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The Experts

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

Teoh’s brave mobile play: Is TPG a buy?

Wednesday, April 19, 2017

By Andrew Main

If the analysts have been mostly underwhelmed by TPG Telecom’s brave move to become Australia’s fourth mobile network, it’s probably because there’s an element of necessity in entrepreneur David Teoh’s decision.

Of the eight houses surveyed by FNArena, only two have the stock as a buy or an overweight.

And two of them – Citi and Ord Minnett – have dropped their recommendation. Citi to Neutral from Buy, and Ord down from Hold to Lighten.

To summarise, last week TPG announced it would raise $400 million via a one-for-11.3 shares issue at $5.25, to help back the $1.9 billion expenditure, of which $600 million would finance a mobile network rollout to reach 80% of Australia’s population.

The Malaysian-born entrepreneur wasn’t up against the wall with his company’s decision, announced last week, that it had bought a swag of 700 megahertz domestic spectrum for $1.2 billion, because it already has a raft of broadband infrastructure that will facilitate the expansion.

To give you an idea of how cheap and cheerful that $600 million total rollout figure is, both Telstra and Singtel Optus lay out more than $1 billion a year on mobile infrastructure in Australia while the third player, Vodafone Hutchison, spends $600 million a year on filling in the holes in its network.

The bulk of the outlay will be $1.26 billion for two chunks of prime bandwidth, for which TPG bid the government a post-2008 world record price of $2.75 per Megahertz per population. (There was some craziness in the US in 2008 when the rate went up to almost $US4 per head, but since then, it’s seldom exceeded $US1.)

That had the expected effect yesterday, the first day of trading since the trading halt was lifted, of lopping almost 18% off the TPG share price, from $6.70 to $5.50.

Clearly, TPG is chasing a meaningful “back of the bus” bundled retail broadband-phone offering. The big selling point for any putative telco titan is to offer a clutch of services at an attractive monthly price, say around $40.

But even with its platform of 2 million broadband customers already, thanks in part to the $1.56 billion acquisition of iiNet in 2015, TPG was until now basically a broadband company. It had a tiny mobile presence courtesy of the iiNet deal, and even that was a headache because TPG had to migrate those customers from Optus to Vodafone at a significant inconvenience because it didn’t yet have its own mobile infrastructure.

Clearly, the carrot for TPG now is to grow a low-cost mobile network thanks to the big amounts of “dark” or unused optic fibre it lays claim to.

They’re talking about how if they merely pick up 500,000 subscribers or 2% of the market, they’ll hit EBITDA breakeven.

And if they can get to 6 or 7% market share (around 2.3 million out of the 33 million phones there are out there), they will be EBIT positive. Bear in mind that even if that 33 million number looks like a pretty full market penetration, Australia’s population is creeping up at around 2.6% a year and every new migrant needs a phone service.

But the stick is that the much derided NBN network has been eating into TPG’s profit margins at a rate which has caused the share price to slip from almost $13 in August of last year to less than $7. That must focus the mind wonderfully.

To digress, there’s been a fair bit of muttering in the ranks of broadband users about the fact that the NBN won’t offer a lot of urban users much of an advantage, if any, on speed.

But like death, taxes, and Christmas, it’s with us and what’s more a lot of people will be compelled to migrate to it as ADSL services are shut down.

But why did Telstra shares fall out of bed (8% in a day) just after the TPG announcement? Clearly, there’s concern about the biggest player losing market share in the all-important mobile space but the other issue out there is that a new entrant may persuade the ACCC – the Australian Competition and Consumer commission – to “declare” roaming facilities on Telstra’s mobile network.

It’s due to hand down a decision by the end of this month.

As with iron ore railways, declaration means the big player has to allow access to smaller players for whom it would be uneconomic to set up in parallel.

Neither Telstra nor Optus, who have spent the most, want to see a declaration by the ACCC. So, it’s inevitably the smaller players who are seeking it, and the more numerous they are (Vodafone Hutchison and now TPG), the more likely a decision in their favour.

The normally very private Mr Teoh hit the phone on Monday to tell the AFR that a declaration would help break the sector’s “monopolistic culture”.

The former computer shop owner, who’s now worth several billion dollars, said there was plenty of opportunity for TPG to capitalise on Australia’s mobile phone market. “I think roaming would help tremendously,’’ he said.

So: is TPG a buy? It’s a tightly run company in a sector that has a great deal of promise but is also subject to regulation, even potentially helpful regulation. That’s one hard-to-control factor and the clear negative is that Australia’s a lousy place to be the fourth biggest player in anything. If you think TPG can avoid the problem that forced Hutchison and Vodafone to have to merge, and TPG’s existing infrastructure should help, it’s worth a look.

But there will probably be a fair few shares floating around looking for an owner until the $400 million issue is bedded down, so there’s almost certainly no rush.

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Quintis not out of the woods yet

Wednesday, April 05, 2017

By Andrew Main

There’s seldom a perfect time to announce that a company’s about to change its name, but TFC Ltd’s move to rebadge itself Quintis Ltd (QIN) on March 21 seems to have become a tipping point for a rush of gloomy news.

The northern Australia plantation company that aims to have 80 per cent of the world’s supply of high-quality Indian sandalwood doesn’t have much week-to-week excitement, but in the fortnight since then, the following things have happened:

On that very day, a US-based short selling specialist called Glaucus put out a scathing opinion on the stock, ascribing a value of zero to the shares and accusing management of effectively inventing a Chinese buyer, wildly exaggerating the ruling price for sandalwood oil, and running what Glaucus says is a Ponzi scheme in terms of pulling in new investors to pay out earlier ones.

That billet doux belaboured the share price down from $1.47 to just under $1.30 in two days, getting the company the reverse of a speeding ticket from the ASX.

The query then caused management to describe the Glaucus report as “self serving and biased” and “littered with inaccuracies”.

Not surprisingly, the Perth based management gathered itself to put out a much longer 13-page rebuttal of the Glaucus report on March 27, having previously asked in guarded terms for a trading halt pending an announcement.

The rebuttal noted that Glaucus was confused between Australian native sandalwood, which Quintis buys and then processes, and the much more valuable Indian sandalwood. The only place in the world where the Indian wood is grown at scale outside India is Australia, by Quintis.

The predecessor company TFC quietly exported sandalwood seeds from India in 1997 just before the Indian government cracked down on seed exports.

That rebuttal helped push the stock back up from $1.10 to $1.25 and it was then put in a halt on Monday and the start of Tuesday, March 27 and 28, which was when the really big announcement hit.

Frank Wilson, the man who’d been driving the company for 20 years plus and who holds a bit over 13 per cent of the stock, quit as CEO because, as he explained, he’d been approached by an overseas institution that was considering a Change of Control transaction.

He was right to quit, given how conflicted he would otherwise be, but that didn’t add much illumination to the pervading air of confusion surrounding the stock.

Which might explain why the stock price closed last night down a cent at $1.07.

There’s an argument that our market is trading uninformed because there are a lot of possible outcomes out there, quite independent of whether Texas based Glaucus is right in any of its criticisms.

Just to throw a few more litres of petrol on the fire, there was a report published on April 2 by a mysterious group called Circie which came to a 180-degree different view from Glaucus about the outlook for Quintis, saying for instance that the Glaucus suggestion that it was labouring under a huge debt burden was the very opposite of the facts.

“Quintis is not even close to default: Exactly the opposite is true. Quintis’ debt does not mature until 2023 and was just refinanced 8 months ago,” says the mystery Circie report.

What is even more strange is that some of the design, typefaces, underlinings and other layout characteristics of the Circie report look uncannily as though they came from the same source as the Glaucus report put out more than a week previously.

Where we are at the moment, then, is that one much rebutted but at least sourced report has now been confronted by another mystery report that’s more or less a herogram for the company.

The most likely course of action for most investors, which we suspect some of the authors may be hoping, may well be to discount both of them and go back to the old fashioned system of waiting to see what the company tells us.

The talk is that that Frank Wilson’s tame institution might be Kohlberg Kravis Roberts (KKLR), also Texas based. KKR owns one of the few other sandalwood operations in Australia, Santanol. 

Let’s not jump to conclusions about collusion but if that overseas institution were so minded it could obtain a form of control by simply buying Frank out and leaving all the other investors such as Regal Funds Management and T Rowe Price hanging.

It’s more likely that they’d have to put in a cash bid and the general opinion was that it might need to be $2 a share, but the recent drop in the share price means that some stock could easily be shaken loose at say $1.60 a share. 

Wilson’s a tax lawyer by trade but his middle name is Cullity, representing his connection to a family that is second only to the Bunning clan in terms of being timber titans in WA.

Every indication is that he doesn’t want to walk away from the company but wants to be around in whatever incarnation is to follow.

Shareholders are meanwhile impatient to find out a bit more about this supposed Change of Control Transaction, and the sooner it becomes a reality, the happier they will all be.

If you are seeking a recommendation, it’s hardly a screaming buy at the moment because there’s always the chance one of the bigger holders may get nervous and head for the door.

But existing shareholders would be silly to ditch a company whose 2020 harvest is reliably forecast to be about 4000 tonnes of Indian sandalwood timber, compared with the 2016 harvest of 300 tonnes. Let’s call it a speculative punt at the moment.

Disclosure: Andrew Main owns and plans to retain shares in Quintis

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Can Kathmandu climb higher?

Wednesday, March 22, 2017

By Andrew Main

You know backpacking’s moving to another level when a pair of wheels can pop out of the base of the pack so it can become a wheeled suitcase.

That’s what outdoor outfitter Kathmandu Holdings recently did, winning an award for the clever design of the Terrane Adapt pack, as it’s called.

It’s also interesting to note that in the latest half-yearly results announcement, which saw a 6% lift in net profit to exactly $NZ10.0 million despite a tiny lift in overall sales, Kathmandu is deliberately walking the city-country tightrope.

It features a photograph of a neatly coiffed female hiker climbing what looks to be The Peak in Hong Kong, having clearly got bored waiting for the Peak Tram.

But that’s what companies like Kathmandu have to do these days. On the assumption that most hardy outdoorsy types have already got most of the kit they need, the New Zealand based company clearly has to look for new markets.

And as with all Kiwi-based companies, there’s a lot of stretched geography. The main operations are in Australia, where sales are almost twice what they are in the home country, but meanwhile they’ve had to close two UK stores, a move which which saw the company report a 57% drop in overall sales there.

In fact, the UK wasn’t a big part of operations, producing a mere 700,000 pounds in sales in the half as it closed three cycling stores that clearly hadn’t taken off. The company’s now going to stick to online and wholesale business there.

Online overall is on the up, reaching 7.4% of total sales, having climbed by 18% year on year.

Kathmandu management was able to announce yesterday that overall sales were still marginally up at $NZ196.3 million, a lift of $NZS300,000 over previous.

Clearly, the result was in line with or slightly above expectations, with previous guidance having predicted $NZ9.9 million with the shares, which had run up past $3.50 in Australia back in early 2014, opening steady at $1.78.

The interim dividend was lifted 33% from NZ3c to NZ4c but because the company pays its taxes on the other side of the Tasman, it’s not franked in Australia.

Recently, appointed CEO Xavier Simonet said the result was in line with expectations, and highlighted the 6% increase in sales in Australia, which indicates a strong Christmas season in a market which has lately been something of a disaster area for the apparel business.

He also noted that coming out just ahead of square on the half was a solid achievement given there had been around $NZ4 million of adverse currency impacts on gross margin.

“We have had a solid start to FY17 but as always, the success of our full year result will hinge on key sale periods that fall in the second half.”

That’s a reference to Easter, which this year will be very late, falling in mid April. That’s good news for Kathmandu in this hemisphere, as the later Easter falls, the more warm clothing they should be able to sell. As Scottish funnyman Billy Connolly notably observed, there’s no such thing as bad weather: just unsuitable clothing.

A big problem for the company is that most canny hiking types wait until there’s a Kathmandu sale on before they darken the doors, and management grumbled that a higher proportion of clearance sales year-on-year had an effect on gross margin. Welcome to the retail business.

Not that they should grumble too loudly: that gross margin is still at 61.6%, down only a fraction from 62.8% previously.

There’s mixed news on Kathmandu out there, what there is of it, from the brokers. Morgans has stopped following the stock, most probably because it’s just dropped out of the ASX 300, but Deutsche Bank and Macquarie both gave the stock a modest cheer on February 8 after the first-half trading update. They should have more to say today.

Because Kathmandu trades both here and in its home jurisdiction, Deutsche has a price target of $NZ2.25 on the stock.

Analysts were pleased by the Christmas sales performance and encouraged by what it says should be “a credible strategy for low risk offshore expansion.” That’s a compliment of sorts to the decision to close those stores in the UK.

Note that while the stock did nothing much in Australia yesterday, sticking at $A1.78, it climbed NZ4c in early trading across the ditch to $NZ1.97. Perhaps it’s all about a lack of alternative NZ equity stories in a quiet week.

Macquarie damned with faint praise by stating that the half-year result was likely to be “better than feared” - and it was.

“Strong sales and tight expense controls have offset margin pressure from higher US dollar sourcing costs,” the broker stated, making it clear it likes Monsieur Simonet’s success in revitalising aspects of the merchandise part of the business and working on turning profitability round.

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Are more leisurely times ahead for Ardent?

Wednesday, March 08, 2017

By Andrew Main

You know a company’s on the ropes when it posts a sharp drop in revenue and the share price goes up, as happened yesterday with Ardent Leisure.

The management announced that the February 2017 revenue total for the theme parks division was $4.4 million, down 35% on the previous February’s figure of $6.78 million.

That was actually no surprise after last October’s horrible accident at Dreamworld’s Thunder River Rapids ride, which took the lives of four visitors and caused the closure of the park until December 10.

The stock, formerly known as the Macquarie Leisure Trust, picked up 6 cents to $1.62 because, as the company announcement revealed, things were less bad in February than they were in January, which in turn had numbers that were less bad than December.

Specifically, December visitor numbers were down 63% on the previous December - in line with revenue being down by about the same amount - whereas January visitor numbers were down by 44% versus January 2016.

The worry in January had been that revenue actually dropped off by 50.4%, a bigger drop than the turnstile numbers, most likely because of people paying reduced entry prices and getting concessions because of previous cancellations. The prices will be back at higher levels from April.

February, meanwhile, was a comparative gusher with revenue and visitor numbers getting back into equilibrium with each other, with visitor numbers a mere 33.6% below the numbers for February 2016, close to the revenue dropoff of 35% for the equivalent period.

The conclusion the managers would love you to take away is that the pain is fading slightly, which is what does generally happen after disasters and/or scandals. Business goes on because it has to. People still want entertainment and employees still need jobs. The world can’t just stand still.

It takes a hardheaded approach but if you were a parent looking at taking your kids to Dreamworld now, you’d know to put aside the reputational damage that the company has suffered and consider instead that every safety issue has now been gone over with a magnifying glass.  

The affected ride has been closed and it’s human (and corporate) nature to make absolutely sure nothing like that can happen again. This is a cynical thought but also, you won’t have to wait so long to get on the rides.

That gradual recovery story goes with the global picture relating to man-made disasters.

Should you now be prepared to walk along the Promenade des Anglais in Nice, where the truck mowed so many people down in July last year, you’ll see a lot more concrete barricades and heavily armed police and while it would be foolish to rule out another terrorist atrocity there, you will be more safe there than almost anywhere else.

The VW diesel scandal is another (much less scary) example of what happens after bad news.

Latest reports indicate that VW sales in Australia are getting back up pretty much to where they were before the emissions cheating scandal broke in October 2015, despite the recall to recalibrate the 2 litre diesel cars’ computers.

The reason is that while it was a giant scandal in the US where the cars were sold on the basis of very low emissions, they were sold in Australia on simple fuel economy, which remains good.

So what does all this mean for Ardent Leisure and CEO Deborah Thomas? 

It’s a bombed out stock that merits closer examination.

As she told reporters at results time on February 23, “the trend in visitation is obviously in the right direction”.

The decks were cleared to some extent on that day when the company announced a half-year loss of $49 million after writing down Dreamworld’s value by more than $90 million. The previous equivalent half saw a profit of $22.7 million.

The shares dropped more than 20% on the news to $1.71, and they are now below even that level.

Clearly Ms Thomas is still rowing against the wind.

The brokers are yet to be convinced that the worst is over, not least because the group’s Main Event operation in the US has also been an underperformer.

Of the seven brokers canvassed by FNArena post the result only one, Credit Suisse, retained an “outperform” on it while the others were either neutral or suggesting a sell. The pessimist was Citi, which now has a 12-month target of $1.55 on the stock. That’s actually seven cents below yesterday’s close of $1.62.

The big worry seems to have been the deterioration in like-for-like sales at Texas-focussed Main Event, which the less positive analysts believe won’t turn around any time soon.

Even the stock’s champion, Credit Suisse, has lowered its 12-month target price from $2.80 to $2.25.

On the more positive side, Credit Suisse believes that where goes the Texas economy, there also should go Main Event, and Texas has been strong over time. “Texas retail sales have been strong over the last four months and this keeps the broker’s outperform rating in place”, says FNArena.

The consensus forecasts averaged among the brokers suggest the stock’s going to deliver a skinny 2.4 cents a share EPS for this current 2016-7 year, rising in 2017-8 to 6.7 cents. The current share price represents a PE for this current year of 68 times, easing back next year to a less demanding 24.2 times.

The dividend’s not that dazzling, either, being expected to halve this year from 12.5 cents last year to 5.9 cents this year, to climb modestly next year to 6.4 cents. 

So overall, it’s one for investors who may well be tempted to pick up a few on the back foot while so many other big name stocks in Australia are looking expensive. All bad news fades eventually, but it will take a while.

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BHP bounces back to profit, boosts dividend

Wednesday, February 22, 2017

By Andrew Main

BHP chief executive Andrew Mackenzie’s much reported “laser-like focus on costs” has paid off handsomely, with last night’s half-year earnings report reflecting a turnaround from a $US5.6 billion loss in 2015 to an equivalent $US3.2 billion net profit for the half just ended.

BHP is, in his words, the world’s biggest diversified resources company.

He was quick to thank the recovery in bulk commodity prices for much of what he described as “a very strong set of results”, but made a clear case that much of the good news came from a reduction of 40% in the resources giant’s unit cost of production over the last four years.

Revenue was certainly up, but only by 20%, compared to what the company called a 157% lift in net profit.

The big news for Australian investors was that the fully franked interim dividend will be US40c, to be paid out of the company’s $US5.8 billion of free cash flow. Basic earnings were US60c per share, versus a loss of more than $US1 a share previously.

That outburst of largesse should give the shares a push this morning, as it is US10c above the 50% payout ratio level that the company uses in its calculations, and which the analysts feed into their models.

Source: AAP.

Looking closely at the numbers, the company claimed that its underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $US9.9 billion represented an EBITDA margin of 54% for the latest half, up from 40% previously.

Net debt was down from $US26 billion six months ago to to $US20.1 billion. $US2 billion of that improvement came from a mix of lower interest rates and exchange rate benefits.

That US40c dividend, which will be paid to shareholders on March 28, is a dramatic improvement on that very nominal US16c paid out the year before, which incidentally came shortly after the Samarco dam disaster in Brazil in November 2015.

But it’s certainly not breaking new ground. The company paid out US62c a share in early 2015 and US59c in early 2014, back in the salad days when it looked as though the resources boom wasn’t ever going to end.

Much of yesterday’s positive news was telegraphed in the upbeat half-year production report in late January, which saw a record half year iron ore output of 118 million tonnes from the company’s Pilbara operations.

Coking coal output was also up slightly at 21 million tonnes but the real gusher was the more than doubling of the price being paid for the commodity.

For instance, the average sale price of hard coking coal was up from $US82 a tonne to $US179 , and iron ore enjoyed a 27% rise in price from $US43 a tonne to $US55, half on half.

It wasn’t all beer and skittles. Copper’s under a cloud as there’s been strike happening at the 57% BHP owned Escondida in Chile since February 9, where incidentally a worker lost his life during the latest half, sullying a good safety record. 

On the plus side, a rejig of the low-cost sulphide leach pad at Escondida allowed the company to claim $US1.2 billion in productivity gains and it looks to claim a total of $US1.8 billion altogether for the year from that project as long as the recently declared strike ends soon. 

Copper volumes were also down at Olympic Dam in South Australia, while BHP’s global oil production dropped 15% in the half as fields declined and the company held off developing new acreage in the US because of last year’s low oil price.

A buoyant Mr Mackenzie was upbeat about the oil price thanks to the recent decision by producer cartel OPEC to cut back on production, although he was more cautious about how long the sharp lift in Chinese steel demand is going to last.

“There is probably a little more risk to the downside in iron ore,’’ he said, although he dismissed a suggestion that there’s a debt bubble in China due to burst any time soon.

He revealed he’d done his bit to push the climate change issue during a recent one-on-one conversation with new US president Donald Trump. 

“I spent most of the time talking to him about resources, as the world’s biggest diversified resources company,’’ he said.

“We discussed some of the issues around coal and climate and carbon,’’ he said, adding that BHP maintains what he called an “enduring” support for the Paris Agreement on climate change.

None of that sounds like the Trump view of the world but he wouldn’t be drawn on POTUS’s response to his comments.

“I’ll leave you to ask him about that,’’ he dodged, after noting that the climate conversation needs to be had.

He told journalists that “free trade is a very strong driver of economic growth in the medium to long term,’’ and that “protectionism blows most people an ill wind,’’ not that he was claiming to have put that to the new world leader.

He played down any talk of using the positive performance to fund any big acquisitions, noting that BHP had looked at a lot of projects but hadn’t found any in the recent past to justify large scale investment.

But “we have a rich pipeline of options that are looking more and more attractive,’’ he said, inferring that the big miner won’t be keeping its powder dry indefinitely.

Disclosure: Andrew Main owns shares in BHP

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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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