III. CAPITULO III: Situación del entorno
4. Unidades de abastecimiento de bienes y servicios
Good morning,
What’s catching my eye?
1.
Australian Q4 capex ‐2.2%↓
2.
Australian Q4 capex ‐8.6% vs pcp↓
3.
Australian Q4 GDP print could be negative↓
4.
Here comes the next 25bp from the RBA↓
5.
AGB 3yr bonds @1.79%↓
6.
AUD/USD @77.92usc↓
7.
NZD/AUD @96.62↑
8.
German 5yr bond yields @‐.10%↓↓↓
9.
EUR/USD @1.1197↓
10.
US Dollar Index (DXY) @95.30↑
11.
WTI Oil @$49.01↓
Qantas Airways (QAN) has been my single best “trading idea” of the last 14 months. From a low point of 95c back in December 2013 QAN shares have gained +200%. Today I am recommending “taking trading profits” in QAN.
Airlines are trading stocks: always have been, always will be. They are not long-term investment grade in my opinion due to the fact they control very few of the variables in their business.
QAN was clearly undervalued at the bottom of its earnings & sentiment cycle, yet today it is fairly valued with optimistic sentiment and that means from a trading perspective it is the right time to be locking in the substantial capital gains and look for other ways of making our capital work hard for us.
Pretty much everything went right for us in this QAN “trading idea”. The Oil price collapsed, the AUD collapsed, the domestic capacity war ended and QAN’s earnings recovered as confirmed in yesterday’s interim earnings result. The QAN share price has tracked the FY15 consensus EPS revisions up as illustrated below.
That drove a +200% share price appreciation and that’s enough for me. Despite QAN management doing an excellent job, I suspect the next +20% gain in the QAN share price will be much harder and slower than the last +200%, and that is why I am recommending taking trading profits today.
My final reason for recommending taking trading profits is all the analyst bears from 95c are now bulls with price targets above the current share price. The contrarian in me is happy to feed trading stock into that major sentiment change. This is illustrated in the table below where the buy/hold/sell ratio is now 11/1/1 and median price target $3.49.
So where do we reinvest our trading profits from QAN???
Earlier this week I wrote in depth about the structural growth Crown Resorts (CWN) offers and that is one of the stocks (CWN cum 18c div) I would reinvest QAN proceeds in to keep myself exposed to the Australian inbound tourism theme.
The second idea is Sydney Airport (SYD). I think it’s time to take trading profits in SYD’s largest customer, QAN, and reinvest in the Airport itself. SYD has been a member of our high conviction list but I want to use the slight post reporting pullback to increase weightings. The chart below confirms QAN has now outperformed SYD on a two year common performance base and that to me says it’s now time to own the airport not the airline.
SYD vs. QAN: common performance base 2 years
SYD is a macro meets micro idea. The falling AUD is improving Australia’s relative value as a tourism destination. SYD is Australia’s gateway Airport. Airline capacity into SYD is increasing. Passenger numbers are increasing. SYD’s margin per passenger is increasing. The risk free rate is collapsing.
SYD is effectively a structural “growth bond” yielding 5.00% for 12 month. It’s yield premium of 2.58% to a 10yr Australian government bond (2.42%) will narrow in the years ahead. Inversely, SYD capital growth will come from yield compression. Warren Buffett famously said “a monopoly toll bridge is my dream investment”. SYD is a “monopoly toll bridge” that now has strong macro tailwinds for activity and valuation.
Sydney Airport does have a genuine strategic, structural advantage over other Australian airports. Just consider the figures below. Look away good people of Melbourne, this might hurt a little.
Sydney & NSW combined benefit from: 32% of Australia’s population
41% of Australia’s top 500 companies’ headquarters 90% of international banks’ regional headquarters 34% of Australia’s international visitor bed nights
42% share of Australia’s premium traffic
37% share of Australia’s outbound leisure traffic
517k tonnes or 47% of all international air cargo into Australia $65b value of air cargo each year
Yesterday SYD confirmed CY14 earnings and confirmed a final distribution of 12c. They also guided to another 25c of distributions in 2015 (+6.5% on 2014).
I only EVER play yield based strategy in individual stocks where the underlying earnings are RISING. SYD has a rising earnings base as confirmed in yesterday’s 2014 result.
Which is translating to distribution growth. This is a textbook “structural growth bond” with strong management extracting high levels of economic rent from the monopoly asset base. I can fully understand why SYD’s register is dominated by major pension funds, both global and local, looking for a predictable and growing income stream.
SYD also confirmed the data I used in my CWN note from Wednesday about increases in bilateral air capacity between China and Australia. This remains big news yet not widely known.
To me, as I’ve written three times already in this note, SYD is a “structural growth bond”. I’d own it over any form of fixed interest, every day of the week.
The confirmation of that view is long-term traffic growth data which clearly shows structural passenger growth at SYD. This will continue and will accelerate in the years ahead as Asian capacity is added.
So how do we value SYD?
The way I do it is to consider SYD a “structural growth bond” and price it relative to Australian Government bonds. At $5.00 the prospective 2015 distribution yield is 5.00%.
Over the months ahead I expect SYD’s distribution yield to be bid down to 4.50%, a 200bp premium to a 10yr AGB yield.
A 4.50% distribution yield equates to a
$5.55
12 month share price target on SYD.With the potential for another +16% total return in the year ahead, I rate SYD a high conviction buy and the stock remains a core member of my high conviction portfolio as we enter a medium-term period of low or even lower cash rates and an associated lower AUD.
SYD wins on yield compression and revenue growth in that scenario.
Have a good weekend, Go Australia, Charlie