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Andrew Main
+ About Andrew Main

About Andrew Main

Andrew Main has spent 35 years in journalism and stockbroking, which took him from Perth to Sydney, Paris and London. He was Business Editor of The Australian between 2007 and 2009.

He was a joint winner of the Gold Walkley Award, Australia's top journalism prize, in 2003 for a series of articles on errant stockbroker Rene Rivkin's Swiss bank accounts and he has published two books, one on the collapse of HIH insurance and the other a biography of Rivkin. He had a regular spot on ABC 702 for five years in Sydney explaining the mysteries of finance to a mid-morning audience.

More recently, he has also been a regular commentator on Sky Business

Toll and traffic growth drive Transurban profit

Wednesday, February 08, 2017

By Andrew Main

Transurban Group yesterday turned in a very solid half-year profit result as a solid example of what happens when a utility demonstrates tight discipline in how it throws its money around.

The toll road operator saw the price of its stock kick up 20 cents on yesterday’s open to $10.58 (and moved up from there to close 6.36% higher at $11.04) on a report that saw traffic growth vying with increased tolls to have the bigger effect on top line earnings, EBITDA.

CEO Scott Charlton announced a first-half distribution of 25 cents a share and noted the full 2016-7 year guidance had moved up to 51.5 cents a share, an increase of 13.2% on the 45.5 cents paid out after the 2015-6 result. The previous guidance was for 50.5 cents.

Transurban holds a portfolio of toll roads on the east coast of Australia and in Washington DC, and because of its stapled security structure and continuing investment in new and existing projects, it doesn’t expect to start paying tax until, as Mr Charlton put it, “the early 20s”.

That’s not great news for franked dividend hunters, who, for instance, will only see franking on 1.5 cents of the last 25 cents a share payout due to hit investors’ accounts on Friday. But more on that later.

The company reported a statutory operating profit of $88 million, which appears to compare with $22 million for the previous half.

The real standout numbers were that the company’s proportional share of toll revenue jumped by 10.9% to $1.065 billion, while average daily traffic was up by 4.8%.

So more vehicles are on the road and they’re each paying more to be there. There’s an extra positive, for instance, in Sydney’s Lane Cove Tunnel, M5 and Westlink M7, in that large vehicle toll multipliers are now at three times those of cars.

So, won’t big trucks avoid toll roads if the operators start to find the charges a bit steep?

Mr Charlton chose that well-known Melbourne rat race, the Tullamarine Freeway between the Bolte Bridge and Melbourne Airport, as an example of why they won’t, even after a toll rise on April 1.

Daytime section tolls for heavy vehicles will increase from 1.9 times the cost of an equivalent car trip, to 3.0 times.

(Regular users know very well that Transurban is widening the Tullamarine Freeway and that, for the moment, usage has actually shrunk slightly).

“There will be a 30 minute time saving, or will be, on a return trip when the road is at full capacity,’’ he said.

To back his point, in the December quarter in Melbourne, Transurban’s car traffic decreased by 3.5% and large vehicle traffic increased by 14.4%.

The company is a worked example for investors to see there’s more to life than franking, assuming they are looking at the bigger picture.

Melbourne-based Transurban owns all of the Melbourne CityLink, Sydney’s Lane Cove and Cross City tunnels and the M2 Hills Motorway, plus two tollways in Washington DC.

And that’s before you look at part-owned assets such as the 75% owned Eastern Distributor in Sydney, a clump of previously maligned tunnel assets in Brisbane, and a 50% stake in the new NorthConnex tollway in Sydney designed to relieve Pennant Hills Road.

As Scott Charlton put it in a call to analysts yesterday, “a quarter of our portfolio has been picked up out of receivership.

“We’d rather be the one taking assets out of receivership than the alternative.”

In other words, Transurban managed to dodge the silly financial engineering-led flurry of tunnel construction in Sydney and Brisbane that caused so much pain for big investors most of a decade ago.

Remember how traffic volumes on projects such as Clem7 in Brisbane, the Cross City Tunnel and the Lane Cove Tunnel in Sydney were nowhere near what had been modelled?

Transurban has enjoyed what you might call a second mover advantage.

Interestingly, Charlton noted that there aren’t many professional traffic forecasters left in Australia given the liability issues involved.

He added however that Transurban does its own numbers, with a crew of “rocket scientists,’’ as he called them, “who sometimes say things I don’t understand’’. More power to them, I’d say, and to Charlton for admitting it.

He said that missing out on the big I-66 tollway project in the US, a major traffic artery outside the Washington beltway, was the first project in four-and-a-half years that Transurban had bid for and missed out on.

“We did lose by a considerable amount,’’ he said, adding ominously for the winner that “we continue to remain disciplined” about bidding on projects.

Star performer among recent broker reports has to be the one from Morgans, which on January 30 upgraded the stock from Hold to Add.

Runner up is Credit Suisse, which had had it as an Outperform and keeps it on a price target of $12.50. The January 17 report does indicate that “Transurban is not expected to upgrade dividend guidance at the upcoming interim report release,’’ but holders will be happy to forgive that outburst of caution.

The stock did run up past $12 in July of last year before dropping back to just above $10 in November thanks to nerves about interest rates going up in the wake of Donald Trump’s plans to borrow heavily to rebuild US infrastructure.

That concern didn’t take up a lot of time during the analysts’ call yesterday, not least because upward rate moves aren’t now being seen as an imminent disruptor of Transurban’s plans as they were.

The big project heading Transurban’s list of likely starters is the giant $5.5 billion Western Distributor proposal, which will see Transurban partner with the Victorian Government on cutting a corner between the West Gate Freeway and the Tulla Freeway, cutting out the Bolte Bridge.

Transurban is expected to provide details of the financing arrangements shortly. Credit Suisse is talking about a $1 billion raising in the current half. 

That sounds like a lot until you note the company’s capitalised at well north of $20 billion and, to quote Credit Suisse, “the share market will treat it positively.’’

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Shriro could snag sales with celebrity BBQ range

Wednesday, January 25, 2017

By Andrew Main

What better way to celebrate Australia Day than to replace the backyard barbecue?

Australia has a fine tradition of DIY barbecues using unlikely materials. Old bushies who were Land Rover fans used to use the lift-off radiator grilles as grills and were mortified when the Series III came out in the 1970s with a plastic one. At least one lonely diner allegedly failed to spot the difference until it was too late. 

We’ve moved a long way from that but there’s always room for improvement.

Listed Australian company Shriro Holdings (ASX:SHM) recently launched the Everdure by Heston Blumenthal range of barbecues.

The English culinary maestro might not be your cup of liquid nitrogen but there has to be upside in reconsidering the way we cook food out of doors.

British chef, Heston Blumenthal. Source: AAP

The big positive of the Everdure range, launched in September, is that a patented electrical heating element gets charcoal up to cooking temperature in around nine minutes, while the market giant Weber of the US takes around twice as long to get that hot and other barbecues take even longer. You might not have known this but most outdoor cooking around the world relies on charcoal.

An October report on Shriro from Wilson stockbrokers noted that “anecdotal evidence suggests immediate traction on sales … in the domestic market despite cooler than normal weather on the east coast.’’

The weather has certainly warmed up since then but we’ll have to wait for the full-year results announcement in February to know how Everdure sales went.

Shriro’s a Sydney based kitchen appliance and consumer durables wholesale specialist that’s capitalised at around $120 million and has that rarest of joys, a solid fully franked dividend yield of around 8%. Its 2015 dividends were 6 cents a share and the 2016 total is forecast by Wilsons to hit 10 cents.

It sells almost exclusively in Australia and New Zealand although it has a small staff in China keeping an eye on the quality of some of its product range that is manufactured there. It has around 150 staff overall, mostly based in Sydney’s Kingsgrove.

The shares which were first listed in June of 2015 at $1 are now priced around $1.16.

Heston’s barbecues may, in future, be a big part of Shriro’s range of offerings but the company currently earns more than half its revenue from being the sole distributor of Casio products in Australia. As in calculators, watches and keyboards, none require a sunny day and cold beer to work best.

To give you an idea of how good that cash flow is, Casio calculators enjoy between 90 and 95% of the Australian school calculator market via the basic Casio FX 82 model, which retails for around $22.

Shriro has reportedly worked with each state educational board of studies to have FX 82 learning lessons built into the school curriculum.

Meanwhile, the Casio G-shock range of watches is a solid seller among younger Asian males, both here and in New Zealand.

SHM is reporting its results in mid February. Net profit after tax (NPAT) is expected to increase by around 8% from the normalised $12.4 million reported for 2015, held down mostly by the one-off expenses related to the launch of the Everdure range. Without those expenses, growth would have been in double figures.

It also makes cooktops and stoves in Italy under the Omega label, intended to bridge the gap in the market between the basic offerings and the Miele/Smeg level products.

The Omega range was designed by Rockpool group founder Neil Perry, who incidentally introduced Heston Blumenthal to Shriro.

The company’s biggest shareholder is 33% holder Shriro Pacific, controlled by Monaco resident Mark Shriro. The family started out more than a century ago in China selling furs into Europe via the Trans Siberian Railway, so don’t write the stock off for its Monaco connection. 

There was a price lurch last year down to the 80 cent mark because of what appears to have been a failed 5% selldown by the controlling shareholder, but people close to the company say that any selldown that occurs in future will be better managed.

Shriro Holdings is in that interesting size range whereby it would like to make organic acquisitions, and at the same time, be a possibly tempting target for a bigger company in the same space, such as Breville.

Last year, Shriro CEO Mike Westrup, who was previously at Breville himself, said Shriro was looking for a bolt on acquisition in the $15-$25 million EBITDA range.

“The acquisition has to make sense and be in an allied area of SHM’s expertise,’’ he said.

Certainly, Shriro’s temptingly low Price Earnings ratio makes it a target for a bidder with a higher PE, as the usual measure demands.

Wilsons has it on a forecast PE for the 2017 calendar year of 8.7 times, the lowest in its sector compared with for instance GUD on 8.9 times and Breville on 10.3.

It has a Buy on the stock, no great surprise given it was a joint manager of the float, with a 12-month target price of $1.55.

In a world of maybes, uncertainties and tech stocks, this widget purveyor with a steady track record and a good yield could be worth a look.

ImportantThis content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Gold has tanked, so what next for Perseus?

Wednesday, December 21, 2016

By Andrew Main

Gold share investors aren’t in the mood to cope with bad news, judged by the shellacking that followed the downgrade issued by Perth based west African operator Perseus Mining.

In case you missed it, the price of gold in US dollars has dropped by around 16 per cent since September, despite Donald Trump’s shock election to the US presidency and the associated risks.


It’s now around $US1,135 an ounce compared with $US1,350 just over three months ago.

So when Perseus told the market last Thursday that things at their operations in Ghana were not going as well as had been previously advised, the shares ended up being whacked down from by more than a third from 53 cents to 34.5 cents, since when they have done the expired feline experiment back up to 35 cents. These are shares that back in early November were worth more than 67 cents each.



The news was the sort of thing that gold miners have to fess up to regularly. A longer than expected maintenance shutdown of the mill in October at the company’s Edikan mine and a lower than expected head grade caused the estimate of gold production for the current half to drop from around 90,000 ounces to a figure more like 75,000 ounces.

And with that, the estimation of the All In Site Cost (AISC) of gold production for the period “is now expected to be between $US1,550 and $US1,650 per ounce” as management put it.

Three months ago that number would have been a bit worrying, being $US250 below the AISC, but that gap has now yawned out to more than $US450 an ounce. Ouch.

Management’s done a fair job of hedging, with 176,880 ounces sold forward at $US1,280 an ounce, but it’s still firmly underwater. To be fair, All In Site Costs include production costs, plus royalties, plus all sustaining and development capital costs, but the current picture isn’t pretty.

Looking to the future

They’re much more positive about the coming June 2017 half with expected output of around 135,000 ounces, but that’s in the future and past predictions have now been shown to have been too optimistic.

Where gold miners usually maintain investor morale is via the “jam tomorrow” descriptions of promising nearby exploration areas. They’ve got two other west African exploration projects, Sissingué and Yaouré, near neighbours to each other in the adjoining state of Ivory Coast, but Perseus has just had to announce a 20 per cent downgrade to the resource estimate for Sissingué, which they hoped to have up and producing by late 2017 and which will now not start until the end of February 2018.

The problem was sheeted home to contaminated drill samples rather than excess optimism, but this is a company which told a Denver conference in September that the total AISC would drop to below $US1,000 an ounce in the 2017-18 year and that the average AISC over a projected 7.5 year remaining life would be around $US865.

That’s lots of short term gloom but there are a number of issues in play here. One, Perseus is one of the most highly leveraged gold miners listed in Australia.

That’s great news when the gold price goes up, because profits lift at a greater rate than their peers’ do, but of course the reverse works when the bullion price goes down.

Gold loses its shine when other interest paying asset classes become more attractive, as has happened in the US and elsewhere because President elect Donald Trump has said he wants to rebuild infrastructure in the US.

That’s despite the fact that gold historically rises on the threat of inflation, which occurs when governments need to borrow big licks of money…to rebuild infrastructure!

Perhaps there’s another shoe still to drop here, although many experts say the risk of serious inflation remains very modest. Whatever happens, the gold price won’t keep going down for much longer.

The ET-eFfect

And there’s another factor at work on all the smaller gold producers that a lot of people haven’t thought about: the impact on prices of Exchange Traded Funds or ETFs.

On Friday there were 100 million shares in Perseus that went through the ASX, way more than on Thursday, the day of the downgrade announcement.

We can’t be sure just how much of a stock like Perseus is owned by ETFs, but the problem is that if a big issuer, such as US based VanEck, gets hit by redemptions (as has happened across the board in recent weeks) it is compelled to sell shares to keep its holdings in line with the relevant index weightings.

Such issuers are called value agnostic in that they can’t play games with adjusting weightings, as that would be outside their mandate.

A recent report by RBC Capital Markets noted that VanEck alone holds around 18 per cent of Regis Resources, 16.53 per cent of Saracen Minerals and 14.68 per cent of Resolute.

There’s nothing villainous in VanEck’s ETFs alone holding an estimated 7 per cent of the Australian gold sector but the effect can be a lot like a highly leveraged stock such as Perseus.

As the RBC report puts it, “while funds flow in, active investors are competing against passive buying requirements, driving prices higher.

“On the downside there can often be a lack of support as investors flee the space while mandatory selling continues unchecked from what are essentially value agnostic investment products.’’

The bank concludes this actually provides buying opportunities at the bottom, “where valuation and share price can disconnect as redemptions lead to continued selling pressure below fair value, obscuring the conventional price discovery process.’’

Back on their models, the analysts certainly aren’t excited about Perseus, even at these levels.

Citi’s moved it from Neutral to Neutral/High Risk, pinning a very modest 12-month target of 42 cents on the stock, while UBS is a mite kinder with a straight Neutral recommendation and a target of 60 cents. However FNArena’s consensus estimate across a wider broker sample is for a target of 71 cents.

The bottom line

Given all that, Perseus has to be one for the brave at the moment, unless you believe the gold price is going to snap back upwards any time soon. Leverage, in this circumstance, is everything.


Andrew Main is a shareholder in Perseus Mining.

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Can Bellamy's be nursed back to good health?

Wednesday, December 07, 2016

By Andrew Main

If Bellamy’s shares were worth more than $12 each last Thursday, what’s happened that makes them worth around $6.40, a bit over half that, yesterday?

The shares dropped by $5.28 on Friday alone and closed at $6.41 yesterday. This is a stock that was just under $15 four months ago.

Clearly, there’s been a loud pop caused by Friday’s profit warning over the Tasmanian company’s sales in China, which, up to now, seemed to conform to the old Billion Armpit Theory of the 1990s: whatever you sell in China is bound to find a billion buyers.

Specifically, CEO Laura McBain warned that changes to China’s import regulations had created “temporary volume dislocation” in the company’s distribution network in China.

That’s a euphemism for oversupply, borne out by reports from elsewhere that tins of Bellamy’s infant formula are now on sale in China at half the price of six weeks ago.

The crazy market in infant formula in China started back in 2008, after the notorious melamine scandal, when it emerged that local formula had been adulterated with melamine, a toxic product, causing some deaths, and illness to an estimated 300,000 babies in China.

In a country where the one child policy was still in force, the scramble for reliable formula was a godsend for scandal-free overseas suppliers such as Bellamy’s, which started in 2004 in Launceston, although it listed much later in August 2014, at $1 a share.

I got a glimpse of what it meant on a visit to Hong Kong three years ago.

Out of curiosity, I took the train up to Lo Wu on the Chinese border, opposite Shenzhen.

While Hong Kongers now seem to dress like golf professionals, the passengers on the train were mostly mainland Chinese men in cheap anoraks, each clutching a big box of formula that was clearly destined to be carried far inland to the baby at home.

Moving back to 2016, just to give you an idea of how stratospheric investor expectations have become, it emerged that single-day revenue in China from last month’s Singles Day shopping festival, which includes online sales, was more than twice the previous year’s, but “below the Company’s expectations,’’ according to the CEO.’

Switzer commentator Paul Rickard made the point on Monday that until last week, Bellamy’s shares had been priced “at a phenomenal level” and that after the company had revealed on Friday that it couldn’t grow as fast as planned, “the market is not going to forgive quickly.’’

So he advised caution even at these levels.

The brokers (and Paul’s an escaped broker himself) are a bit the same way.

Ord Minnett and Morgans have both downgraded the stock from a Buy to a Hold, while Citi has kept it as a Sell, having initiated coverage back in October with that recommendation.

So there’s a heavy element of ‘we told you so’ in Citi’s comments that coverage was initiated “with the view that risks were too high for infant formula exporters into China and investors should wait for cheaper entry points.”

They think investors can wait longer.

“Post Friday's shock market update, estimates have been slashed, the price target has halved to $6.00 from $12.10 and the rating remains Sell.

“The analysts state they need to see an improvement in brand momentum and Chinese industry conditions before they can turn more positive.”

“Interestingly, the loss of momentum also reduces the chances for a take-over approach, in Citi's view, while price discounting could severely hurt the Bellamy's brand, which would be a long term negative.”

Cutting to the chase, consensus estimates for the three brokers for this 2016-7 financial year are that the stock’s going to earn 32.4 cents a share, a cut in annual growth of 18.6% with a dividend yield of 1.6%, and a Price Earnings Ratio of 20.6 times, which is tall for a company surrounded by uncertainty.

Estimates for next financial year look better, however.

The consensus between the three brokers (two Tepids and one Sell) for 2017-8 is a lift in EPS to 37.6 cents, implying annual growth of 16%, paying a dividend of 13 cents and with a prospective P/E ratio of a slightly more manageable 17.8 times. 

My stab at the Big Picture is a bit more rosy.

Clearly, Bellamy’s did a sensational job of riding the reputational wave, and even if demand seems to have dropped short of investor expectations, Bellamy’s products haven’t wavered in reliability and it’s worth noting that the regulatory changes in China are aimed at clamping down on dodgy imports.

That’s hardly a problem for Bellamy’s in the long run, and it looks as though the short-term oversupply of baby formula in China is partly due to cheap stock trying to get in ahead of the crackdown.

That problem will inevitably go away.

And the Chinese people are going to keep having babies, and with so many mothers working, the demand for formula is likely to stay strong.

A negative for Bellamy’s is that the domestic production of formula in China has risen significantly since the scandal faded, so there’s not such a big cake for the imported formula products to share.

But even if you downgrade the armpit theory from a billion to a few million, it’s still a massive and relatively untapped market. It’s just not growing quite as fast as the optimists were thinking.

So is Bellamy’s a buy? Long term yes, short term no.

There could well be more price weakness as the stale bulls get carted out, but it’s one to watch closely.

No one’s going to ring a bell to herald the eventual share price recovery.

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Is Apollo Tourism and Leisure a buy?

Thursday, December 01, 2016

By Andrew Main

One of the demographic certainties in the developed world is that we are going to see many more people in their late 50s, 60s and even 70s  doing a lot more travelling.

Apollo Tourism and Leisure (ATL), a Brisbane-based campervan specialist that listed on November 3 at $1.00 a share and is now trading at $1.35, is one way for investors to get exposure.

Founded by Gus and Carol Trouchet in 1985, renting out one pop top camper, the company now imports and builds a variety of different campervans and caravans but also has around 3000 vehicles for rent, including holding 9% of the campervan market in the USA. The family still owns around 65% of the company, which since 2001 has been run by their sons Karl (CFO) and Luke (CEO).

What’s the appeal?

Campervans may not be very exciting to get stuck behind on a winding road but if you’ve ever hired one, you’ll get the appeal. Suddenly, your accommodation costs have blown away on the wind and you have all the choice in the world about where you will go and, most relevantly, stop for the night. Different shires have different rules but there are still many places in Australia and New Zealand where you can just pull off the road and park.

Rent or buy? Since Apollo builds these big sugar lumps as well as rents them out, they have both ends covered. Clearly, the way to start is to rent one, usually by the week, but there are growing numbers of grey nomads who have got the bug in a big way, in some cases selling the house and buying a monster camper van. How big? I’m not saying Apollo does these, but if you know what a Ford Louisville truck cabin looks like, that will give you some idea. Big as in bus big.

Factors driving interest

A number of factors have created what could easily become a snowball of interest in this wheeled retirement. Greater rates of retirement saving are of course a major one, plus the joys of internet banking that allow retirees’ income stream to follow them seamlessly around. Throw in that fact that many of today’s 60 year olds are as fit and active as their 50 year old equivalent 30 years ago, and you have a huge pool of potential travellers.

It’s like the cruise industry, with the extra parallel that you don’t have to keep packing your bag as you move around. Count the cruise ships compared with 10 years ago.  

The fleet

Back to investing, Apollo has the exclusive rights to import Adria and Winnebago products in Australia and New Zealand. An Australian Winnebago isn’t as bulky as its US equivalent (think Breaking Bad, with Bryan Cranston charging around in his jocks) but the badge counts for a lot. Most local Winnebagos and other camper vans are built up from conventional van and truck cab chassis, mostly European or Japanese.

How big is the market? It’s surprisingly big in scenic places like Tassie and New Zealand and campervans fit well with inbound tourism anywhere in Australia. Even if Chinese visitors are only gradual adopters, the visiting relatives market will keep growing as long as people keep coming to Australia from overseas to work.

The US market, meanwhile, is so big that Apollo’s 9% of it is the equivalent of having the entire Australian market to themselves, which of course, they don’t have.

What the brokers say

The broker to the float, Morgans, has not surprisingly given it a boost in its first post float report.

Morgans is predicting a 57% rise in EBIT to $27 million this financial year over last and says that as the company penetrates the new recreational vehicle market, it should be able to keep delivering double digit growth.

Clearly the happiest campers (sorry) are the ones who got into the $50 million issue at $1 a share but Morgans sees a 12-month upside to a target of $1.44.

If the company hits that price, it will return around 7% excluding dividends, fees and charges, with a full year dividend of 2.5 cents a share on earnings per share of 9 cents. Morgans sees the dividend doubling in the 2017-8 year even if EPS only climbs to 10 cents, which seems conservative. 

The potholes

Where are the potholes? If inbound tourism falls over and/or the price of fuel goes through the roof, they are obvious but improbable events at the moment. It’s a concern that the family still holds 65%, but they are escrowed for two years.

It doesn’t look like a screamer but look at ARB Ltd, the 4WD aftermarket specialist equipment manufacturer. ARB is catering to the grey nomads, if the more adventurous ones, and its price has been climbing steadily for years to its current level of just below $17. It’s put on 50% in the last two years alone. ARB might be bullbars and winches to the customers but it’s been a nice earner for the shareholders and ATL might just find itself heading the same way if it manages growth carefully.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Hazelwood closure: A transition to renewables?

Wednesday, November 09, 2016

By Andrew Main

What does the planned closure of the Hazelwood power station in Victoria’s Latrobe Valley mean to most people in Australia?

Clearly if you’re one of the 800-odd employees, the news is bad, but they are going to get paid out and meanwhile, the outcome for the rest of the country should manifest itself eventually as a significant kick along for investment in renewables.

There are a lot of moving parts to policy, particularly the fact that the transition to renewable energy is going to be very expensive whichever way you look at it.

But the transition to renewables isn’t an arguable option, it’s actually a certainty, as per the megawatt cost of building new renewable capacity keeps going down.

Hazelwood, first commissioned in 1971, is classified by the World Wildlife Fund as the most emissions-intensive generator in the industrialised world, which I suspect does not include China, but you get the picture. It’s certainly the dirtiest of the four power stations in the Latrobe Valley.

It’s big and ugly in output terms, with a nameplate capacity of 1600 megawatts. Its brown coal burning boilers put out 20% of all the electricity generated in Victoria and its closure will turn Victoria from being a net exporter of electricity to other states, to a net importer.

Shouldn’t that be scary? Not necessarily. For a start, there is surplus generating capacity down the eastern seaboard of Australia. Did you know that 50% of the black coal power generation capacity in New South Wales is currently idle because black coal fired electricity costs more to produce than brown coal power? There are now only five big power stations in NSW and one of them, Liddell, is slated to go the way of Hazelwood in 2022. Liddell is bigger than Hazelwood, with nameplate capacity of 2000 megawatts.

That idled capacity is why 70% of Hazelwood’s output has been exported out of Victoria, and 71% of those exports are going to NSW.

The big issue the entire power industry is facing is the Large Scale Renewable Energy Target, which states that by 2020 Australia’s going to be able to generate 33,000 Gigawatt Hours of Electricity a year from Large Scale Renewables. That’s estimated to be around 23.5% of Australia’s total power requirement, which incidentally is dropping slightly as energy intensive industries such as aluminium smelters close. Demand started to drop in 2007 and as every new rooftop solar installation is added, it keeps dropping.

That Renewable Energy Target of 33,000 Gigawatt hours per year in four years’ time is a tall order, being for instance almost three times Hazelwood’s 12,000 Gigawatt hours a year output.

It’s dangerous to confuse nameplate capacity with output. The first is a snapshot, the second a total over time.

But let me give you some public numbers from New South Wales alone that should provide a bit of reassurance.

One, five years ago NSW relied 90% on coal for its electricity, and that has now dropped to just over 79%. Renewables are now at 14%, which is twice what it was six years ago, when Snowy Hydro was the only significant provider of power from renewables.

The big point is that while a power station like Hazelwood belts out far more electricity than any single renewables project could ever hope to do, there are now many smaller projects in the planning or construction phase.

In NSW, there are now 8000 megawatts of capacity approved or building, all of it in renewables. Every single new power project going ahead in Australia at the moment is in renewables, by the way.

That 8000 megawatts being planned, or exactly five Hazelwoods, is well in excess of the 6900 megawatts of renewables already in operation.

 That 6900 represents more than 30% of total generation capacity in NSW.

The key positive point here is that existing NSW coal fired capacity is 10,800 megawatts, so large scale renewables are catching up fast, and when complete, will provide 14,900 megawatts of nameplate capacity.

It’s not that simple of course. Renewables have the vice of intermittency, or will do until storage catches up, so there’s a gap between renewable installations’ capacity and output.

So here’s the messy bit. At the moment, old coal fired power stations are at a cost disadvantage in offering power to tenders in the wholesale market because not only do renewable installations have zero input cost, there are subsidies being paid to renewable providers in the form of Power Purchase Agreements or PPAs. Those PPAs have been provided by State governments which have an understandable desire to maximise the sources of electric power to keep the lights on.

Is that fair? It’s only unfair if you discount the uncounted effects of emissions such as the 15 million tonnes of CO2 a year released into the atmosphere by Hazelwood alone, which are currently un-penalised.

Conclusion? Renewables are here to stay. In the short term, there could be an upward move in wholesale power prices as overall supply drops down to meet diminishing demand. In a perfect world, the market would sort that out, since we do have a National Energy Market (NEM), which particularly aims to increase the number of interconnectors between states on the Eastern Seaboard and South Australia. 

Most likely we will still have some growing pains as the transition to renewables continues, but there is one iron law likely to prevail.

That is, that any state government which finds its voters plunged into darkness for any length of time can look forward to a major towelling when election time comes around.

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Is Healthscope a buy?

Wednesday, October 26, 2016

By Andrew Main

Judging by the mauling that private hospital operator Healthscope received having announced last week that revenue growth in the first quarter was less than expected, the market is certainly nervous.

The shares were whacked almost 19%, dropping 55 cents to $2.38 on Friday just after the announcement, a further 14 cents to $2.24 on Monday, before finally picking up some ground to close yesterday at $2.28.

This is a stock that relisted out of private equity more than two years ago, in July 2014, at $2.10.

What’s going on? After Ramsay Health Care, this is the biggest private hospital group in Australia with 18,000 employees.

On Monday, the brokers put out their research on the stock and out of seven reports, only one of them, from UBS, was a Buy and that wasn’t an upgrade.

By comparison, Citi downgraded it from a Buy to Neutral and all the others put it in the Goldilocks basket. Ord Minnett and Morgans, both private client specialists, were the most bullish of that group with an Accumulate and “Add” recommendation, while others were just plain neutral.

What may really be going is the slight popping of a bubble of excess optimism, caused by the assumption that revenue in the sector should take off like a homesick angel as armies of oldies get their knees and hips done.

There’s been some negative press around. As the well-regarded MD Robert Cooke put it, “over the last 12 months we have seen a heightened level of public commentary in relation to healthcare affordability and consumer confidence in private health insurance in Australia”.

He’d know. As chairman, Paula Dwyer noted at the Annual Meeting that followed the sort-of-downgrade, “private hospitals are a key pillar of the Australian healthcare system, performing two thirds of all elective surgery in Australia”.

She amplified Cooke’s point about consumer blowback, citing affordability concerns, product complexity, increasing exclusions and the rise of what she called “junk” policies that severely limit private hospital access.

So what this means is that consumers are unhappy with the way their private medical insurance is working and some of them are holding off elective surgery for that reason.

No one’s saying the private hospitals are doing a bad job and in fact it’s well known in the industry that private hospitals do a good job of keeping an eye on the costs of all those artificial knee, hip and similar operations. That’s their bread and butter.

This doesn’t look like a rerun of the recent crunch on the aged care stocks such as Estia, because that was all about the Government cracking down on the operators charging oldies for services they might not be getting.

This one is between the potential patients and the insurers, with the government playing a less obtrusive (but still important) role in pushing people towards private health insurance to reduce the burden on the public health system.

If you stand back objectively and work out what has to happen, the government is going to make damn sure the private system keeps going, because otherwise we’re going to go back to the bad old days of seeing crowds of people from their mid-50s upwards hobbling around for want of a hip operation.

And the private health insurers had better lift their act. Certainly, Medibank’s been paying attention. New CEO, Craig Drummond, a recovering analyst who can spot a trend a mile off, recently told shareholders that “we need to put our customers at the centre of everything we do”.

This was an insurer which found last year that while it enjoyed a legislated premium increase of 6.59%, the actual premiums paid were only up 5.1% and customer numbers also fell by 2.6%.

Note the word “legislated”. The government controls what insurers can charge and can also dictate how much some inputs cost. For instance, UBS points out it recently announced a cut of 10% in the price that can be charged for cardiac and intra-ocular devices and a 7.5% cut to the price of hip and knee joints.

“A new price referencing mechanism is expected to be applied to the list using global reference prices that are as much as 50% below list rates,” says UBS.

But one reason the broker keeps a rare Buy on Healthscope is that it’s less likely to be seen an impact on actual earnings than on sentiment.

If you assume private hospitals can’t in future charge as much for prostheses, that will bring the insurers’ and the patients’ costs down, which in the long run will be a positive for the patients, the private hospitals and the insurers. It’s no surprise at all to find the overseas manufacturers of these widgets have been ripping us all off blind for years. If retailers used to call Australia “Treasure Island” for our habit of happily paying too much for goods, imagine how the manufacturers of prosthetics must have felt.

Let’s stand back again and look at the big picture. Hips and knees and all those other wearing out parts will need renewing more than ever, and every year that ticks by with fewer people going in for elective surgery, simply bumps up the number who will end up having to go in anyway, at a future date.

It’s like going to the hairdresser. If you choose not to go because of other more pressing considerations, you will still end up going.

And we all know we’re living longer.

So is Healthscope a buy? It’s more of one now than it was, but it will be up to the insurers to reassure potential patients on actual costs. Until that happens, members of the public will hold off increasing their insurance and the private hospital operators will have to wait.

It will all come good, but just not for a while and it’s hard to estimate how long that will be. Maybe one for the bottom drawer.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Battered up telcos: Hold the phone for TPG and Vocus?

Wednesday, October 12, 2016

By Andrew Main

Connecting Australian households to the NBN is going to carry on eating shareholders’ money for a long time, as I recently realised after talking to some Telstra blokes in hi-vis shirts working in a street near my house in Sydney’s lower north shore. 

Telstra shareholders? Well, not this time. These gentlemen told me they were putting in fibre for TPG Telecom, under contract.

I wasn’t going to ask them the terms and they weren’t going to tell me, even if they knew, but that episode jumped up at me this week as I have been looking at the recent lurch in share prices of the smaller telcos such as TPG and Vocus.

Specifically, TPG’s dropped from just under $12 to around $8 in the last month, and Vocus’ has dropped from more than $7 to around $5.60 over the same period.

What’s going on?

Both companies are clearly in a growth and consolidation phase, given that TPG swallowed iiNet for $1.6 billion, and Vocus took over Amcom last year. But where investors are clearly nervous is in trying to work out whether there’s a chance they are growing too fast for their own good.

Sometimes competition can be a bit like a yacht race: a luffing duel sees two competitors so busy watching each other that they part company with the pack and sometimes both lose out.

Given they are the next two players in the market after Telstra and Optus, and given Australia’s history of comfortable duopolies making life hard for numbers three and four, there’s a strong incentive for smaller companies to either get big, or get out.

TPG fell out of bed on October 5 because of some disappointment with its numbers for the June half. In very simple terms, revenue was up solidly, but earnings were not in comparison with the December half.

Net earnings for the half at $117.1 million were almost exactly in line with the previous June half, but well below the $202.5 million reported for the December half-year in between.

And the guidance for the 2016/2017 year, which is something that analysts love to climb all over, wasn’t as shiny as some had hoped.

What the brokers say

Tech companies are worse than conventional companies in how badly they get handled if the future isn’t rosy, even if, as a Citi analyst noted of TPG, management is just being conservative and the next report will provide an upgrade.

Citi has the stock as a buy, although they’ve dropped the 12-month price target from $14.50 to $13.35.

Just to give you the other side of the story, Credit Suisse rates it an ‘underperform’, with a price target of $8, down from $9 previously.

FY16 results were in line with expectations but FY17 guidance disappointed Credit Suisse. The broker notes subscriber growth was again weak in the second half and the company's market share declined.

The broker attributes this to increased competitive intensity, particularly from Telstra.”

(That’s interesting … how do you think Telstra treats its client TPG when they are also competitors?)

"The broker updates its NBN transition analysis and calculates that TPG faces a $200m EBITDA headwind in the consumer business.”

All of which bears out my vox pop conclusion that there’s a lot of money that will still need to be spent providing fibre to actual, and potential, TPG clients in the many places that the NBN is yet to reach.

It’s instructive, by the way, to have a look at the discussion groups over TPG’s NBN offering. By and large they like it, particularly those tragics who need high speeds for gaming, but they won’t be paying up until the NBN gets within hailing distance of their premises.

Meanwhile, Vocus copped a Sell rating from CLSA on October 5 because of worries about the reliability of its accounts, citing the way the company has dealt with acquisition and integration costs, the amortisation of consumer intangibles, deferred customer acquisition costs and the impairment of receivables and accrued expenses. That’s quite a list.

Vocus chairman, David Spence, popped up quickly to say he stood by the financial statements that his board signed off on in late August, but inevitably, the spat has sown doubts in investors’ minds that may take some time to dispel.

Morgan Stanley Wealth Management last week decided that the sector was getting too exciting for its Emerging Companies model portfolio, tipping out its hypothetical 15% weighting in Vocus.

“Recent news flow and volatility has increased the risk profile for the stock in a concentrated portfolio,” clients were told.


These second-ranking telcos have no intention of going away, but they do have a few systemic disadvantages to overcome, and acquisitions to digest.

With the genius of hindsight, it’s clear that a lot of investors have been attaching too much blue sky to them. Managements will no doubt be doing their damnedest to banish doubts about the long term benefits they will be offering consumers and investors.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Aged care stocks hit after government policy changes

Wednesday, September 07, 2016

By Andrew Main

The nasty air pocket hit on Monday by aged care stocks Estia, Japara and Regis is a handy reminder that any share you buy that’s reliant on government subsidy is going to provide the occasional, unexpected price jolt because of policy changes.

To be specific, an advisory by the Department of Health on what fees aged care providers could charge their residents caused a number of brokers to downgrade their earnings forecasts on the stocks. On Monday, they closed down 11.7%, 14.7% and 16.7%, respectively.

If you’d panicked and sold at the bottom during the day you’d have seen Estia down 62%, Japara down almost 46% and Regis down 36.6%.

Last Friday, the Department of Health and Ageing put out new guidelines stating that extra service fees charged by aged care providers would not be supported by the Aged Care Act if the fees paid did not result in a direct benefit to the individual, or the resident could not take up or make use of the services.

In other words, the government was putting a limit on what fees providers may charge residents.

That might sound a bit Orwellian until you remember that those fees relate to the benefits the oldies might not be receiving, and that the fees had recently gone up because of proposed cuts in the Federal Budget.

Viewed in that way, you could say the Government’s just keeping an eye on what’s being charged.

And rightly so. In one instance, the fees were referred to by a provider as “capital refurbishment fees”, and you don’t need to be an actuary to know that few oldies spend enough time in high care to justify being slugged for the costs of fixing the place up.

We won’t make a dire joke about refurbishing the capital base.

And before you suspect that having the government overseeing all this is a Big Brother tactic interfering with the workings of the free market, just remember that it can easily cost over $100,000 a year to provide high care for an elderly patient, but they are unlikely to be charged any more than half that amount by the provider, thanks to taxpayer subsidies.

That’s the most that people at the top end of the assets scale will pay.

The family of a retiree on an age pension who owns their own home would find that the maximum they have to pay is 85% of their pension, or about $17,500 a year. We, the taxpayers, pay that pension and also the remaining aged-care accommodation costs.

The free market’s a long way away from the aged care market.

The barney between the providers and the government basically goes back to the May Budget, where Treasurer Scott Morrison proposed to cut $1.2b over four years from ACFI, the Aged Care Funding Instrument. That’s the mind-bendingly complex financial system via which the taxpayer subsidies are paid.

In simple terms, it looks as though that’s a reduction in the subsidy of around $20 a day per resident, and you won’t be amazed to discover that the providers’ charges to residents had gone up by around $15 on the same basis.

Investment bank analysts revisited their numbers over the weekend and largely downgraded the listed players.

Bank of America Merrill Lynch, for instance, cut its forecast for Estia’s earnings by 5% for this financial year, 12% for next and 24% in 2019. The fees for extras had previously been included in earnings estimates.

I’m pleased to tell you that Estia enjoyed a moderate price bounce yesterday, as did the others.

The recently battered Estia recovered the most, climbing over 5.2% to $2.93.

Estia Health’s profit result last week came in below forecast, so its share price has been badly mauled, coming off close to 50% in a week at one point.

It also dropped its guidance for this financial year, and that was before the weekend’s unpleasant surprise.

To top it all off, Estia’s founder, Peter Arvanitis, resigned and sold off more than 17 million shares at a discount to market.

But if you look a long way forward, the outlook for the sector must be better than all this.

We all know we’re living longer, and that’s not likely to change any time soon.

Elderly citizens in need of care are all going to have to live somewhere, and the Government isn’t equipped to provide anything much more than financial support to help them in their old age.

We know the cost of all this is going to rise as well, since aged care doesn’t simply get cheaper because there are more oldies around.

What’s going to happen and keep happening, like tectonic movements off New Zealand, is that the providers and the Government are going to carry on needing each other.

And they are bound to arrive at funding compromises that will allow as many frail oldies as possible to live in high care facilities, at a subsidy cost which won’t ruin the government, but won’t drop the care standards either.

We’re going to keep seeing providers variously making juicy margins and crying foul when subsidies drop, and we’re going to keep seeing the Government sticking its nose in in the way it did on Friday if it thinks someone’s gaming the aged care system.

It’s a tightrope act for the government but as Mrs Thatcher used to say, TINA. There is no alternative.

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James Hardie cements its market dominance

Wednesday, August 17, 2016

By Andrew Main

In Australia’s equity investment world where most of the action is inwardly focussed, James Hardie Industries is a company whose offshore operations take it off the radar to an unfortunate extent.

Historians, sceptics and mesothelioma victims know all about the dire history surrounding the 2001 restructure and move to the Netherlands, but such background tends to skew people’s perception of a company that is now a US and world leader in a thoroughly useful building product.

Namely, fibre cement siding and backerboard, which are huge in the US residential building market.

The Dublin based (it’s complicated) company turned in a quarterly report last Friday that didn’t really set the heather on fire, but has subsequently seen six broker reports - two of which were upgrades and three recommendations, against one “lighten”. Basically, the brokers like the stock, which is now trading above $22 a share, up from a price just below $15 last November and below $11.50 late in 2014.

Take a bow, the US dollar exchange rate. The stock’s main business is in the US; it reports in the US dollar and it’s also traded there. So to a great extent, it’s an exchange rate play.

And we know how that’s been going; it was all a bit nerve racking when the two currencies were around parity, but at current mid-70s levels, it’s a thing of beauty.

The quarter was nothing if not solid: net profit up 5% compared to the previous corresponding period at $US66.7 million, EBIT up 9% at $US97.6 million, and sales up 12% at $US477.7 million.

One eye-catching element was just how dominant the North American fibre cement market is for the company.

Sales in that geography of $US370.3 million were more than three quarters of the company’s total sales of $US477.7 million, with an EBIT margin in North America of just over 25%.

One of the joys of Hardie presentations is CEO Louis Gries, a laconic southerner who makes it clear he’d much sooner be turning out millions of yards of fibre cement in multiple locations than briefing pesky analysts.

He’s a Louis as in Louis the Fourteenth, but clearly long ago gave up trying to get Americans to pronounce it and he’s effectively Lewis nowadays.

That economy of style and his all round lack of flash is probably why they like him and why the share price put on more than a dollar on Friday, even if it’s subsequently eased back slightly.

By the way, on July 29, the company announced that the boss of its US operations, Ryan Sullivan, “will be leaving James Hardie effective immediately” which doesn’t sound too chummy, but the company barely missed a beat because it then announced that Gries was assuming direct responsibility for that part of the business.

He hosed down any excess exuberance among analysts by forecasting a slightly lower range of net operating profit for the current year than they had been.

They’ve got (or had) $US264 million to $US302 million as a range, whereas his management says it will be more like $US260 to $US290 million.

That assumes business as forecast and a steady exchange rate, which probably won’t happen, but is the safest way to look into the future.

The comparable number for the year to March was US$242.9 million.

You have to look twice at some of management’s statements to see how good the outlook actually is, not to mention how damn big the market is.

“The Company expects to see steady growth in the US housing market in fiscal year 2017, assuming new construction starts between approximately 1.2 and 1.3 million.

“We expect net volume growth for the North America Fiber Cement segment to likely outpace overall market growth by mid-single digits.

“We expect our North America Fibre Cement segment EBIT margin to be at the higher end of its stated target range of 20 per cent to 25 per cent for fiscal year 2017,’’ they noted.

Meaning, the US housing market is bouncing back, but they are confident of bouncing further.

Among local brokers, Citi’s put it up to Neutral from a Sell, and Credit Suisse has pushed it a notch higher from neutral to outperform.

Deutsche has it as a buy, Macquarie as an Outperform, and Morgan Stanley says the same only different by labelling it “Overweight”.

The only dissenter is retail broker Ord Minnett, which notes that the EBIT earnings margin in north American fibre cement has come down by 270 basis points to 25.5%. That’s a glass-half-empty view, given how most building products suppliers would love to see a margin like that, but the Ords analysts back that up by noting that the decline has come about thanks to “a combination of increased discounts and rebates and investment in capacity”.

“While investing in growth is considered a sensible strategy, the broker maintains that the share price already factors in delivery of the company’s objectives.’’

Looked at from an Australian retail investor’s point of view, the stock looks fully priced on a current year PE of between 25 and 27 times, in a situation where the dividends aren’t franked because tax is paid offshore.

But it’s very well established, it’s a great leverage play to the US market, and strong profits mean bigger payouts to the longsuffering claimants on what’s called the Asbestos Injury Compensation Fund (AICF), the scheme by which a threshold amount of free cashflow must go to compensation.

On July 1, the company made a payment of US$91.1 million to AICF, representing 35% of its free cash flow for the financial year just ended.

By comparison, the company paid out $US62.8 million in the previous 2015 year, and $US113 million in the 2014 year.

Asbestos claims are finally starting to ease, decades after Hardie produced its last asbestos product, but the AICF is still dependent on a line of credit from the NSW Government and the central actuarial estimate of the overall liability still sits at $2.03 billion, down $112 million from the equivalent 2015 figure.

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