Slides 21-22 in this presentation are the ones I find most relevant, when it comes to understanding the investment case for TCL in the context of the present inflation and yield environment.
Slide 22, in particular, correctly emphasises all the following important aspects:
1) That CPI-linked price escalation rules are embedded in all concession agreements (with the sole exception of the US business).
2) That wage growth (which is expected to be the main driver of sustainable CPI inflation in the foreseeable future) increases both the ability to pay and the value of time savings to toll road users.
3) That, as a consequence of 1) and 2), Toll Revenue is naturally linked and also inelastic to CPI inflation.
4) That (as also visually illustrated by the graph on the right of the slide) TCL’s business is therefore essentially indifferent to a rise in nominal yields, as long as real (i.e. inflation-adjusted) yields remain stable.
Regarding the debt position (discussed in slide 21), the relevant points I see are that:
1) 98% of interest rate risk is currently hedged.
2) The present cost of re-financing (at prevailing benchmark yields and credit spreads) is lower than the current cost of the debt scheduled to mature over the next two years.
3) Management are actively looking to extend the average tenor of debt, to make the most of the prevailing yield and credit spread environment.
This is exactly what I think long-term holders of TCL should stay focussed on, rather than get distracted by the daily jitters of the 10Y USD yield or by the umpteenth “rates are going up, sell the bond proxies” pitch.
IMHO & DYOR
TCL Price at posting:
$11.67 Sentiment: Buy Disclosure: Held
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