Zenith Practical Completion
On 21 February 2019, Zenith Energy reported that it had achieved practical completion of its 62MW power station at Newmont’s Tanami Gold Mine. The Power Purchase Agreement (PPA) was originally signed on 14 February 2018, Zenith Energy contracted with Newmont to build, own and operate (BOO) a 62MW power station comprising of 52MW gas-fired and 10MW of diesel back-up power generation under an initial 10 year term (and an optional 10 year extension). This contract marks the company’s largest PPA to date.
Zenith has successfully achieved completion on the diesel portion of the power station with the gas supply to follow. The supply of diesel-fuelled electricity has commenced, on time and on budget and consistent with the previously announced 1Q19 deadline.
Avon Products
4Q18 revenue was down 11% YoY to USD1.3bn, driven primarily by FX movements. On a like-for-like basis revenue declined 1.4% YoY. This was primarily due to weakness in Brazil and the UK. EBITDA fell 41.8% to USD107m YoY on a margin of 8.1% (4Q17: 12.0%). Margins were impacted by higher material and logistics costs, as well as increased investment in representatives and advertising. As a result, leverage increased to 2.9x net debt/EBITDA (4Q17: 2.0x).
Avon’s strategic plan is to stabilise its business in 2019, and for low growth over 2020-2021. Under this plan, it is targeting USD400m of savings. As part of this, the Company recently announced a 10% reduction in staff and a 25% reduction in stock keeping unit (SKUs). Avon sees the potential to free up USD120m in working capital, however also targets around USD230m of additional capex through to 2021, the exact timing of which is unclear. Future free cash flow and debt levels are therefore difficult to assess.
CreditSights maintains an Outperform recommendation on Avon’s 2022 7.875% secured notes.
Eric Insurance Ltd.
Eric Insurance (Eric) reported a YTD 1H19 (31 December 2018) unaudited net profit after tax (NPAT) of AUD1.09m, up from a net loss of AUD0.90m in the prior corresponding period (pcp). The NPAT for 1H19 also compares with a net loss of AUD1.6m in FY18. Gross written premiums (GWP) were down 18% on the pcp at AUD56m in 1H19. Policy count growth remains unfavourably impacted by a shift to lower commissions, as well as a general tightening bias in financing conditions in the motor vehicle sector. In light of ongoing regulatory uncertainty, growth in new policies is likely to remain subdued in the near term.
Despite the slowdown in policy count growth, insurance profit (a measure of underlying insurance earnings) strengthened to AUD2.96m as both acquisition costs and net claims fell. This is despite an increase in claims from the Sydney hail event in December 2018. Acquisition costs were lower as a result of increased business written through Eric’s direct channel and lower commissions. Eric’s combined ratio (which measures incurred losses and expenses in relation to the total collected premiums) also improved to 98.2% in 1H19 (a ratio below 100% indicates profitable underwriting results).
Eric’s Tier 1 strengthened to 113%, from 91% in June 2018, and above a required level of 80%. We believe the risk of Eric breaching its regulatory capital requirements is presently low.
Although we believe the underlying credit quality of Eric is improving, the company (and the general insurance industry) remains heavily exposed to regulatory uncertainty.
CML Group Ltd.
CML Group Ltd (CML) reported a strong increase in earnings, reporting a YTD 1H19 (31 December 2018) unaudited net profit after tax (NPAT) of AUD4.37m, up 161% in the prior corresponding period (pcp). EBITDA was also higher, up 30% to AUD10.1m. Invoices financed (a measure of demand for CML’s primary business) were up 44% to AUD838m. NPAT also benefited from a 16% reduction in funding costs following a shift in its funding mix toward a higher proportion of bank funding. CML currently has funding headroom to increase invoice volumes by 30%.
CML’s gross margins on its invoice finance business--which contributes close to 80% of CML’s operating revenues) were down again to 2.3% (from 2.7% in the pcp), although we believe the trend over the last few years has been influenced by a number of acquisitions, most notably the more recent acquisition. We believe margins will improve in the longer run as acquired invoices (at a lower margin) roll-off and are replaced by organically originated invoices at higher margins.
CML did not provide an update on arrears, consistent with prior half-year results.
CML also reaffirmed FY19 guidance of EBITDA of AUD21m+ and NPAT of AUD9m+
IAMGOLD 4Q18 and Full Year Results
On 20 February 2019, IAMGOLD released its 4Q18 and full year results with revenues of USD274.3m and USD1.11bn, respectively. Full year revenues were up USD16.1m year on year however fourth quarter results were down 6% on the prior corresponding period, primarily due to an increase in the AISC (all-in sustaining costs) and lower sales volumes. For FY18, IAMGOLD’s AISC was of USD1,057/oz sold, while this was within company guidance, it was up 5% from FY17, primarily due to higher sustaining capital expenditures. Attributable gold production of 882,000oz was equivalent to FY17.
IAMGOLD finished the quarter with total liquidity of USD1.23bn consisting of USD615m of cash, USD119m in short term investments and USD500m available under its recently upsized and extended credit facility. This continues the Company’s trend of maintaining a strong balance sheet and solid liquidity profile, factors that lead to an upgrade in credit rating by Moody’s during the year.
As at 31 December 2018, IAMGOLD’s attributable proven and probable gold reserves were 17.9 million ounces; up 23% from the end of 2017 (14.5 million ounces).
Zip Co Limited
ZIP Co Limited (ZIP) reported an unaudited net loss after tax of AUD6.8m for the first half ended 31 December 2018 (1H19), an improvement from a net loss after tax of AUD14.6m in the prior corresponding period. 1H19 operating cash flow was stronger at AUD7.1m. Revenue for the half was up 114% to AUD34.2m. Underpinning the increase in revenue was a significant increase in both transaction volumes (495m, up 110% on pcp) and unique customer numbers (1.0m, up 100% on pcp). Retail partners were also up strongly to 12.6k (up 62% on pcp). We expect momentum in the forementioned metrics to carry through FY19.
We note that the results for ZIP reflect the listed company and do not necessarily reflect the performance of the assets supporting the zipMoney Trust 2017-1 Class B 1mBBSW+6.00% notes due May 2019 (Notes). The underlying pool of assets supporting the Notes continues to perform well and in line with the required parameters. Arrears (60 days past due) were 1.4%. The loss ratio within the Warehouse is very low at around 0.20% at December 2018.
ZIP also noted they are well-advanced to replace the 2017-1 Trust. We expect the Notes to be called in May 2019.
IMF Bentham Ltd
IMF Bentham Ltd (IMF) reported an unaudited net loss after tax of AUD10.4m for the first half ended 31 December 2018 (1H19). IMF opted not to declare a dividend for this half. IMF attributed the loss to a smaller number of completions in the period, an increase in employee expenses and increased costs associated with a capital raise and debt restructuring exercise in late-2018. Gross proceeds from litigation cases were 69% lower at AUD15.3m. IMF also noted a possible net-gain of AUD3m-4m expected on cases settled during the period but not able to be recognised by 31 December.
IMF’s aggregate investment portfolio, including both on-balance sheet and off-balance sheet investments, increased to 80 cases funded, with a further 11 cases conditionally funded. The estimated portfolio value (EPV) of these cases increased to AUD6.4bn (or AUD7.5bn inclusive of conditionally-funded cases), from AUD5.6bn at the beginning of this financial year.
The earnings profile remains lumpy and difficult to predict, reflecting the uncertainty and timing of case completions. For example, at the beginning of this financial year, IMF estimated around AUD2.4bn of EPV would be completed in FY19; this has since been revised to AUD1.1bn, with the residual delayed into FY20 and FY21+. Historically, IMF has generated an average gross revenue of approximately 15% of the EPV of the investment at the time it is completed. Gross revenue is therefore likely to fall by more than 50% from prior forecasts for FY19.
IMF’s credit profile however remains very sound. Consolidated capital increased to AUD460m, from AUD368m at the beginning of the year, while it also increased and extended the maturity profile of one of its bonds.