Recent changes to the Blended & Income Portfolios Purchased Rio Tinto (RIO) We have added Rio Tinto Ltd (RIO) to the portfolios as a second resource exposure to BHP. While these mining companies have not been unscathed by Covid19, their balance sheets are robust and key iron ore divisions (~65% of earnings for BHP, 55% for RIO) have had stable pricing. Benchmark prices averaged ~USD89 over the March Quarter as China’s steel production was maintained and the broader economy’s re-start was faster than expected. Pricing across other commodities has been somewhat weaker but production costs are benefiting from lower oil prices and translation to AUD is assisted by the currency’s ~11% decline over the year to date. RIO’s net debt of US$3.7b, with gearing at 7% compares to its free cash flow of more than US$9.4b in 2019, which is forecast to remain above US$8b in 2020. The company’s recent commitment to paying its final dividend as scheduled in April comes amid a spate of deferrals and cancelations of dividends. Recent changes to the Australian Equity Income Portfolio
Sold Transurban Group (TCL) We have sold Transurban Group (TCL) after the company’s market update on April 1 outlined an increase in cash through recently raising $1.2b debt, giving a liquidity position of $3.5b compared to a minimum requirement of $2.9b. The share price stabilised on the company’s statement that corporate liquidity can support its needs and the needs of a non-recourse asset. TCL has, however withdrawn its dividend guidance and is moving to a payout of underlying cashflow. There may be a need to change its payout policy into the future. Group traffic was down just 4% for the quarter but was down 36% in the final week of March compared to the prior period. Citilink has pushed ahead with toll increases in Australia but the US roads have variable pricing which exacerbates the volume impact of Covid19 restrictions. We appreciate that the company’s toll roads are monopoly infrastructure assets with long concessions but its requirement to maintain an investment grade credit rating means that shareholders’ interests are subordinated to debt holders in a time of unanticipated traffic volume declines across all its markets. The company has sufficient liquidity now but the dividend is at risk if continued traffic declines force the company to retain cash rather than raise more debt.