Both SYD and TCL are core investor holdings where we’ve applied “buy-write” strategies to enhance the cash flow. A combination of the December dividend and the call option income is generating 10 – 12% annualised cash flow.
Over the last two weeks, yield sensitive names like SYD, TCL and GPT have all dropped over 10% from recent highs.
One of the main drivers has been the change in interest rate expectations from G-7 central bankers and the subsequent rise in short-term paper.
Moving forward, we see more likelihood of G-7 rates reverting lower within the year’s range and providing upside potential in the stocks above.
Other stocks we like on the basis of lower local rates are: AMC, WOW and MPL.
We see reasonable upside potential in the names and will employ the derivative overlay strategy (selling covered calls) to enhance the portfolios returns.
Transurban
Sydney Airport
General Property Trust
Sydney Airports is approaching buying support at or near $6.60. We see anywhere in the $6.60 – $6.90 range as a reasonable entry level.
Adding covered calls into Sept – Oct will help boost cash flow, whilst waiting for the next dividend period in late December.
Over the last three weeks, shares in local infrastructure and property trusts have really taken a beating.
Some of the yield-sensitive names have lost between 5 and 10% as Australian interest rates in the 2yr to 5yr tenors have followed global interest rates higher.
One of the major aspects of the recent rise in rates has been the consensus amongst G-7 central bankers that the era of low rates and financial stimulus will be coming to an end.
It’s our base case that the market has gotten ahead of itself with the prospects of sustainable higher yields.
With global equity markets still at elevated levels, a material repricing, or “risk-off” period, in the market would increase the demand for “safe haven” government bonds, which would ease rates lower.
The specific stocks that we are following include GPT, TCL and SYD.
The ALGO engine triggered buy signals in these three names at yesterday’s close.
Given the sharp sell off that these names have seen over the last few weeks, we feel the upside potential is an reasonable trade.
GPT
TCL
SYD
Recent price action in the local ASX market suggests we’ve entered a period of heightened volatility and potential for downside risk. Since posting the high for-the-year at 5945.00, the index for Australian shares has dropped almost 4%.
Looking across the spectrum of ASX top 100 stocks, we have found several names which can offer defensive value in a broadly sideways to lower share market.
These include: IPL, MPL, WOW, CTX, QBE, SHL, SYD, TCL, AMC, and IAG.
We consider these stocks to have the potential for moderate capital growth and, combined with a buy/write strategy, will offer 10 to 12% cash flow on an annualized basis.
ASX: XJO Index
Sydney Airports continues to perform well….
We own Sonic Healthcare as a key holding in our client portfolio’s.
We own Transurban in or model…..
Amcor is a core buy-write that we’re holding…..
GPT and WFD are our preferred property (REIT) holdings….
The Dow Jones 30 posted it’s 7th straight lower close for the first time since 1978.
As a result, the US 10-year bond yields fell to a 1-month low of 2.38%. An increase in equity market volatility could could lead to another 10 to 15 basis points of downside on the yield.
Some of the local names that have moved higher on the lower yields have been SYD, TCL, WFD and, to a lesser degree, TLS.
It’s likely interest rate stabilization will work as a near-term cap on these companies and allow for a covered call strategy to enhance the portfolio returns
Over the past month, we’ve been long TCL and SYD , as we felt US interest rates would not push beyond levels already priced in by the market, therefore creating value in yield sensitive names.
Out of the potential basket of yield sensitive names to consider, our preference was TCL and SYD coming into their June dividends.
With the above stocks now trading up 15%+ and 10%+, (respectively), from their recent lows and the yields now compressing below 5%, we feel potential capital gains from here are limited and it’s time to sell covered calls to enhance the return.
SYD’s FY16 results were in line with market forecasts.
EBITDA of $1.1b and DPS at $0.31. The company has flagged a
higher than expected FY17 distribution of $0.33
FY18 we assume EBITDA increasing to $1.2 billion and based on DPS of $0.35 the stock trades on a forward yield of 5.6%.
Our preference remains TCL over SYD.
Stronger retail revenues helped Sydney Airports lift its 2017 guidance as 2016 annual profits were reported up 13.2% to $320.9 million.
The company announced that it will pay a full-year dividend of 31 cents per share for 2016 as total revenue climbed 11% in the year ended December 31st.
Total 2016 revenue was announced at $1.365 billion from $1.229 billion during the year ago period.
Forward guidance was higher, but slightly negative as the company forecast a 2017 dividend of 33.5 cents per share versus the street’s expectation of 34 cents per share. EBITDA rose 8.2% to $1.08 billion, and operating margins are running at 8.2%.
Total passenger numbers increased 5.6% to 41.9 million , with international passenger numbers rising 8.8% to 14.9 million.
Technically, the share price should find support at the $6.00 area, which is also the 30-day moving average.
Our Algo Engine created a short signal in December at $6.70.
Level 29 Chifley Tower
2 Chifley Square
Sydney, NSW 2000
1300 614 002
Investor Signals Pty Ltd
ABN 44 143 555 453
Or start a free thirty day trial for our full service, which includes our ASX Research.