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
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.
With the short end of the interest curve in the US moderately increasing and the longer end not reacting, we’re seeing a flattening in the US yield curve.
The message this sends, is the bond market believes US rates will rise short term but the global economy is still fragile and inflation is low, therefor the prospects of longer term rate increases are quite low.
These events are helping to support interest rate sensitive names such as SYD and TCL.
SYD will pay a $0.16 dividend on the 29th of Dec and TCL will pay $0.26.
SYD is in the ASX 50 model and TCL is on both the ASX 20 and ASX 50 model.
We consider both names fully valued at current prices and recommend overlaying a covered call option to enhance the return.
On October 5th, shares of TCL traded as low as $11.62. At that time the US 10-year bonds were yielding 2.40%.
US yields have now dropped to 2.28% and TCL’s share price is over 6% higher at $12.30.
This interest rate correlation and sensitivity is linked to several other ASX stocks including WOW, SYD and SCG.
With the odds of a FED rate hike in December still over 70%, we see limited upside in TCL beyond $12.50.
As such, we like selling the $12.50 TCL calls into March and collecting the 40 cents premium.
In addition, TCL is set to pay a 27 cent dividend in December, which will bring the total cash flow from the derivative overlay strategy to 67 cents.
Transurban Group
Following recent Algo Engine buy signals, we’ve seen solid price performance in TCL, SYD & AMC.
At the time of the algo buy signal, we highlighted these stocks to members as preferred buying opportunities.
However, we now see the stocks as near full value. Yields have compressed relative to 12 month EPS growth and investors should look to take profit, or sell at the money covered call options.
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
We continue to like the setup in CTX, WOW and IPL. We also feel that TCL and SYD are now approaching oversold levels.
Our Algo Engine has flagged a buy signal in TCL with the price trading at or near $11.60.
With a 10% underlying dividend growth supported by free cash flow, we feel TCL should trade back up into the $12.25 level, as bond yields retrace from their current short-term rally.
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
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