The 2021 convertible bond finally looks attractive after the share price fall

Beni Stabili's share price has fallen by about 23% in 2016 and is trading today at around € 0.54. The stock has underperformed the benchmark index of European listed property groups (Euronext IEIF REIT – Real Estate Investment Trust), which has ended the year 17% lower. - At first sight, this sell-off may appear to be linked to upward pressure on interest rates in general (25bp rate hike by the Fed in December and its market impact on interest rates in Europe, outlook for higher inflation, etc.) and, in Beni Stabili's specific case, on interest rates in Italy ahead of the referendum in early December and amid difficulties faced by the country's banking sector. For example, the yield on the Italian sovereign bond (BTP) maturing in September 2022 rose from a low of 0.4% in July 2016 to a high of 1.2% in early November. The yield has tightened more recently and stands at around 0.9% today, close to its level at the start of the year. However, this factor needs to be placed in context since: 1/ as we have seen, the yield on the BTP has barely changed on an annualised basis; and 2/ 79.2% of the group's debt at 30 June 2016 was either at fixed rates or hedged. - There may be another reason for this downward pressure on Beni Stabili's share price: its high exposure to tenant Telecom Italia (around 39% of the property portfolio at 31 December 2016). Our analyst (Jean Raoul-Duval) who covers the Italian telecoms group has a negative credit opinion on it (see his Credit Focus published last September), arguing that, despite encouraging results this year, the entry of Enel and Iliad will gradually intensify competition in the Italian market, to the detriment of incumbent operators. That said, it is worth remembering that Beni Stabili and Telecom Italia signed an agreement securing future rents in April 2015. - After the fall in the share price (partly unwarranted, in our view), we think that the profile of the 2021 convertible bond is finally becoming attractive, with: 1/ a yield of 2.0%, close to the average yield-to-worst of our sample of straight bonds in the BB category and also very close to that of the 2022 straight bond (2.4%) – these observations imply that the conversion option is not fully priced in today; and 2/ a share price that seems fairly valued today (discount of 30% to the NAV, in line with the historical average). - Consequently, we are raising our recommendation on this instrument to Buy (vs. Neutral). We reiterate our Neutral recommendation on the 2019 convertible bond (yield of 0%). - - >