Coast Wholesale Appliances Income Trust

01/12/06 01:08:33 PM

by Koos van der Merwe

The income trust market in Canada is hot — VERY hot!

Security: CWA.UN.TO
Position: Accumulate

In recent years, income trusts in Canada have enjoyed surging popularity because of their potential to deliver higher yields than bonds. The recent low interest rate environment has made high yields attractive especially to seniors, who live off the income from their investments. Income trusts are structured to avoid corporate taxes on distributions, which are again taxed in the hands of the investor. They thus eliminate or significantly reduce corporate tax; the corporation, now a trust, pays little or no tax on its earnings because most of the income is distributed directly to the unit holders.

In November 2005, Canadian Finance Minister Ralph Goodale stated that the government was considering a change in the tax structure for income trusts. The outcry by the public was so great he was forced to rescind his threat. With Income trusts now making new highs, Coast Wholesale is a laggard, but one worth looking at.

Coast Wholesale Appliances income trust was formed by a company that operates only in British Columbia. Therefore, turnover is not so large that it attracts the big investors, so the price has fallen from its original listing price of $10 to present levels. However, the company, which provides appliances capitalizing on the building boom in BC, has maintained a distribution of 10 cents per share, giving it a yield of 15.6% at current prices.

The company's negatives are its high long-term debt, and the fact that with its small turnover, it could be affected should the BC building boom slow down. With the Winter Olympic Games due in Vancouver 2010, however, any slowdown could be delayed.

What does the chart tell us (Figure 1)?

FIGURE 1: COAST WHOLESALE INCOME TRUST. Despite the dip since this income trust's first offering, the RSI, the stochastic, and volume suggest that the sideways movement could be a sign of strength in the near future.

Graphic provided by: AdvancedGET.

The initial prospectus sold the share at $10 each, but as is usual with new listings of income trusts, the price usually opens in the market at a price minus an approximate of the fees charged to purchase the trust on the open market. In this case, the trust opened at $9.91 on June 23, 2005. Since that date, it has been trending down as shown, eventually reaching a bottom of $6.50 on November 22, 2005, after Minister Goodale's announcement. With the hue and outcry, the price quickly rose to $7.86 before retreating and forming what appears to be a cup & handle formation, giving a price target of $8.82 once the resistance at $7.86 is pierced.

What is also interesting is that with the handle, a triangle has developed. This is suggesting a lesser target of $8.45.

Finally, do note that the relative strength index (RSI) is showing strength; the stochastic indicator is at overbought levels, and volume is below average. The latter is suggesting that the sideways movement on low volume could be a sign of strength in the near future.

Coast Wholesale income trust is a tradable that the investor could own at present levels, if simply to collect a handsome yield. We should always keep in mind, however, that nothing is guaranteed, and the company, which pays its interest monthly, also declares what it intends to pay approximately 15 days before settlement date and could at anytime reduce the amount it intends to pay should sales and profit deteriorate.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.