In Brief (MYBG, WESN)

MYOB Unsecured Subordinated Notes (ASX: MYBG)

In my previous role I analysed MYBG when it was sold to investors (November 2012) and decided not to invest despite the attractive terms. The reason being was the amount of debt involved and my lack of understanding of the business - or more accurately - my lack of understanding of the the future of the software industry. MYBG have since dropped from the face value of $100 to $95. While a $5 drop isn't the end of the world, the point to note is that income style investments have been aggressively sold in Australia and not everyone of them will work out. I've learned that the hard way.   

MYBG are issued by MYOB which is a software company (see their website here) and is very popular with small businesses in Australia. MYOB was bought out by Bain Capital last year and loaded it up with debt, which include the MYBG notes. The screen shot below is a summary of the latest financials:

Take a look at the FY12 column. Notice the monstrous gross profit margin and EBITDA margin? Look further down and see the very large Depreciation/Amortisation figure? That represents previous expenditure being amortised and unless the software is absolutely bullet proof and cannot be competed away, it will incur future at least some expenditure to keep the software up to date. Look further down and notice the large interest bill. All of this adds up to negative PBT.

The big X factor here is what figure truly represents future capital expenditure? Is it $63.1m or lower or higher? This figure can dramatically distort true profitability for better or worse. MYOB carries a monster intangible asset of $1.195bn, and most of this is goodwill ($738m) - hence the large amortisation charge. Current capital expenditure is nowhere near as high as $63.1m, and knowing the software, I doubt whether they need to spend this sort of money in the future.

MYBG are being priced in the 'junk' territory: they pay 6.7% above the 90 Day Bank Bill Swap Rate meaning the current yield is 10.3% p.a. and the Yield to Maturity is 11.2% p.a. (they mature December 2017, so there is also a small capital gain on offer). That's a similar yield to the Healthscope Notes I recently discussed (these posts have been by far the most popular since I started writing the blog - I guess reinforcing the point of the popularity of income investments. Or maybe my other articles are mind numbingly boring!). Both have their risks. If I had to choose one, I'd go for Healthscope given the strong fundamentals of healthcare.

MYBG aren't for me, but I can understand the attraction investors have to them.

Wesfarmers Partially Protected Shares (WESN)

WESN has been discussed in previous posts (the last can be found here). At the time I disclosed I was selling a few of my shares given we were getting close to the $43.11 threshold and WES itself was getting expensive. Little did I realise this was the short term high in the stock! I have since sold my remaining shares. Why? After revisiting my numbers, it is obvious WESN doesn't stack up on an IRR perspective as well as other investments I am in. I want to stress this doesn't mean WESN won't keep going up, but as I live on my capital I need to squeeze every drop I can.

Kristian 

Disclosure: no position in MYBG or WESN