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Bond of the Week: 22 March 2013

Time to revisit the UNITE 6.125% 2020 Bond?


Newsflow out of Europe is deteriorating. Recent economic data all point towards stalling economic growth in major European countries. And there is Cyprus – a new, festering wound in the Eurozone.

Against this jittery backdrop, investors are nibbling government bonds to hedge against a correction in the equity markets. This week saw the 10-year UK Gilt yield touched new 2013 lows; whilst the 10-year Euro yield is heading towards the 1.30% major range support again.

Softening interest rates are pushing corporate bonds and gilts from their recent floors. Certainly, this helped some of the recent Bond of the Week recommendations. The HSBC 5.375% 2033 bond, flagged in late February as a buy, extended the rally into 110. The UK 3.75% 2020 Gilt traded new year highs – despite UK losing the triple-A ratings. The ICG 6.25% 2020 bond jumped by more than 1.5 points to fresh highs (see below, red arrow indicates the time of recommendation).

Encouraged by these bullish chart action, I wish to highlight a potential buy in the Unite Group 2020 bond, a retail bond listed in last November. Oliver Butt covered this bond in some details here.

To recap some of the bond’s specifics:

Unite Group 6.125% 2020
Issuer – Unite Group
Coupon – 6.125% semi-annual
Rank – Senior Unsecured
Maturity – June 2020
ISIN – XS0856594642

Why I like this bond is because it is offering the largest yield at around the 2020 maturity band. In 8-March’s Bond of the Week, I urged readers to use the Fixed Income Investor Yield Map to look for potential retail bonds trading at good yields (see here) This tactic has done well in helping us to identify the ICG 2020. Continuing down path, I now observe that the Unite 2020 Bond is trading at the top of the Yield Map. This means that the bond is providing the second highest yield in FII universe, at 5.658% (see below, highlighted in red circle).

Normally, when a corporate bond is providing such a wide spread versus other bonds, it signals troubles ahead. Reading through Unite’s corporate results, I struggle to find the obvious negative points. In its recent interim update (6-March), the firm hiked its full-year dividend from 1.75p to 4.0p. This is a substantial amount and shows the firm’s confidence in the market. Unite’s Net Asset Value also gained from 315p to 350p (see the results here).

What is interesting is that half of the firm’s portfolio is located in London, where the property market is stronger than the rest of the country. This means that the firm may be able to capitalise on profitable property sales in the future.

Turning to Unite’s price action. Firstly, on the 2020 bond, it is currently testing the upper side of the range at 102.75. The pattern of rising lows since listing suggests a steady accumulation of the issue.

Second, Unite’s equity performance is also in a strong position. The stock recently breached the 300p major level recently, which may open the door for a rally into 400p (see right). A bullish stock action also means that the market is relatively sanguine about the firm’s prospect.

View: The Unite 2020 bond is providing investors with an interesting choice in the market. The firm operates in a niche area and there are good business opportunities within the sector. A relative comparison show the bond is providing a reasonable spread versus government bonds and other property retail bonds. With the prevailing mood bullish on bonds, I expect potential new price highs here upper side of the range at 102.75. The pattern of rising lows since listing suggests a steady accumulation of the issue.

Dr Jackson Wong

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