Transurban (TCL) was able to monetise the Chesapeake assets for an incredible price, during the period, which reflected a) pension fund demand for quality infrastructure assets and b) the very low real interest rate environment, which frees up the balance sheet capacity needed to overpay for these assets.
That news isn’t new, although it was a contributing factor to our decision to exit the stock, post a strong share price rally that begun back in May.
Otherwise, whilst TCL is normally lauded for it’s defensive, resilient earnings profile, it is acutely vulnerable to the stay-at-home COVID related effects. As such, it isn’t a great stock to be owning through an environment in which the R0 appears > 1, even with fairly restrictive lockdowns in place.
Secondly, it appears that a few projects are encountering difficulties, most prominently West Gate, in which it appears that all parties will need to throw more capital at the problem. That’s just the sort of thing that tends to get worse before it gets better.
Thirdly, and most importantly to our minds, is that TCL is a very long duration stock. That means the sensitivity of the market capitalisation of the company, to changes in the level of rates, is very high, and in this case, the higher the change, the lower the valuation,
Given our view that real yields are set to move higher, we wish to make sure that the portfolio is not overly exposed to long duration names until after such a move.
Combined with the above factors/observations, we look elsewhere in the market.
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