Later today Market Matters will launch a new weekly income report with an associated income portfolio. Today I want to take you through three income opportunities that we’ve identified in today’s market. I provide a summary on each opportunity and an overview of the valuation.

AP Eagers

Price $8.20;  FY17 P/E 15.7x;  Yield of 4.7% (fully franked)  

A rough 12 months for the Nick Politis backed national car dealer which has traded from a 12 month high of $12.50 to a low of $7.25 before closing yesterday at $8.20. APE own the 12 top selling car brands in Australia with a huge dealer network that it predominately on the East Coast. One of the interesting aspects of APE is their property ownership. They own around 65% of the land the dealers sit on making them not only a ‘car’ play but one that’s backed by real assets.  In May they provided earnings guidance which was below market expectations and the stock was sold off. Market conditions remain challenging, which is clearly the case across most retailers in Australia however they’ve been through this before, have a very experienced management team with a lot of skin in the game. The dividend is likely to stay around 35cps for the next few years putting it on a yield of 4.7% fully franked, while importantly, this represents a 70% payout of earnings – so not stretched.  

We are keen on APE around $8.00 as an income play.

Centuria Capital

Price $1.20;  FY17 P/E 10.1x (underlying);  Yield of 6.6% (40 % franked)   

CNI is a listed funds manager that does a variety of different things such as property funds management, insurance, investment bonds, reverse mortgages and the like. For those that attended Market Matters Live in Sydney we had the Executive Director Jason Huljich present on the night. The funds management business is growing and they now have around $3.6bn under management with the bulk of this (around $3bn) in property. A large proportion of their revenue is now re-occurring (around 77%) and they have increased their scale following a large acquisition earlier in the year. They have a strong balance sheet, low gearing, on a reasonable multiple with a good yield that represents a payout of around 75% of earnings. A lack of meaningful liquidity is a negative however we think this is in the price.

We are keen on CNI around $1.20 as an income play.

Hybrids – some interesting themes

Hybrids are a listed security that combine some elements of debt and some of equity. If managed properly, Hybrids within a portfolio can increase yield and also increase capital stability (or reduce overall portfolio volatility). A lot pay quarterly dividends (of distributions for some) and they are generally lower risk than equities. That said, they’re not a replacement for cash and are higher risk than a Bond or Subordinated Note. Hybrids will feature within the new Market Matters Income Portfolio and we will write about them weekly, giving investors a better understanding of the vagaries of the instrument and the opportunities in the market, in terms of existing listed securities and any new offers that come up.

On the ASX, there are around 36 Bank Tier 1 Hybrids, which make up the bulk of the Hybrid market,  around 7 Bank Tier 2 securities which are Subordinated Notes or Bonds and around 15 Corporate Issues of various structures , from companies like Crown, Ramsay Healthcare and the like. It’s a reasonably small market however with some active management, Hybrids can be a worthwhile proposition.

At this juncture, most relative value is obvious in the Tier 1 Bank Hybrids over and above the corporates, and over and above Tier 2 notes. Most Hybrids have rallied in price recently making them less compelling however there are still some opportunities about.

CBA Capital notes

The CBAPF is a Tier 1 Hybrid with 4.7 years to first call date. Based on a trading price of $101.70, this has a yield to call of 6.10% pa, which for its duration and credit quality of the underlying issuer, look reasonable value.

James Gerrish is an advisor at Shaw & Partners and a key contributor to Market Matters. These income ideas will be included as part of the new Market Matters Income Portfolio.