If we choose to calculate TCL’s yield according to the FCF/EV approach, the “unlevered” earnings we get are "directly" linked to CPI, i.e. in an unlevered way.
Therefore, the government bond yield that should be taken as a benchmark is by all means the yield of the most long-dated (2040) Australian Government Indexed Bond, whose notional follows CPI in exactly the same way.
That yield, as of today, is 0.88%; therefore, the spread between TCL’s FY2020 FCF/EV yield and the 2040 indexed bond yield is presently 5.26%-0.88% = 438bp.
Now, even if the long-term real yield went up by 100bp (i.e. more than doubled) between now and FY2020, we would still have a 338bp spread. To me that looks like a rather fat premium, for this type of business and on an unlevered basis, not a skinny one.
TCL Price at posting:
$11.33 Sentiment: Buy Disclosure: Held
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