Stronger Growth at T.C. Pipelines
We are reiterating our Buy recommendation and raising our price objective ($40 vs. $38) for T.C. Pielines (TCLP) units. On the recent call, management provided the first clearest possible indication of major asset draw-downs in the near future from TransCanada Corp., the general partner. TransCanada's major capital needs this year, largely due to its pending acquisition of major power generation asset in the U.S., is expected to prompt it to sell assets to TCLP.
The potential addition of quality assets to the partnership's portfolio over the next few quarters, which were not previously part of our distribution-growth expectations, is a major boost to its growth prospects. We believe that a greater appreciation of the partnership's growth prospects will help bring down its discount to the group.
On a distribution yield basis, TCLP units are trading at a yield spread of 382 basis points to the 10-year Treasury yield, at a significant discount (higher yield = lower value) to the peer pipeline MLP group's average spread of 334 basis points. Our new $40 (up from $38) price objective reflects a target distribution of $3.05 (9% above current levels) and a target yield of 7.63%, reflecting a 313 bps spread over our 10-year Treasury bond yield expectation of 4.5% over the next 12 months.
Mild Applause for Hurray! Holdings
We maintain our Hold recommendation and the same valuation target for Hurray! Holding Co. Ltd. (HRAY), a leading provider of wireless value-added services (WVAS) and digital download content in China. This is following mixed financial results for first quarter 2008.
Top-line sales volatility continues despite momentum improvement for the core WVAS market. Net income was above our estimate due to improved operating efficiency. Hurray! has a strong financial position with $3.10/diluted share of net cash. The company's ongoing business transformation strategy taken to develop into a leading entertainment content production and distribution provider in China is likely to contribute favorably moving forward.
On the other hand, the overall Chinese WVAS market remains challenging due to strict regulatory policies and we expect sales fluctuations to continue over the next six-to-twelve months. Therefore, we maintain a Hold rating on the shares.
Hurray! is currently trading at 59.4x our fiscal 2008 EPADS, which is at a premium to both S&P 500 average and the peer group average. However, with respect to other selected valuation metrics, the stock is trading significantly below peer levels. According to our view, the company has not yet derived required benefit from its diversification strategy and its WVAS business needs to demonstrate further stabilization. Our target price of $4 is based on a 1.4x Price/Sales using our 2008 sales estimates, closer to the S&P 500 average.
Ford Working Out of a Tight Space
Ford Motor Co.'s (F) 'Way Forward' plan undertaken to restore the profitability of the North American automotive business, its new products, profitable financial services business, and cost reduction efforts are some of its potential positives. However, rising gas prices is affecting the company's operations. Ford dropped its plans of becoming profitable by 2009 due to difficult operating environment. Hence, we reiterate our Hold recommendation and set a six-month target price of $6.00.
Ford will adopt lean and flexible manufacturing capacity utilization that will result in the closure of 16 facilities by 2012, reduce capacity by 10-15% by the end of 2008. The company plans to cut up to 12% of its salaried staff by August 2008. Ford's international profits are improving.
Despite the presence of these factors, Ford's prospects are clouded by the loss of market share, high costs, labor problems and product launches. We expect North American vehicle sales to be down compared to last year. Its market share is likely to fall and the company expects to incur losses for the full year due to deteriorating US markets. Ford is also facing mounting pressure to deal with excess employment of Ford United Auto Workers (UAW) members at Visteon (VC).
Although the company's new product launches, cost-cutting efforts and recent appointment of new CEO make us optimistic, its market share losses, lowered credit ratings, waning SUV sales and a tougher operating environment concern us. We set our six-month target price at $6.00 as we believe the stock will trade in the same range and recommend a Hold rating.
Arby's Marrying Wendy's
After two failed attempts, Nelson Peltz, Chairman of Triarc (TRY), the franchisor of Arby's restaurant chain, was able to strike a buyout deal with Wendy's (WEN). Under the agreement announced April 24th, Wendy's shareholders will receive 4.25 shares of Triarc Companies for each share of Wendy's they own. This equates to $28.18 per share at Triarc A shares current price ($6.63), an 11.8% premium to Wendy's share price at the close the day before the announcement.
However, the buyout price is a 24% premium to Wendy's closing price of $22.72 on April 15th, the day before it broke out of its trading range and 13 days before Triarc formerly announced that it was considering launching an acquisition bid for Wendy's.
