (mere 10bps in from IPT!) with 2x cover. The £250m 7Y came alongside it, pricing flat to IPT at UKT+290.
- The question for us is will we see a repeat of the IDSLN28s in secondary; it came in 70bps over 6months to pre. acquisition news levels. For investors that left a 385bp spread & 550bp yield return.
- IDSLN28s is a cheap view for us right now but we are struggling to be motivated to extend duration into PNL even at revised FV of +170. 7Y CDS mids are around +150, roll down into more liquid 5Y is 30bps. If basis comes lower than -50bps (i.e. +200) we think investors can eye this for value implied by basis & CDS roll-down.
- Roll & neg. basis is similar reasoning we had for a cheap view on new Elo 4Y earlier this year; its 14bps in (was -20 in last week).
Is IPT coming this wide justified?
- The treatment both curves are getting is harsh with little regard for any e-commerce driven parcel growth for PostNL (it is already majority of the revenue). It is the latter that is supporting ratings in IG as well.
- Reminder; BS is levered substantially on current FCF (though in target on net/EBITDA), high operating leverage means earnings vol for EBIT (which moves leverage) & dividend pay-outs are hefty - all credit negatives we've mentioned in FV.
- Still IPT is pointing to it coming wide of 'in structural decline' BBB & combustibles heavy tobacco names Imperial & Altria. They run much higher margins/FCF conversion though, much larger scale (global) and are lower levered.
- FV of +170 will now give 15bps over tobacco while shorter duration IDSLN28s gives +35 despite the larger scale.
Background on PostNL & Initial FV linked.
406 words