Suncorp-Metway issues re-priced by the market

Legendary Mr. Market has re-priced issues of Suncorp-Metway.

On 19 May when we looked at Suncorp-Metway's June 2008 convertible preference shares IPO and found the new issue, quoted as SUNPB, being offered with a very attractive yield compared to other issues of the bank. At that time, floating rate notes SUNHB and reset preference shares SUNPA were offering gross yields of 9.64% and 7.80% respectively. Based on latest two half year dividend payouts, fully paid ordinary shares quoted as SUN were offering a grossed up dividend yield of 9.91%. SUNPB was being issued with a gross dividend yield of 10.97%.

Ideally, SUNHB should have the lowest and SUN the highest yield. SUNPA and SUNPB should have the same yield but be between yields of SUNHB and SUN. However, that was not the case before the issue of SUNPB.

Since then a gradual re-pricing has occured. SUNHB, SUNPA, SUNPB and SUN closed the day at $84, $89, $101.24 and $12.15. Their yields respectively are 10.18%, 8.13%, 10.84% and 12.58%. Apart from SUNPA, whose yield still looks out of line, yields of SUNHB, SUNPB and SUN look more in line with their associated features and risks.

I suspect that the issue of SUNPB contributed to an increase in the yield of SUN and therefore a drop in its price.

At current yields, SUNHB with its cumulative interest payments is attractive compared to SUNPB. We cannot comment on SUN without conducting a detailed analysis of the bank's accounts and operations.