Wachovia analyst sees IOS Capital/Ikon convertible about 7% cheap

By Ronda Fears

Nashville, Tenn., Nov. 7 - Noting positive views on the credit practices of IOS Capital/Ikon Office Solutions Inc., Wachovia Securities, Inc. convertible analyst Sri Nadesan said the convertible looks about 7% cheap.

The IOS Capital/Ikon 5% convertible bond due 2007 was quoted around 84.3 with the stock at $7.65.

Those levels imply a current yield of 5.9%, a yield to maturity of 9.4% and conversion premium of 65.7%.

"We believe that even with a credit spread of 800 bps and 50% stock volatility, the convertible is 7.3% cheap," Nadesan said in research note Thursday.

"We believe the implied credit spread of about 1,110 bps is wide for this Baa3/BB+ rated convertible bond."

Standard & Poor's has taken a positive view of IOS Capital's credit practices, the analyst noted.

On Tuesday, S&P assigned an "above average" equipment lease servicer ranking to IOS Capital, the financing subsidiary of Ikon, with a stable outlook. S&P took a positive view of IOS Capital's portfolio management, credit monitoring and watch list, asset recovery and default management practices.

"Although the company's organic growth has been weak over the past two fiscal years due to a tough macro and competitive environment, the company has been able to generate respectable levels of free cash flow," Nadesan said.

"Organic revenue declined 3.6% in fiscal 2002 (ended Sept. 30, 2002) after declining 3.2% in fiscal 2001. For next year, excluding areas the company is exiting or downsizing, organic revenue should be flat.

"Free cash flow (operating cash flow after capital expenditures) for fiscal 2002 was $339 million and is expected to be $250 million-$275 million in fiscal 2003."

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