Recent changes to the Blended Australian Equity Portfolio
Purchased Chorus Ltd (CNU)
Chorus Ltd is New Zealand’s major wholesale telecommunications infrastructure provider to telephone and broadband service retailers. It owns most of the country’s telephone lines and exchanges and is responsible for building ~70% of the Ultra-Fast Broadband (UFB) network, due for completion in 2022. In 2011 Chorus was demerged from Spark, the privatised Telecom NZ, to participate in the UFB project. It is now the largest owner and manager of the open access internet network, with more than 1.5m broadband connections.
The company’s product portfolio encompasses a range of wholesale broadband, data and voice services across a mix of regulated, contracted, and commercial products. Declining connections for copper services are offset by growing broadband connections and increasing data usage on the UFB network. While there remains an element of regulatory uncertainty for the post 2022 period, but the company’s capex will step down considerably and it will transition to a dividend policy based on a pay-out range of free cash flow. This should result in a step up in the annual dividend into FY23-2424, with sustainable modest growth beyond. In the current environment of extremely low interest rates and extremely high uncertainty, Chorus exhibits a low risk profile and a 3.2% dividend yield with potentially substantial growth into the mid-2020’s.
Purchased Waypoint REIT Ltd (WPR)
The Trust was listed in 2016 to hold Viva Energy Australia’s portfolio of Shell service stations convenience retail properties. The 469 properties are geographically diversified with 73% by value located in metropolitan areas, valued at approximately $2.65b with a capitalisation rate of 5.8%.
The distinguishing characteristics of the portfolio are its long weighted average lease expiry of 11.7 years, fixed annual 3% rental reviews and that 92% of the portfolio’s income is derived from triple net leases, under which the tenant is responsible of all property outgoings and capital expenditure. These characteristics are particularly attractive during a period when the retail, office and residential property asset classes face challenging conditions for maintaining and growing income and asset values.
With gearing at 30.4% versus the target range of 30-45% and a yield of 5.6%, we consider Waypoint’s income well secured and capable of modest growth through annual reviews and ongoing acquisitions. Under the internalisation announced in February with the exit of Viva Energy from the register, Viva’s pre-emptive rights over the remaining properties it leases from external parties have been grandfathered to Waypoint until 2030 and there are no change of control clauses to hinder any corporate interest in Waypoint. New management appointed under the internalisation is also reviewing the portfolio for value adding opportunities and alternative uses in the longer term.
Recent changes to the Australian Equity Income Portfolio
Increased Spark New Zealand (SPK) We have recently added to Spark New Zealand (SPK) which reaffirmed its FY20 earnings guidance in late April, highlighting the resilience of telecommunication sector. SPK’s ability to generate stabile earnings underpins our confidence that its dividend of AUD$0.21c can provide investors with an attractive dividend yield of c.5.3%.