For clients that have elected the “Income” Australian equity option we have bought Transurban, funded by the sale of Coca Cola Amatil.

Purchase of Transurban (TCL)

Transurban is a major toll road operator with six motorway concessions in Australia and the three in the USA. The concessions grant the company the right to operate the roads and collect tolls for a predetermined amount of time. Concessions in Australia have a weighted average remaining life of circa 23 years, while the concessions in the USA are extremely long at 75 years or more. The latter may however end earlier without a significant improvement in traffic volumes.

We like the Company due to:

• Its high quality Australian assets which form the backbone of Melbourne’s and Sydney’s motorway networks;
• The company’s income stream is defensive, benefitting from an improving economy via upside through traffic growth while inflation protection is provided by toll’s increasing annually in line with inflation or at an agreed fixed rate;
• Its expected advantage over other potential investors in terms of new asset opportunities as an owner operator given its ability to fractionalize overhead and tolling systems across a broader network; and
• Attractive organic growth opportunities via initiatives like road widening.

We had previously owned Transurban but sold it largely on concern that the expected traffic growth from the Hills M2 upgrade would not materialise. The most recent quarterly traffic statistics however seem to indicate that our concerns were misplaced with traffic growth gaining momentum in 2Q14.

In essence we view Transurban as a defensive exposure with a reasonable yield growing solidly.

Sale of Coca-Cola Amatil (CCL)

Coca-Cola is one of the largest bottlers of non-alcoholic ready-to-drink beverages in the Asia-Pacific region and one of the world’s top five Coca-Cola bottlers. The company manufactures, sells and distributes a diversified range of products including carbonated soft drinks, water, sports and energy drinks, fruit juice, flavoured milk, coffee and packaged ready-to-eat fruit and vegetable products.

With the company’s shares currently trading at a premium to the broader market at 16.5x FY14 estimated earnings based on Bloomberg consensus, we are concerned about a possible P/E de-rating at the upcoming reporting season should there be another earnings miss.

An Earnings Disappointment is Possible due to the following:

• Ongoing price competition from Pepsi is expected to keep pressure on revenue growth and margins;
• The Asahi/Indofood joint venture to manufacture and sell non-alcoholic beverages in Indonesia could hamper Coca-Cola’s growth in this market which is considered a key driver of the company’s future growth;
• Carbonated drinks in which Coca-Cola is the clear market leader is losing fridge space in supermarkets and convenience stores, primarily to energy drinks and water which is a category
• It is relatively weaker in. Given that the convenience/single-serve products are much higher margin than the take-home product, the negative impact on earnings could be greater than the loss of sales;
• And Decreasing capex-driven efficiency gains.

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