Suncorp-Metway Jun 2008 convertible preference shares IPO

[Adapted from my statements in an email conversation.]

I assume you know about Suncorp-Metway.

They are looking to raise money through the issue of Convertible Preference Shares (CPS). They have applied for the symbol SUNPB and we will use that to denote the new issue.

Suncorp-Metway has previously issued Reset Preference Shares (RPS) that trade with the symbol SUNPA and floating rate capital notes that trade with the symbol SUNHB.

Coupons

SUNPA is offering a pre-tax yield of 7.24% till Sep 2011 on the issue price of $100. SUNHB is offering a pre-tax yield of 0.75% above the 90 day bank bill rate at the beginning of each quarter, paid quarterly, and stands at 8.55% of the face value of $100 as determined in Feb 2008 to be paid at the end of May 2008. SUNPB is being issued to offer a yield of 3.2% above the bank bill rate as at the first business day of a quarter, paid quarterly. At present the pre-tax yield of SUNPB is expected to be 10.97% on the face value of $100.

Yields

As of now the asking price for SUNPA is $92.80, for SUNHB it is $88.70 and the issue price for SUNPB is $100. Corresponding pre-tax yields are 7.80% for SUNPA, 9.64% for SUNHB and 10.97% for SUNPB.

SUNHB is the closest comparison to SUNPB. Lately, SUNHB has traded as low as $85 and has reached a low of circa $79 last in 2002. At $85 the yield for SUNHB is 10.06%. We cannot compare this to the price and yield in 2002 as market circumstances were significantly different.

SUN shares closed the day at $15.43. Preceding two half yearly fully franked dividends amount to $1.07, giving the fully paid ordinary shares a gross dividend yield of 9.91%.

Ideally, SUNHB should have a yield lower than SUNPA and SUNPB, with the latter two having comparable yields. SUN should have the highest yield as it is riskiest of all issues. With dividends of SUNPB being non-cumulative and distributions of SUNHB being cumulative, the 1.33% difference in yield in favour of SUNPB is warranted.

SUNPB is being offered with a good yield according to latest market pricing of comparable securities in the same franchise.

Sufficient interest cover

Suncorp-Metway's profit for HY2008 before tax and capital funding costs associated with paying interest to bond, note and preference share holders is $553m. Payments as interest and dividends for non-ordinary capital is shown to be only $63m. The actual amount has been offset with interest earned though non-ordinary activities. Nevertheless, the pre-tax profit is a little greater than 8 times the interest commitments. Not only is this good for ordinary shareholders, but also for the bond, note and preference share holders.

In my opinion SUNPB is worth subscribing to.