Hold on to Transpacific SPSs

As the underlying creditworthiness of Transpacific Industries continues to rise – thanks to the pending sale of its NZ business – so does the price of the Transpacific Step-up Preference Shares (SPS). Now that they're trading above $100 you may be wondering whether it's time to sell. In short, not yet.

All things being equal we’d sell the Transpacific SPSs at face value – $100 – but it's not as simple as just waiting for the market price to hit that level – you need to adjust for the accrued coupon, which is the value of the next income payment that has so far accrued. It accrues at a rate of about 50 cents a month and you need to deduct this from the current market price to give you the underlying price, which you can compare against the $100 face value. Right now, there is $3.21 of accrued coupon included in a market price of $100.50, giving an underlying price of $97.29 – well below the $100 face value.

The Transpacific SPSs pay a six monthly distribution equal to the BBSW (currently 2.62%) plus a 6% margin, which equals a running yield of 8.9% (the distribution of $8.62 divided by the underlying price of $97.29). There's limited scope for capital gains from here and if the security price rises much further we’re likely to sell our holding in the Income Portfolio. For now, with the security price rising 5% since Transpacific SPS down a notch from 08 Oct 13 (Hold – $95.60), HOLD.

Note: Our model Income Portfolio owns Transpacific SPS securities.