Transurban – oversold & buying support building
Our Algo Engine triggered a recent buy signal in Transurban, and with the stock now trading $11.10, we consider it a buying opportunity.
TCL goes ex div $0.265 on the 29th June.
Transurban
Property Stocks Find Buying Interest
As the US yield curve flattens, which is caused by the long-end of the curve no longer increasing at the same rate as the shorter-end, we’ve started to see institutional money flow back into ASX listed yield sensitive names.
Our preference among these, within the property sector is GPT, SGP, and WFD, (based on valuation grounds).
Within Utilities and Infrastructure, we continue to like AGL, SYD and TCL.
U.S. Retail Sales Weighing On Rates
U.S. Retail Sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, pointing to a slowdown in economic growth in the first quarter.
Consumer spending, which accounts for more than two-thirds of U.S. GDP, appears to have slowed at the start of the year.
The combination of weak consumer spending data and global manufacturing data has been enough to see yields run into resistance.
The peak optimism on synchronized global growth and inflation pick-up, now appears to have passed.
With yields moving lower, we’re likely to see a better environment for the yield sensitive sectors. Telecommunications, Utilities, Consumer Staples and Real-Estate.
Some of the local names in these sectors include: SYD, TCL, AGL, GPT, SCG and WFD.
The chart below illustrates the yield on the 30-yr bonds falling relative to the shorter dated 2-yr bonds. This is typical during a period of slower economic growth.
Buy Transurban & Sell Call Options
We recommend buying Transurban Group and selling covered call options to enhance the income.
TCL will pay a $0.27 dividend on June 29th.
TCL
Yield Names Get A Boost From Lower US Rates
As US 10-year bond yields pull back from recent highs, shares in local yield sensitive names have been lifted off their recent lows.
The inverse correlation between US interest rates and GPT, SYD and TCL has been acute over the last 3-months.
Since January 1st, US 10-year yields have risen over 20%, climbing from 2.40% to reach a 4-year high of 2.95% last week.
During this same period, the share prices of GPT, SYD and TCL have all dropped by over 10%. However, both SYD and TCL gained over 2% on Friday.
It’s our base case that the US 10-yrs will find resistance at the 3% level and offer upside price action in the local yield names.
All three of the above names are included in our ASX Top 50 model portfolio.
We expect to see price appreciation in the 4% to 6% range over the near-term as US yields retrace lower.
Sydney Airport
Transurban
The US Government Is Back Open………….Until February 8th
The US Senate was able to agree on a short-term resolution to allow the Government to reopen until the 8th of February.
The US has not had a properly ratified budget since 2009 and these “stop-gap” agreements are now getting shorter in duration.
The DOW, S&P 500 and the NASDAQ all responded by making new all-time highs.
Interestingly, as illustrated in the charts below, not only are the 2-yr Treasury notes now yielding more than the SP 500 in the last 10 years, but the Index itself is the most overbought in history.
We suggest that the extreme valuations on Wall Street will soften US yields over the medium-term.
As such, we would expect to see buying interest in the ASX yield names such as TCL, SYD and WFD .
Our ALGO engine currently has flagged buy signals in TCL and SYD at $11.70 and $6.80, respectfully.
2-yr versus SP 500 yields
SP 500 Sentiment Oscillator
ALGO UPDATE: Stay Long Transurban
We added TCL to the model portfolio on July 3rd at $11.70 and our ALGO engine triggered a buy signal on July 12th at $11.20.
With its $9 billion pipeline of road projects over the next 7 years, the stock should be well supported with increased longer-term cash-flow numbers.
For the six-month period ending December 31st, TCL will pay 28.5 cents per share and a total of 56 cents per share over fiscal 2018.
This equates to 4.5% with the share price at $12.40 (plus some limited franking credits.)
We see the next resistance level at the December 19th high of $13.15.
Transurban
Softer US Yields Could Lift Local Names
The recent move higher in longer-dated US Treasuries has created a headwind for some of the yield sensitive names listed on the ASX.
Over the last 10 days, the US 10-year notes have risen from 2.28% to just under 2.50%.
This 10% move has also lifted the 2yr to 30yr spread from 85 basis points to a full 100 basis points.
The impact on local shares has been a 4.5% drop in TCL and a 3.3% fall in SYD.
Looking forward, it’s reasonable to expect the US yields to soften and the yield curve to flatten.
Given the current correlation to the local shares, we see the US flattening trade as potential positive for the local names such as TCL, SYD, WFD and GPT
US 2yr versus 30yr spread
TCL Entitlement Offer
TCL is undertaking a 3 for 37 entitlement offer at $11.40 per share to raise $1.9b of new equity. The retail offer will close on 24th January.
The TCL share price has hit an all-time high today at $12.93.
And while the internal momentum indicators on the daily charts are approaching an overbought reading, we expect prices to move higher and consider TCL a cornerstone holding in the model portfolio.
Transurban
Transurban – Preferred Holding
TCL announced a $1.9bn fully underwritten renounceable entitlement offer to
fund WestConnex & West Gate Tunnel Project in Melbourne.
We continue to see high single digit growth in dividends with FY18 guidance at $0.55, placing TCL on a forward yield of 4.8%
TCL & SYD are current holdings in our ASX 50 model portfolio, following the recent Algo Engine buy signals.
Level 29 Chifley Tower
2 Chifley Square
Sydney, NSW 2000
1300 614 002
Investor Signals Pty Ltd
ABN 44 143 555 453
Send our ASX Research to your Inbox
Or start a free thirty day trial for our full service, which includes our ASX Research.