Grupo Kuo: February 22

There are still some headwinds to face. While the consumer business, which makes slightly more than half of the group’s total sales, is seeing a strong growth in export volumes, in particular to China, domestic prices continue to be affected by COVID-19. The Food Service segment in Mexico is still affected by the containment measures. The recovery of the Yucatan processing plant will take time, as the investments to restore the operations will stretch well into the fourth quarter. The other two business, contributing almost equally to the over half of the group’s total sales, will also see some pressure. In Chemical, prices of raw materials will start to bottom out, as the economic recovery is going to continue building in 2021. Finally, in Automotive, there is likely to be a slower recovery this year. There are benefits of running a diversified business group, with unrelated segments, despite the global headwinds. In the crisis that followed the pandemic, Grupo Kuo has been able, after two consecutive quarters of weaker credit ratios, to restore a solid profile, despite the operational difficulties. We maintained our “outperform” recommendation last October on Grupo Kuo 5.75% Jul-2027 bonds, yielding 6.1% (z-spread: 558bps), based on its solid liquidity and the flexibility it got from its banks. As of now, the bonds have rallied to yield 3.1% (z-spread: 293bps). OUTPERFORM.

Energy Transfer LP: February 22

The financial projections do not include the operations of Enable Midstream Partners, which Energy Transfer just agreed to purchase. Enable has substantial gathering and processing assets in the Anadarko Basin along with crude gathering assets in the Bakken. Management believes that it can achieve more than $100 million of annual run-rate cost and efficiency synergies. Energy Transfer is paying $7.2 billion for Enable, including the assumption of debt. The deal, which is slated to close by the middle of the year, will be financed with all equity. Enable will increase Energy Transfer’s size and scale, adding almost $1 billion of EBITDA. The outlook for better-adjusted EBITDA is encouraging. But even more favorable is the decline in growth capital spending. Management indicated that spending would probably fall to between $500 million and $700 million in 2022 and 2023. Management also noted that it does not intend to implement unit buybacks or increase distributions until the company meets its leverage target of 4.0x to 4.5x on a rating agency basis. No asset sales are planned as part of the debt reduction process. The distribution coverage ratio was 2.3x for 2020. We estimate that it will soar to 3.6x this year. Energy Transfer remains confident that it will prevail in the litigation surrounding the Dakota Access pipeline. We reiterate our outperform recommendation, with the 2030 notes trading at a spread of +168.

Walmart: February 22

…Walmart set revenue records in the fourth quarter and the year, which given the anticipated divestitures probably represents a peak for a while. All three segments saw sales increase in the mid to high single digit percent range, led by the biggest segment by far, Walmart U.S. Comparable-store sales excluding fuel at Walmart U.S. increased by 8.6%, as a 22% increase in average ticket more than offset an 11% decline in transactions, while eCommerce growth of 69% contributed more than 600 basis points of growth. Walmart U.S. had a good holiday season (not discussed in any detail) and the first stimulus checks boosted January sales. Strength in food sales was broad-based and general merchandise sales tilted towards “comfort” categories. The segment’s adjusted operating margin was flat at 5.2%, as modest gross margin expansion was offset by COVID-19 related expenses totaling about $900 million. The International and Sam’s Club segments followed a similar pattern of good sales growth with some margin compression, especially in the International segment, due primarily to nonrecurring factors. Walmart carries the highest ratings by far of any retailer we cover, and has held onto them seemingly forever. The pandemic has been on balance positive for Walmart. It does not need to reduce debt, with rock solid lease-adjusted leverage of around 2x for many years, including our projection for the current one. It cut back on share repurchases amid the uncertainty of last year, but we expect all free cash flow to be used for buybacks in the foreseeable future. With a stunning $36 billion in cash flow last year, free cash flow was $20 billion. Despite a 36% planned increase in capital spending this year, primarily for technology, we project sufficient free cash flow (not counting divestiture proceeds) to cover share repurchases. This would leave it with divestiture proceeds of about $10 billion to invest. We have long considered it the safest credit in retailing. We reiterate our “outperform” (notes due 2029 at T+24).

American Axle: February 19

…For 2021, AXL is assuming industry light vehicle production of 15.5-16 million units in North America, 25 million units in China, and 19 million units in Europe. Based on this production outlook, AXL’s initial 2021 guidance looks for sales of $5.3-5.5 billion, up 15% at the midpoint. The company noted limited downtime taken in the first quarter due to semiconductor chip shortages with some supply disruptions built into 2021 sales guidance. At the midpoint, the EBITDA margin is expected to improve by at least 100% basis points on higher volume, a more favorable mix, and productivity benefits. These factors translate into adjusted EBITDA of $850-925 million, a 23% increase at the midpoint. Free cash flow in 2021 is anticipated to be $240-340 million, up from $241 million in 2020 as higher earnings and slightly lower capital spending more than offset higher working capital usage. Free cash flow will be used to fund R&D, small incremental investments into joint ventures, and to reduce 2021 leverage by a full turn or more. Based on our revised model, we forecast 2021 leverage will decrease a full turn to 3.7x (3.0x net) and move lower in 2022. We are encouraged by the growth in AXL’s hybrid electric powertrain backlog as the company continues to benefit from its Chinese JV with Inovance. The 6.5% senior notes due 2027 yield 4.5%. Reaffirm outperform with limited upside.

Klabin: February 19

…Despite the increase in EBITDA, the company posted a negative free cash flow of BRL 714 million due to elevated capital expenditure. Yet, net debt declined quarter-on-quarter due to a favorable FX translation effect on its debt and the marking to market of interest rate swap instruments. Net leverage decreased from 4.6x in 3Q to 4.2 in 4Q20. In January 2021, the company issued $500 million of 10-year linked to some performance indicators in sustainability with a yield of 3.2% and plans to use the proceeds to redeem its bonds maturing in 2024 so as to further extend its debt maturity profile. For FY21, we forecast a decrease in net leverage towards 3.2x amid supportive market conditions and the Puma II startup. Meanwhile, Klabin stated that, during the coming weeks, they will announce their final decision regarding the potential new investment phase in the second stage of Puma II (which would consist in another kraftliner or cardboard machine that would come on stream in mid-2013). Against the backdrop of strong business conditions, we believe that the company will launch this project this year. KLAB 5.75% 2029 bonds trade at 116.3, a z-spread of 231bps and offer a yield-to-worst of 3.4%. Their spread over underlying sovereigns is now at 30bps. At current pricing levels, the upside potential for these bonds looks limited but we keep a constructive view on this credit amid good business conditions in both pulp and packaging products. We keep our “outperform” stance, with limited upside potential.

Anthem: February 19

…Some of the cash flow was used to fund capital expenditures ($1.0 billion) and acquisitions ($2.0 billion). In February 2020, Anthem completed the acquisition of Beacon Health Options, a specialist in behavioral health, serving over 34 million individuals nationwide. The transaction reflects the company’s ongoing diversification strategy. Other recent additions include Medicaid plans in Missouri and Nebraska, along with AmeriBen, a third-party administrator. Earlier this month, Anthem agreed to buy Puerto Rico-based MMM Holdings, including its Medicare Advantage (MA) and Medicaid plans, from InnovaCare Health. MMM operates Puerto Rico’s largest MA plan and the second largest Medicaid plan, as part of a vertically integrated healthcare business, which includes specialized clinics and physician groups. The transaction is slated to close in the second quarter, subject to regulatory approvals. Terms were not disclosed, but Anthem expects MMM to be “slightly” accretive to earnings this year. During the fourth quarter, Anthem completed $1.4 billion in buybacks, with a total for the year of $2.7 billion, exceeding the original target for 2020 of $1.5 billion. At year-end, the remaining repurchase authorization was $1.1 billion. The board of directors increased this total by $5.0 billion in January, subject to completion over a multi-year period. Common dividend payments last year totaled $954 million. For 2021, Anthem’s guidance calls for “at least” $1.6 billion in buybacks. The board also just increased the quarterly common stock dividend by 19%, from $0.95 to $1.13 per share. Debt ratios are stable, and we expect Anthem to continue to manage its balance sheet prudently. The 2.25% notes due 5/15/30 are seen at T+73. Opinion: buy.

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