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Blue-Chip

Two Expensive Blue-chip Stocks

October 27, 2015 | Team Kalkine
Two Expensive Blue-chip Stocks

Westpac Banking Corp (ASX: WBC)



WBC recently announced a fully underwritten, pro rata accelerated renounceable entitlement offer to raise about $3.5 billion at $25.50 per new share. Normally, the effect of a capital raising is to reduce stock prices but it appears that the prices of this company have risen by almost 5% after the announcement of the completion of the issue and so lost ground has been regained. There was also reassurance for potential investors in the news that the bank would be raising interest rates on loans and this partially would offset the cost of higher capital requirements. The very fact that they are in a position to raise rates in a highly competitive environment would indicate the dominance of their position in the Australian banking market. The market will now be wondering whether the other three of the four big banks (CBA, ANZ and NAB) will follow suit especially when Prime Minister Malcolm Turnbull has noted that the increase was not necessary. Obviously, despite Turnbull's comments, the banks will do whatever is necessary to protect their commercial interests and this could mean an increase in interest rates across the board as banks move to protect their earnings. Westpac has increased the mortgage interest rates by about 0.2 percentage points on its own, irrespective of the Reserve Bank.


Impact of Efficiency Programs (Source: Company Reports)
 
Of course, there is always the possibility that the other banks could keep rates flat in an attempt to steal market share and this could add some uncertainty to the profit growth of Westpac. However this has to be considered in the context that the big four banks will have to continue to raise capital in the next few years because of regulatory concerns and will need to find methods to offset the cost of the additional capital raising. The bank is also in limelight these days with regards to the so called “privacy breach” for seeking personal banking information of investigative journalist, Nicky Hager, from Westpac without any legal order by the police. The bank in response has modified its policy in view of “full and frank” disclosure sought by Nicky from the bank for handing over information.


WBC Daily Chart (Source: Thomson Reuters)

On balance, we believe that Westpac shares are expensive and that investment should be postponed till we have a clear picture of their future growth and prospects.
 

Transurban Group (ASX: TCL)


 
This company has an excellent portfolio of listed toll road properties and clued up investors are already aware of its strengths. The stock currently produces a dividend yield of around 4.4% which is expected to increase in double digits over the next two years with much potential beyond that time frame. The quality of the company's assets and its growth can be seen in the composition of its portfolio. Three of its major roads that account for 55% of total revenues and 77% of EBITDA, have minimum rates of increases for tolls which comfortably exceed the rate of inflation (4.5% for Citylink and 4.1% for M1 & M2) while the other roads in Australia provide a minimum increase of CPI. This means that revenues and EBITDA should grow above the rate of inflation but, what is striking is that, the company has been able to consolidate its position in Sydney and Melbourne by taking advantage of the work being done to increase the capacity of the network which should also produce growth in traffic. This has enabled them to negotiate greater increases in tolls on trucks in four of their roads including the largest to compensate for the work undertaken. Moreover, the operations in the US though modest have significant potential to grow over a period of time. The company expects to have a 19% surge in its toll revenue to $446 million in the first quarter of 2016. The company has also indicated about a bid to buy the Airport Link tunnel which is said to be the only toll tunnel in Brisbane that is outside TCL’s Brisbane network.
 

Traffic and Revenue Performance (Source: Company Reports)

Investors can expect consistent growth in both earnings and dividends over a period of time but we believe that the stock is overpriced at the current levels and do not recommend an investment at this point in time.


TCL Daily Chart (Source: Thomson Reuters)
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