Eureka Correspondence

Eureka Report members ask about bonds, hybrids and Ausenco.

Where to for bonds?

Bond yields seem to be going up, even though Australian cash rates are not rising and there is debate as to whether the RBA will lower again soon. What do you think the outlook is for bonds?

Name withheld

Editor’s response: Thanks for your letter. There has been much discussion on the outlook for bonds of late and Eureka Report has published some very timely articles on the topic. John Abernethy has just written about bonds versus equity in his article, A warning for yield investors, while I think you would also find Chris Black’s article, A turning point in the market, of use.

Finally, Elizabeth Moran’s article, Taking the plunge on bonds, looks at current opportunities in bonds.

Hybrid opportunities

I would like to know more about hybrid investments being issued by the banks such as ANZ and Westpac?

Name withheld

Editor’s response: Thanks for your letter. Philip Bayley has just written about both ANZ and Westpac’s hybrid issues in his article, Noting the fine print.

Ausenco

I would be interested in seeing some analysis on Ausenco (AAX). It looks like it would return a great dividend at the current price, but the share price is still falling heavily. I can’t understand why. Is this a result of emotional decisions to sell or is there a valid reason for why the market has been selling these shares?

ND

Brendon’s response: Thanks for your letter. The whole sector is being punished because of the lack of earnings transparency. The fear is falling commodity prices will force miners to keep cutting back on new projects and mine expansions.

There is a double whammy. With less work around, these contractors will be scrambling over one another to bid for work, which means lower margins at a time when revenue is declining.

With commodity prices so volatile, it is hard to say when the dust will settle, but I believe the downturn is more cyclical than structural in nature. If you share the same view and are a long-term investor, it would make sense to buy the best quality mining contractors, given that they all have been sold down aggressively.

Obviously, you will want to look at the strength of the balance sheet, track record in generating returns during up and down cycles, and target those that are more exposed to mineral production/maintenance work instead of new project development/exploration.

As a general statement, the contractors I like are Forge Group (FGE) and NRW Holdings (NWH). However, you should speak to your financial planner to see which stocks are better suited for your portfolio.

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