Deutsche adds Old Mutual, Rallye/Casino to European focus list

By Peter Heap

New York, April 29 - Deutsche Bank AG convertible analysts added Old Mutual's 3.625% convertible due 2005 and Rallye's 4.5% exchangeable into Casino due 2005 to their European focus list.

The securities were added as names that should perform well now the war in Iraq has ended and investors start to focus on other news.

"In particular, the question of whether the world economy will pick up speed again will be the main influence," wrote Deutsche Bank analysts Clodagh Muldoon and Bruno Gargiulo.

"In the event of a rebound we maintain the view that Europe would outpace the U.S. as it is more interesting from a valuation perspective."

However they caution that there are "considerable headwinds to any recovery and the valuation of the U.S. market provides a cap on any upside."

In terms of specific names, the analyst say: "High grade credits have tightened across the board and we now believe that investors can profit from names which have yet to experience an improvement but should be in line to follow suit."

For Old Mutual, Muldoon and Gargiulo note that all other convertibles in the insurance sector have gained but Old Mutual has yet to follow suit.

They believe its valuation has been limited by South African government bonds, which were trading at a spread of 200 basis points over Libor. They have now tightened to Libor plus 100 basis points while Old Mutual is at Libor plus 150 basis points.

Furthermore, Old Mutual obtains 70% of its operating profit from South Africa but reports in sterling so should find the strength of the rand "extremely beneficial," Muldoon and Gargiulo said.

While South African equities have started the year poorly, the analysts anticipate they will do well, outperforming developed markets.

For Rallye/Casino, the analysts say the market is valuing Casino's activities outside France at zero even though more than €2 billion of capital is invested and indicates that return on capital employed in the French market will fall 15% to 20%.

"We believe both of these assumptions are overly negative," Muldoon and Gargiulo wrote. "In the French market, we strongly believe in margin resilience, even if the Galand law was to be modified. Outside of France, we believe that investors significantly underestimate recovery potential in Brazil, Uruguay and above all Argentina, as well as the strong margin improvement potential at Laurus in Europe."

They believe Casino has demonstrated its ability to improve profitability and consider it one of their favorite stocks in global food retailing.

For Rallye, the analysts say they are "reasonably comfortable" with its debt position and anticipate the remainder of the issue will be converted.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.