United Rentals: May 05

…The industry operating environment hasn’t changed since URI’s fourth quarter conference call, but strong first quarter results and increased visibility enabled the company to raise its 2022 guidance. The outlook for total revenue was increased by $450 million to $11.1-11.5 billion on the improving visibility into the balance of this year. This will flow through to adjusted EBITDA which was raised by $250 million to $5.2-5.4 billion. The midpoint of this guidance implies a 150 basis points increase in the adjusted EBITDA margin on better fleet productivity and a continued focus on managing costs. Net rental capital expenditures were unchanged at $1.85-2.05 billion as the strength in used equipment prices offsets revised expectations of selling less fleet to support demand. Free cash flow expectations were increased by $200 million to $1.7-1.9 billion. This 2022 free cash flow is expected to be used to complete $1.0 billion of share repurchases this year and/or to fund the company’s robust acquisition pipeline ($77 million of deals were completed in the first quarter) with a focus on Specialty businesses that can add new product lines to URI’s existing network. Our updated projections look for 2022 leverage to decline to 1.8x, at the lower end of URI’s target range of 2.0-3.0x over the cycle. Next year could benefit from infrastructure legislation as federal projects for road and bridge work, water control, harbors and ports, and the power grid kick off in 2023. We remain constructive on URI’s longer-term credit prospects. The 3.875% senior notes due 2031 yield 5.5%. Maintain outperform with limited upside. URI Bonds: Sr Nts 5.5% 500mn 5/15/27; Sr Nts 3.875% 750mn 11/15/27; Sr Nts 4.875% 1.7bn 1/15/28; Sr Nts 5.25% 750mn 1/15/30; Sr Nts 4.0% 750mn 7/15/30; Sr Nts 3.875% 1.1bn 2/15/31; Sr Nts 3.75% 750mn 1/15/32.

AbbVie: May 05

…This sales mix and Allergan acquisition synergies were beneficial to margins. Adjusted gross margin rose 50 basis points, and the R&D expense ratio fell by a similar amount. In total the adjusted operating margin (now including IPR&D and milestone expense) expanded by 150 basis points to a robust 51.4%. Adjusted earnings increased by 9% aided by lower interest expense reflecting last year’s $9 billion in debt reduction. Although we don’t have any first quarter balance sheet or cash flow information, we can infer that debt was reduced even further in the quarter, using free cash flow, judging from the sequential decline in interest expense. Management has consistently vowed to reduce acquisition debt, and made impressive progress in 2021, thanks to free cash flow of nearly $13 billion, most of which was used to pay down debt. AbbVie ended the year with $12 billion in short-term debt, all of which we expect to be paid off this year. This should bring debt/EBITDA down from 2.6x to 2.1x. However, this will be the last year of EBITDA growth for a while, given the Humira sales decline next year. Acquisitions could be next. Therefore, we don’t expect debt protection measures to improve materially from here over the near term. We are reiterating our “underperform” (2029 notes at T10+144).

Turk Telekom AS: May 05

…Turk Telekom reiterated its guidance for this year. The company targets a revenue growth of 23% – 25% and an EBITDA of TRY 17.5 billion – 18.3 billion, which points to a 4 percentage points decrease in EBITDA margin compared to FY21. Earlier this year, the company stated that, amid high costs inflation in Turkey, the weaker lira, higher electricity prices and an expected lag between price hikes and increase in operating expense, EBITDA margin will decrease this year. We see room for the company to revise upwards its revenue guidance for this year if it manages to implement higher selling prices on its products and services to reflect the higher costs inflation. Besides, the regulator stated that it will allow a 67% increase in wholesale prices (i.e., wholesale tariff implemented by Turk Telekom to other operators) from June 1st, 2022. This will support Turk Telekom’s revenue in 2H22. Since we last wrote on Turk Telekom (on February 22, 2022), the spread on TURKTI 6.875% 2025 bonds widened by 40bps to 480bps and the spread of underlying sovereigns (TURKEY 4.25% 2025 bonds) remained broadly unchanged at 444bps. TURKTI 6.875% 2025 bonds now trade at 98, a z-spread of 480bps and offer a yield-to-worst of 7.7%. Rising interest rates in the U.S., the strong dollar and very high inflation expectations in Turkey (with an estimated increase of the consumer prices index above 50% this year) remain key risks for Turkish bonds. This is partly offset by the defensive nature of Turk Telekom business and its relatively low leverage ratios. We change our rating on TURKTI bonds to “outperform” to reflect the more attractive pricing levels and the expected improvement in operating results during 2H 2022 that should lead to an upward revision of revenue later this year.
TURKTI bonds: USD500m 4.875% due 06/19/24, USD500m 6.875% due 02/28/25.

GOL Linhas Aeras Inteligentes SA: May 05

The credit metrics are yet to reflect fully the recovery in air travel. The leverage ratio remains high and the increase in EBITDA will be dampened by the impact of fuel prices. Cash generation appears relatively good, but higher revenues will also require more working capital. The 2022 outlook published by GOL calls for a 2.0x reduction in leverage through the year. Even then, this leaves the capital structure at risk of future shocks. The liquidity remains adequate, with BRL3.3 billion largely covering the next twelve months of debt coming due, but it has been falling steadily, now representing only 37% of net revenues for the last twelve months, against 85% in the same quarter last year. We have maintained a positive view on the Brazilian airline. The yield on GOLLBZ 7% 01/25s has come back from its recent jump to 16%, trading at 13% currently (z-spread: 1,089bps). The first lien GOLLBZ 8% 06/26s remained weak, yielding 12%, up from 11.6% at our last update. The whole sector remains under pressure: AZULBZ 5.875% 10/24s yield 11%, down from 12.4%. The return to air travel will support better credit metrics going forward: keep at OUTPERFORM.

The Williams Companies: May 05

Available funds from operations soared 16% mostly because of the better EBITDA. The robust growth led management to raise its guidance for 2022 AFFO to $4.6 billion, a 13% improvement versus 2021. Williams also increased its estimated capital growth spending by $1 billion to $2.3 billion, mostly as the result of the acquisition of the Trace midstream assets in the Haynesville region. Maintenance capital spending is likely to be around $700 million at the midpoint. Williams now has six unique transmission expansion projects in execution totaling 1.9 Bcfe per day. The 4% hike in the dividend will take total payouts to just under $2.1 billion, resulting in a dividend coverage ratio of 2.22x. The outlays amount to roughly $500 million more than AFFO. We assume the company will add about $500 million in debt to fund the spending. The additional debt combined with the expectation for better adjusted EBITDA implies that leverage will end the year at 3.8x, a decline from 4.2x at the end of 2021. Leverage has steadily declined over the past five years, after being as high as 4.83x. Assuming the company reaches its goal of adjusted EBITDA this year, it will have expanded at a pace of roughly 7% per annum over the past four years. Williams is also producing excellent free cash flow, expected to be more than $1 billion this year. The company will need to add $500 million of debt for the Trace acquisition, but since debt was cut by $1.2 billion in the first quarter, debt should actually be down for the year. We like the substantial progress made on leverage over the last several years. Although the movement to reduce fossil fuels is gathering momentum, the immediate response is likely to be a preference of natural gas over coal, ensuring substantive demand for gas in the near term. We reiterate our outperform recommendation, with the 2031 notes trading at a spread of +157.

Charter Communications: May 05

…First quarter results included the addition of 185,000 residential and SMB internet subscribers versus 355,0000 in the prior year period. The decrease in residential video customers continues—a loss of 123,000 in the quarter. Voice customers also continued to decline with a 150,000 loss compared to an 88,000 loss in the prior year’s quarter. Charter’s marketing of its mobile offering/bundle added 377,000 lines in the quarter but the segment is still small compared to the video and internet businesses. Charter’s total revenue increased to $10.2 billion (+3.7%) in the first quarter with the Internet segment reporting 7.2% revenue growth while Video was basically flat and Voice declined near 2%. Overall adjusted EBITDA grew to $5.2 billion, a 5.4% increase. Margin was flat as was capital spending. Net cash flow from operating activities was $3.6 billion, down near $100 million from the prior year period resulting in slightly lower free cash flow (cash from operations less capex). LTM adjusted EBITDA of near $21 billion resulted in net leverage of 4.4x. We are increasing our 2022 estimates that include near $52 billion in revenue and over $21 billion in adjusted EBITDA that would result in leverage remaining stable to slightly improving in the mid 4x range. Charter increased debt with new issues in the quarter and also accomplished significant share repurchases of $3.6 billion. We last rated the 2031 bonds outperform and the y.t.w. is currently 5.2%. Maintain outperform.

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