21 May 2024
Matthew Macreadie
On a relative value basis, we view the investment-grade notes (2080 and 2081 and 2082s) as offering very good value against other BBB issuers, especially as they have such a short time to being called (2, 3, and 4 years to call respectively). These bonds are a great place to park your cash, especially for investors who believe that sticky inflation will continue to cause a rise in bond yields going forward – given floating rate securities.
Supply is limited in the 2080 and 2081 notes, so worth investors getting exposure to the issuer when it comes up opportunistically.
Why We Like Ampol
- We have strong conviction in the credit profile of Ampol having produced strong recent FY23 results. Although earnings have come off the highs in the FY22 result due to the correlation with Brent crude oil prices, Ampol’s slimmer structure and strategic successes are a positive foundation for future earnings. Additionally, the continued recovery in retail and international sales should help the business. Jet fuel volumes are recuperating from COVID-19 lows while Australian and New Zealand retail petrol demand is also below the 2019 baseline. Higher mobility flow would flow directly to Ampol’s top line.
- Cashflow generation remains strong, and the balance sheet is well positioned pre the Gull divestment. While there have not been any issues with the Z Energy acquisition it is still in early-stage integration. We consider the earnings-related leverage metrics as sound but do expect balance sheet gearing to be gradually reduced over time.
- Ampol launched AMPCharge in April 2022 and commenced the rollout of its electric vehicle charging network with the first sites operational in July. We view the market leadership here as a positive given the transition to EV has been gaining traction for some time now yet charging stations are almost exclusively at home for users. Furthering this value proposition, the group have received energy retailer authorisation during the half and is piloting a retail electricity offer (at-home charging) with a small group of employees in 2H22.
Relative Value
- On a relative value basis, we view the investment-grade notes (2080 and 2081 and 2082s) as offering very good value against other BBB issuers, especially as they have such a short time to being called (2, 3, and 4 years to call respectively). These bonds are a great place to park your cash, especially for investors who believe that sticky inflation will continue to cause a rise in bond yields going forward – given floating rate securities. Interest rate futures now suggest the first RBA interest rate cut will not be until 2025 now and these floating-rate investments are a good hedge / paying appropriate income.
- We note there is a discount for the notes because of the inherent subordination and ESG issues. Being the front-runner in the electric vehicle (EV) rollout is a competitive advantage especially if the group keeps spending its capex on its EV charging offering. That said, we note the 2082 notes are sustainability-linked and are trading significantly tighter given their “green” premium. Thus, we don’t think the 2082s are as attractive.
- In our view, the 2080 and 2081 notes have at least 50bps margin contraction given where the BBB universe is trading and are an “outperform”.
Currently, the trading margin on the subordinated 2080s, 2081s, and 2082s still look very attractive versus the BBB equivalent corporate curve when viewed on a spread to call basis.
There’s rarely stock available, so it’s worth getting this out to your clients quickly to see if they want to gobble it up.
