Comcast: September 20

Management warned that net adds in the Cable business slowed in August and therefore net adds for the third quarter will be less than the record additions in the third quarter of 2019. Additions will be considerably lower than in 2020, which benefited greatly from the pandemic. Nevertheless, full year additions should exceed those in 2019. ARPU increases have partially offset some of the subscriber declines such that video revenue is actually modestly higher through the first half of the year. Although Comcast continues to lose basic cable customers, it has been adding steadily to its high-speed internet base, illustrating that broadband remains a growth industry. The eventual deployment of DOCSIS 4.0 should aid the effort to expand the broadband base. Meanwhile, the wireless business is expanding tremendously, with estimated growth of nearly 50% this year. While profitability in that business turned positive last quarter, the focus is still on rapid growth. The strong performance in wireless is also reducing churn, particularly for broadband-only subs. Revenue in the Business Services segment continues to increase nicely, as growth in the public sector is compensating for sluggishness in the larger business area. NBCUniversal enjoyed exceptional upfronts this summer, with double-digit increases in both dollars and volume, and management is hoping for robust results from the Super Bowl and Beijing Olympics over the next six months. The Parks segment retuned to growth and profitability in the second quarter and should see even better results in the third quarter despite the huge slowdown in international travel. The effectiveness of its strategy of spreading content distribution to other distributors such as Netflix and Amazon is uncertain. Comcast’s inclination to resist large acquisitions complements the robust revenue growth, our expected improvement in margins, the massive free cash flow, and the declining leverage. We confirm our buy recommendation, with the February 2031 notes trading at a spread of +70.

MHP S.A.: September 20

The increase in EBITDA resulted in a 50% increase in cash flows from operations before changes in working capital in 1H21. Net of the increase in working capital, net cash from operations was $49 million (1H21: negative -$24 million). Hence, after capital expenditure ($54 million) and dividend payments ($38 million), free cash flow remained negative in 1H21 (-$43 million). While MHP’s net debt is moderately up year-to-date, its net leverage decreased to 2.8x (as per covenant calculation) vs 3.7x in FY20. This ratio is therefore now below the covenant limit of 3.0x (incurrence covenant) which prevented MHP from incurring additional debt or making restricted payments. Management indicated that the outlook for 2H21 remains bright. In the poultry division, MHP expects prices to remain elevated internationally. In grain growing, strong yields should support the company’s financial performance. In meat processing, MHP expects a continued profitable increase as it aims at increasing its exposure to value added and culinary products. As such, MHP now forecasts an EBITDA of approximately $600 million for the full year (50% above FY20). Meanwhile, the company also raised its capex guidance for this year to $150 million. We therefore expect a decrease in net leverage towards 2.2x at year-end. Things have changed for the better. While MHP’s management only expected a moderate improvement in credit measures earlier this year, the improvement in business conditions seen in 2Q led to a completely different outlook for the rest of this year. The improvement will be visible across the board as MHP is set to benefit from high poultry prices and the combination of strong crop yields and high spot prices of wheat and rapeseed. After a relatively weak performance in the last six month, MHPSA 6.25% 2029 bonds reacted positively to these new circumstances and now trade at 103.8, a z-spread of 444bps and offer a yield-to-worst of 5.6%. These bonds trade broadly in line with underlying sovereigns (UKRAIN 6.876% 2029). They also trade in line with METINV 2029 bonds (that we rate “outperform”). We change our rating on MHPSA curve from “underperform” to “outperform”. September 20

…Sales came in within Amazon’s guidance range, and profitability outperformed the midpoint of guidance. The extremely wide range of operating income guidance was $4.5-$8.0 billion, and operating income came in at $7.7 billion. This produced a modest expansion of operating margin of 24 basis points to 6.8%. By segment, operating margin expanded by 80 basis points in North America, fell slightly in International, and plunged by 275 basis points in AWS to a still lofty 28.3%. As we’ve noted previously, management does not discuss margins, but Amazon continues to strive to reduce prices (including shipping) in all its segments, and we note that shipping costs increased by 30%, more than sales, and marketing expenses were up 73%. Higher expense rates for every line item were more than offset by gross margin expansion of nearly 250 basis points. We estimate EBITDA rose a robust 36%, and on a trailing twelve months basis soared by nearly 50%. With debt only $11 billion higher, debt/EBITDA improved to 1.0x (1.6x lease-adjusted). The company has said it intends to use cash on hand to fund the pending $8.5 billion acquisition of MGM. Cash and investments at the end of June totaled nearly $90 billion, well above the debt total, for a sterling balance sheet both with and without cash. Cash flow on a trailing twelve months basis increased by 16% to $59 billion, but elevated capital and lease spending (primarily investments in fulfillment) consumed most of it. According to the most conservative definition of free cash flow (recall there are three), free cash flow for the past four quarters was about breakeven, versus a $21 billion surplus in the prior year period. Although sales growth has slowed somewhat, Amazon appears to be well positioned to thrive under nearly any consumer behavior scenario, AWS gives it some welcome diversification, and its financial flexibility is enormous. We reiterate our “outperform” (2031 notes at T+48).

Goldman Sachs: September 17

GreenSky went public in 2018, with a $4 billion valuation, and a $9 billion servicing portfolio, but has had issues which have caused its stock price to lag. Goldman is paying a 25% premium to pre-announcement market levels, adjusted for a tax receivables agreement. GreenSky is a fintech which operates an installment loan platform (point-of-sale financing) linking a network of over 10,000 merchants (the largest are the Home Depot and Renewal by Anderson) with a group of bank financing partners. The company also finances elective health care procedures, although this part of the business was negatively affected by the Covid-19 pandemic. GreenSky earns transaction fees from merchants and loan servicing fees. The market is competitive, and some of GreenSky’s bank partners have recently opted to pursue installment lending directly, rather than through a third party. Just last month, Truist said it would acquire another home-improvement lender (Service Finance) and end its relationship with GreenSky. GreenSky has also had some regulatory missteps. It recently settled with the Consumer Financial Protection Bureau, agreeing to pay a $2.5 million penalty, and to cancel up to $9 million in loans. The agreement resolved allegations that unauthorized loans were initiated by some merchants without customer consent. The American Banker reported this week that Goldman plans to phase out the bank partnerships over time and bring the loans onto its own balance sheet. (Loan originations were $1.5 billion in the second quarter.) This could lead to higher loan losses over time for Goldman, although the portfolio is skewed towards prime/super-prime credit risk. While credit risk may increase, the consumer business should be more stable than trading/investment banking, and GreenSky appears to be a logical addition to Goldman’s other consumer initiatives, including its Marcus online bank and its credit card partnerships. The CET1 ratio (standardized) was 14.4% at the end of June. Goldman is required by regulators to maintain a minimum capital level of 13.6%, higher than its peers, because of its large capital markets business and strategic importance as a G-SIB. During the second quarter, the company completed $1.0 billion in share buybacks, which was down from $2.7 billion in the first quarter. The company told investors earlier this year that it intended to “pull back a little bit” on buybacks in order to focus on investing in its businesses. We expect Goldman to remain prudently capitalized and have a buy opinion on the 2.383% notes due 2032, seen at T+92.

Ovintiv: September 17

OVV ended the second quarter with $4.4 billion of liquidity. Six months free cash flow (cash flow from operations less capital spending) after base dividends swung $1.2 billion to $795 million on higher earnings and lower capital spending. FCF jumped to $1.8 billion after two first half asset sales (the Duvernay assets in Western Alberta for $232 million and Eagle Ford assets for $880 million). This FCF was used to reduce net debt by $1.7 billion to $5.2 billion, including the June redemption of the $600 million of 5.75% senior notes due 2022) and to increase the base dividend 50% to about $200 annually. In August, the company redeemed its $518 million of 3.9% senior notes due 2021, pushing out the next scheduled bond maturity to July 2024. The combination of asset sales and increasing FCF enabled OVV to accelerate the timeline for achieving its initial $4.5 billion net debt target by one year to year-end 2021. The company raised its 2021 production guidance modestly while keeping the capital budget unchanged at $1.5 billion as continued capital efficiencies offset material inflation. Revised production estimates look for 190-195 Mbbls/d for oil & condensate, up from 190 Mbbls/d, 80-85 Mbbls/d for NGLs, up from 80 Mbbls/d, and 1,550-1,575 Mmcf/d for natural gas, up from 1,550 Mmcf/d. Total costs per BOE was also raised $0.70 to $12.95-13.20 per BOE. Based on revised projections, we look for OVV to end 2021 with net debt decreasing to $4.5 billion and net leverage falling to 1.4x. Depending on commodity pricing, the company could reach its $3 billion net debt target as early as the end of 2022, but consider the end of 2023 as more likely, with $3 billion of net debt translating into net leverage of about 1.0x. While the company’s near-term priority of repaying debt is now being shared with returning funds to shareholders, the outlook through 2022 remains positive. The 6.5% senior notes due 2034 yield 3.0%. Maintain outperform with limited upside.

GOL Linhas Aeras Inteligentes SA: September 17

Airline travel is slowly improving in Brazil. GOL’s August traffic figures are encouraging: revenues-per-kilometer-flown jumped by 85%, bringing the accumulated traffic figures to a level only 23% lower than 2020. International flights are yet to restart. When they do, they will add to current numbers and provide some upside. GOL has already been allocating more aircraft to its domestic routes. It had revised down its forecast of the overall number of planes to fly in 2H21, from 110 to 102, as well as its expectation for revenues and EBITDA. With this new investment, its liquidity will now increase from an initially targeted BRL4.2 billion to BRL5.2 billion, or more than 1x EBITDA on its total adjusted leverage. The equity investment by American Airlines is a very positive news for GOL. It replaces the divestment from Delta Airlines, which held a 9% stake until 2019. In the sector, US airlines have long been interested in the Brazilian market. United Airlines holds a 7.8% stake in competitor Azul and they have been reportedly in talks to further expand their commercial agreements. Codeshares are an attractive mechanism to allow passengers to purchase tickets with a domestic leg that complements an international flight. For GOL, this investment brings to a total of $704 million the capital raised in the last six months. This is a positive response to much weakened capital structure, as a result of the pandemic and the grounding of its fleet over such a long period. With this investment, GOL will be able to weather the storm and find a path to full recovery. We have been cautious on GOL’s prospects, due to the high level of COVID-19 infections in Brazil and the much-protracted crisis of the air travel industry. Several major airlines have entered bankruptcy proceedings in the region. Yet, the surviving airlines will be able to increase their market share, in a recovery. This strong endorsement by American Airlines in the perspectives of GOL demonstrate this belief of a return to better times. GOLLBZ 7% 01/25s yield 7.9% (z-spread: 730bps), compared to 9.0% (z-spread: 835bps) a month ago. The first lien GOLLBZ 8% 06/26s trade at 7.2% (z-spread: 657bps), also better. AZULBZ 5.875% 10/24s yield 7.0% (z-spread: 645bps), by comparison. Current prices remain attractive. Change to OUTPERFORM.

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