BFC3540 Investment Debates – Week 1 – SYD and TCL

So, the time has come for students to taste a dab of real life. Your finance degree is not constrained to calculating the NPV, defining CET ratios or coding visual basic. The investment group debates are all that more exciting because you get the opportunity to flex your muscles on other people who have no clue what they’re doing. Asking a kid with an 80 WAM the relationship between bond yield and bond price – except in a real-life example with REITs and interest rates, only to hear him say “sorry what?” is quite the sight to behold.

I’d also like to point out that last year, the investment group debates made their debut on the EXAMS – worth a MASSIVE 25%. So, what you do here should not be taken lightly. But here are our two cents on how you should argue long or short for your six stocks, and what questions you could ask to make that commerce kid lose their composure real quick!

Sydney Airport (ASX: SYD)

Sydney Airport (SYD) owns and operates an airport in Sydney, Australia. SYD Provides Aeronautical, retail, property, car rental and parking and ground transport services through their two main business units which are Aviation (Sydney Airport) and Leasing & Advertising Opportunities.

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Macro: Sydney airport is an incredibly popular stock among the ASX200. Why? Because Sydney is a hotspot for Australian tourism, business and population growth etc. Sydney airport do monthly traffic performance reports, and we always see strong growth figures when it comes to tourism from Asian countries.

If we jump into the numbers, SYD is actually relatively expensive, trading on a price-earnings of 43. It can do so because everyone is confident that SYD will continue to grow organically on the back of tourism, immigration, affordability of flights etc.

Reasons to LONG

It’s difficult to come up with short term reasons why you should long SYD when it’s more a long-term hold sort of stock. With that being said, can bring up some of the following points:

  • A monopoly in its area/industry
  • Cheap flights
  • Tailwind from surge of tourism

Reason to SHORT

SYD is classified as a utility stock. A lot of people hold SYD for its yield. The problem with that is when interest rates start increasing, investors sentiment demand a higher yield from SYD – and therefore the share price falls – while the yield increases. As the US Fed have already increased rates this year and continue to do so before the end of CY2018 – could adversely affect SYD.

Further to this, there are some other points why SYD could be a short:

  • Main drivers of profits are parking – which has diminishing growth
  • Dividend growth for the next five years (CSE 6% CAGR) is likely to be lower than what it was in the past – we could see a shift of funds to other dividend stocks
  • And again, interest rates

Transurban Group (ASX TCL)

Transurban Group (TCL) manages and develops urban toll road networks in Australia and the United States of America. Company engage in the development, operation, maintenance and financing of toll road networks as well as management of the associated customer and client relationships. Company have 13 roads in Australian portfolio and in US company have 2 roads in the state of Virginia, both in Washington DC area.

Transurban in many ways is like SYD – they are a monopoly within the industry, well-received by income investors, have demonstrated many years of sustained growth and will continue to do so on the back of a growing population.

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TCL have also recently acquired WestConnex (see image below)

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Reasons to LONG

Like SYD, TCL has been a favourite among income investors. It’s a story that goes well with an organically increasing population, we all drive cars and pay tolls. Not only is TCL exposed to organic growth, but they recently made an acquisition that will further attribute to growth. Here is a list of reasons why you might want to long TCL:

  • Cars, cars and cars. There are pretty much more cars than people in Australia – as TCL’s assets generally bring people from metro/rural into the city – we can really expect them to grow … forever.
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  • Their segments have performed strongly, and their recent acquisition will add more strength to their portfolio.
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Reasons to SHORT

  • TCL is a dividend focused stock, with rising global bond yields and interest rates – TCL might be at risk of a sell off.
  • The market is again, quite weak at the moment, and buying a stock that moves along with the market might exposure your portfolio to losses.
  • A capital raising for the acquisition will dilute earnings per share
  • Getting the blessing of the ACCC doesn’t mean the end of regulatory pressure – they’re still under parliamentary enquiry to address the concerns of their growing market monopoly – negative news will further downgrade the share price

Questions to ask (SYD and TCL)

  • Thoughts on rising interest rates impact on SYD
  • Thoughts on curbing growth on areas such as parking
  • The market is looking quite bearish at the moment as the ASX been in the red for eight consecutive days – why make a move on a stock that moves with the market?
  • Besides growing organically via population and tourism – SYD haven’t really made any acquisitions or other means of growth, why not opt for companies that can grow more/provide a better return?
  • This debate is based on weekly returns – why are you buying an income stock?
  • What if TCL cannot make this acquisition – what happens to their growth and what happens to investor sentiment?
  • Why invest in such an expensive stock on a P/E basis. Why not look the other successful stocks like TWE, A2M and MQG who provide better risk/return.

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