Australand ASSETS
Recommendation
After almost reaching $98 in May last year, the security price of the Australand ASSETS hybrid securities fell to $84 in September as markets feared a European banking collapse. While it has now rebounded to around $93, it’s a timely reminder that hybrid securities share more in common with ordinary shares than fixed income securities.
With the Reserve Bank dropping interest rates by 0.5%, the current running yield has fallen to 9.2%, still well above current deposit rates. Capital gains will be limited from here and interest rates (and therefore distributions) could fall further. But at the current price the 4.8% interest margin over the three-month bank bill swap rate is enough to keep the securities in the model Income portfolio.
We recently updated Australand’s progress on 7 May 12 (Hold – $2.74). We’d feel much more comfortable if the property developer’s debt was locked in for much longer than an average of almost four years. Should Australia suffer an economic shock, the company might need to raise capital. That would dilute ordinary securityholders but make the hybrids safer.
With the security price increasing 1% since 6 Feb 12 (Hold – $92.00), we’re sticking with HOLD.
Note: The model Income portfolio owns Australand ASSETS and the ordinary Australand securities. The Growth portfolio owns Australand securities.