New ASX Listed Issue: Australian Unity (ASX Code: AYUPA) Mutual Capital Instrument (MCI)
IAM Capital Markets View
Australian Unity (AU) is a financial services provider that fits into the ageing demographic story by offering a whole of range ‘Wellness’ approach for its members. Traced back to the 1840s, it has a platform of three businesses, which, whilst thematically linked, also offer a nice level of diversification and hedging benefits.
Profitability has been consistently good throughout several economic cycles. The five-year average NPAT is around AUD45m. In terms of the balance sheet (pro forma for acquisitions after FY21), there is around AUD500m in retained earnings and reserves, which has organically been reinvested into the business.
This constitutes around 2x the amount of mutual capital instrument (MCI) outstanding (on a pro forma basis). Members balances sit around AUD250m, which ranks ahead of the AYUPA MCIs. The new MCI transaction (AUD160m in total) will be used for pursing other acquisition opportunities across AU as well as to repay debt facilities that were utilised across several social infrastructure transactions.
Thus, in aggregate, there will be around AUD280m in MCI outstanding. AU has both APRA-regulated and non-regulated entities, which are wholly owned by a Non-Operating Holding Company (NOHC) — the issuer of the MCIs. Any surplus capital at the APRA-regulated entities is up-streamed back to the NOHC. However, profit is only up-streamed after each entity has been appropriately provisioned under APRA guidelines.
We believe the AYUPA MCIs offer good relative value and sit well wide of both listed and unlisted comparable issues. While the perpetual shares are unrated, a Yield to Call (%) of 4.75% (low end of the range) looks very good against BBB- rated AUD ASX Listed Hybrids. For those investors comfortable with high-yield financial risk outside the regional banks, the AYUPA MCI is also worth considering.
Australian Unity (AU) is a mutual with over 180 years of history that can be traced back to 1840. Through strategic mergers and diversifications into new activities, AU has grown to an organisation of approximately 7,000 employees across Australia, serving over 400,000 members. Since its origins, AU has remained committed to its core purpose of providing health, wealth, and care products and services that deliver community and social value.
AU is split across three platforms, which, whilst thematically linked, also offer a nice level of diversification and hedging benefits:
- Independent and Assisted Living (40% of EBITDA in FY21): Residential communities (including aged care), Home care services, Disability services, Indigenous services, and Health services
- Retail (45% of EBITDA in FY21): Health insurance and Banking
- Wealth and Capital Markets (15% of EBITDA in FY21): Advice, Investments, Property (including social infrastructure), Life and Super, and Trustee services
Australia’s population is expected to both grow and age over the next twenty years. AU’s strategic agenda is to meet Australia’s future wellbeing needs for members across valued health, wealth, and care products.
Chart 1. Australia’s Growing and Ageing Population
Source: ABS 2020
FY21 results were somewhat impacted by COVID-19. In FY21, NPAT was around AUD33m (up from AUD9m in FY20). This compares to a five-year average NPAT of around AUD45m. FY21 results included an extra AUD17m after tax deferred liability charges. Consistent across all health insurers, this charge related to elective claims surgery, which increased total provisions from AUD38m to AUD55m.
Positively, the banking division of AU was actually better off, with provisions falling following the reduction in expected credit losses (ECLs). This was largely due to Australian Government measures to protect households (including JobKeeper/JobSeeker), as well as house prices remaining firm. AU was thus able to pay a dividend of AUD14m (or around 41% of FY21 NPAT).
In terms of the balance sheet (pro forma for acquisitions after FY21), there is around AUD500m in retained earnings and reserves, which has organically been reinvested into the business. This constitutes around 2x the amount of MCI outstanding (on a pro forma basis). Members balances sit at around AUD250m, which ranks ahead of the AYUPA MCIs.
Chart 2. Financial Snapshot Across Three Business Platforms (of EBITDA in FY20)
|Independent & Assisted Living||Retail||Wealth & Capital Markets||Corporate Functions||Australian Unity Group|
|Contribution to Adjusted EBITDA of operating business||41%||38%||21%||–||–|
Source: AU Investor Presentation
The AYUPA MCI relative value can be assessed against several AUD ASX Listed Hybrids and OTC Capital Notes issued from domestic major and regional banks. The AYUPA MCIs sit well wide of both listed and unlisted comparable issues.
While the perpetual shares are unrated, a Yield to Call (%) of 4.75% (low end of the range) looks very good against BBB- rated AUD ASX Listed Hybrids. For those investors comfortable with high-yield financial risk outside the regional banks, the AYUPA MCI is also worth considering.
Features of the AYUPA MCI
- Perpetual shares with no rights for holders to require repurchase or redemption by AU
- AU has call rights only in relation to a Tax Event, Regulatory Event, or Demutualisation Event
- Rank for repayment ahead of Non-Shareholder Members (i.e., preferred equity) but behind all creditors
- Scheduled to pay fixed-rate dividends semi-annually in arrears
- Dividend rate of 5% per annum
- AYUPA MCIs to be issued at higher price than AUD100, so running yield at Issue Price of AUD103-105 will be 4.75-4.85% per annum
- Dividends are discretionary and non-cumulative
- Franking applicable, subject to the ability of franking credits
- Dividend stopper to protect investors
- Will be ex dividend-date on Issue
- Conversion to equity, no write-off
- The perpetual shares will be unrated
Chart 3. Assumed a Yield to Call (%) of 4.75% and Time to Call (Years) of 5
Source: BondAdviser as at 8/10/2021