The value in AUD Corporate Hybrids

Last month we highlighted the value in the Ausnet BBSW + 3.10% October-25 investment grade corporate hybrid. In our view, the issue stood out on a relative value basis and the cause of the depreciation in value was a technical market thematic rather than an underlying issue with the credit or the likelihood of the issue being repaid in 2025. At the time, the issue was trading at a trading margin of 3.57%, a forecast yield of greater than 7.00% (to call) and a capital price of $98.627. Over the last month the issue has re-traced its depreciation and is now trading back closer to par value.

For investors that entered the trade in July-2022 the trade has achieved an annualised return of 18.6% or a cash return of $9,580.00 (P&I) for a $500,000 investment. We believe the issue still represents value at todays market pricing, especially given the increased quarterly income holders will generate as future coupons are re-set off an increasing reference rate (BBSW).

Our other top pick in the AUD corporate hybrid sector is the Ampol BBSW +3.40% March-27 (call). Ampol recently released their 1H22 results which were very pleasing and have contributed to a 55.54% (annualised) increase in the share price from lows in March-2022.

Ampol supplies fuel to cars, trucks, and planes through almost 2,000 sites across Australian and offers a fuel refinery in QLD. It also earns a third of its revenue by selling items from convenience stores attached to its sites.

Key things for investors to consider:

1. Australian vehicles overwhelming run-on fuel and any transition to EVs will be gradual
2. Profit margin is all about scale and brand when selling a commodity product and Ampol is the largest fuel distributor in Australia
3. Partnering with Woolworths is a great match that adds fresh food and extra brand recognition to Ampol’s network of metro locations
4. Government policy to provide top-up payments to Ampol’s refinery when times are tough will help the company’s earnings stability
5. EVs pose a risk but are outside the scope of the bond term and will take decades to play out

We view the Ampol BBSW +3.40% March-27 (call) as another opportunity to add a higher yielding floating rate note to portfolios with an investment grade rated credit profile, forecasted growth in quarterly income and whilst it is trading near recent lows.