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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

Metcash surprises short sellers

Wednesday, June 28, 2017

By Andrew Main

Grocery and hardware group Metcash has proved emphatically to short sellers that standing between a Scottish CEO and a cost saving program is a strategy that can easily land them in grief.

Indeed Metcash, whose boss Ian Morrice intimated on Monday that he would be standing down next year after five years at the helm, achieved a one-two punch on short sellers on Monday by turning in a better than expected full year profit, and resuming dividends ahead of time, after an 18-month gap.

Metcash has been one of the most shorted stocks in the Australian market, thanks to the clearly simplistic belief that it will never survive the cornucopia of supposed negatives from the various bogeys of Woolies, Coles, Aldi and Amazon.

Aldi is building up capacity in two of Metcash’s stronghold states, South Australia and Western Australia, while Amazon keeps popping up in conversations as the potential ruination of much of Australia’s retail industry.

Morrice told the media that he doesn’t see Amazon as a huge threat given that it hasn’t focused elsewhere on fresh food.

“We think they will start with their marketplace format and that will have a much bigger impact on the discretionary sector than it will do in food,’’ he told The Australian.

“And where they have operated in the food area, both in the US and UK, it tends to be in the premium sector and consequently prices are actually higher, and not particularly competitive in food industry markets.”

Not surprisingly the share price kicked up by 5% on the dividend and result news, rising 11 cents to a two month high of $2.30, before easing back yesterday morning to the pre-result level of $2.19. Metcash closed yesterday 3.9% lower to $2.21.

The company will pay a final dividend of 4.5 cents, fully franked, in late July. It hasn’t paid a dividend since late 2015, the year when Metcash turned in a net loss of more than $380 million.

Management had long signalled that there would be no new dividends until 2018, which is what must have taken the shorts by surprise.

Given what a tough life it is in the grocery sector at the moment with price deflation rampant, just achieving a flat result in that area was well received by the market, which expected a 5% drop.

The final result for the year to April 30 saw underlying net profit of $194.8 million against expectations of around $188.7 million, thanks in particular to cost savings of around $40 million.

Metcash, which not so long ago had the painful experience of having a hailstorm cave in the roof of one of its warehouses, was able to point to a 5.4% increase in revenue for the year to $14.12 billion, helped by an extra trading week in the year plus higher earnings from liquor and hardware.

Hardware is a small but sharply growing part of the Metcash business, given it added what had been Woolies’ Home Timber and Hardware (HTH) operation to its existing Mitre 10 arm in late 2016. Hardware sales were up a stellar 52% at $1.6 billion and earnings not far behind, up 48% to $48.5 million.

Announcing that sort of number must feel a lot like treading on Woolies’ foot, considering how much money Woolies lost with its (admittedly much bigger) failed Masters hardware foray.

It’s worth noting, by the way, just how fragile the growth in grocery and overall sales is. The 53rd week allowed the company to announce small growth in overall (up 1.3%) and food (up 0.6%) sales, but without that extra week those numbers would have been respectively 0.6 and 1.3% down from the previous year.

Metcash’s reported net profit fell 20.6% to $171.9 million, thanks mostly to the restructuring and integration costs that followed the Home Timber and Hardware purchase, an entirely expected item.

But for all the upbeat noises from Messrs Morrice and Co, the broking analysts aren’t jumping out of their skins about Metcash’s prospects.

FNArena’s consensus target for the stock is $2.39, which is only a modest premium to the current price.

Let’s start with the fans, headed by Macquarie and Morgan Stanley.

Macquarie has retained an “outperform” rating and a target of $2.60, noting that the company “is continuing to deliver.” It damns Morrice with faint praise, noting that his tenure “has focused on balance sheet repair,’’ and that a new CEO could be more growth oriented.

They don’t say it but Morrice has cut net debt from $686 million to $81 million.

Morgan Stanley is also keeping an overweight stance, with a target of $2.80, cheering the cost cutting and maintenance of grocery earnings.

“When the supermarket sales performance improves, the broker expects the company to re-rate. The potential in the hardware business is also under-appreciated, in Morgan Stanley’s view.’

Citi is neutral, with a target of $2.50, but reckons the reported 9% growth in net profits in the interim update overstates the real momentum inside the business. The analysts say growth was more like 3.2% during the six-month period.

UBS was the gloomiest of the analysts, maintaining a Sell on the stock.

It reckons the cost reductions produced a positive surprise in cash flow but that cost cutting can only work for so long. East coast competition is re-emerging and investment in price will be required, the broker says.

But there’s clearly value in watching a pessimist such as UBS find a silver lining. It’s lifted earnings forecasts and with that, has lifted its target on the stock from $1.85 to $2.00.  

My conclusion? It’s somewhere between a Hold and an Overweight. Metcash is a small dog running close to the tall grass with the big dogs.

It’s clearly very tightly run and the company’s done all it can to position itself well, but there are bigger influences out there that could still make life hard in the medium to longer term.

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Aussie car dealers hit by slowing sales

Wednesday, May 31, 2017

By Andrew Main

It was going to happen sooner or later: the boom in new car sales in Australia, which seems to have been running since we dodged the GFC, has shown significant signs of running out of steam.

The best indicator of prosperity in the listed space is AP Eagers, the Brisbane-based distributor that will sell you anything from a Holden to a Mercedes.

CEO Martin Ward told shareholders last week that national sales of new vehicles fell by 2.8% in the first four months of 2017.

Eagers shares fell by 6% in one day last week and that was before Ward made his comment. They had been close to $8 until a week ago but closed at $7.50 yesterday.

Major player Automotive Holdings, which is 22.8% owned by AP Eagers, saw its shares drop by 10.4% on Thursday to $3.03. Since then, they have eased to below $3.

So what’s going on? Western Australia and Queensland have apparently been leading the retreat, thanks to the end of the mining boom.

Both states are loyal to Holden and Ford’s big cars which are now going out of production. If anything, that change should have provided a fillip to sales but for most people savings are more important than brand loyalty.

Queensland vehicle sales were off 5.9% and that wasn’t as bad as WA, although Ward declined to say how bad that was.

He was being diplomatic. This comparison is not “like for like”, but in the first three months of this year, WA sales were off 9.2%, with passenger car sales down a whopping 18.3%.

Issues facing the car industry

As AP Eagers chairman and stockbroking legend Tim Crommelin put it, the calendar year 2016 was unusual.

“It was characterised by continuing comment around industry disruption, electric cars, battery operated cars, ride sharing, driverless cars - and you can be assured this will continue,’’ he said.

That sentence neatly summarised the biggest issues the car industry faces, all of which will make life hard for the sellers of conventional internal combustion engine driven cars.

And he didn’t even mention Amazon, that incubus looming over the retail sector in Australia, which late last year did a deal with Fiat Chrysler in Italy to sell small Fiat cars at prices approximately 30% below current levels.

We don’t live in Italy and we can’t all squeeze into the Fiat 500 model that they’re focusing on, but that’s just another potential negative out there that could turn into a monster.

So, are car dealers doomed in Australia? Well, no. We will still need to get around, in whatever form of futuristic conveyance the market wants to offer us, shared or not, driverless or not.

They will still need fixing and perhaps most importantly, they will still need financing.

The real cream for new car sellers in Australia is the financing, to the extent that in the last 12 months there have been two ASIC reviews and two ACCC investigations into aspects of how new cars and their associated insurance are sold.

But what’s clearly a problem for the dealers is the uncertainty surrounding where the new car market is going. Unlike the advertising market or the newspaper market, it’s not undergoing a near-overnight transition because there are a lot of uncertainties still out there.

Just last week, Hamish Douglass, the well regarded founder of Magellan Group, told an investment seminar that he believed electric car pioneer Tesla may not have a long-term future under its current business model.

Having written off Uber as “One of the most stupid investments in history,” he went on to suggest that “the probability of Tesla surviving in the long term is actually pretty low as well.’’

He’s no Luddite: his point is that both organisations assume cars will have drivers in them, whereas he believes the future is with driverless cars, with Google taking the lead in that area.

His speech was reported fairly and clearly by Fairfax columnist Elizabeth Knight, a noble effort since her husband Alex Pollak, founder of disruptor fund Loftus Peak, is a firm fan of Tesla.

He recently gave a very positive interview on Switzer TV about Tesla and other innovative groups in which Loftus Peak has investments.

(Declaration: I have known both Lizzie and Alex for decades and applaud the civilised debate).

All of which suggests that buyers have cooled down slightly on buying a new car, not just because of the downturn in the West Australian and Queensland economies, but also because of the belief that new and ground-breaking automotive developments may be just around the corner.

My guess is that because of the multiplicity of new technologies, it may take slightly longer for new technologies to arrive in Australia at price points which will make them more attractive than conventional vehicles.

It’s not impossible. As Alex Pollak noted to Peter Switzer, there are fewer moving parts in an electric car than in a conventional one.

And the dealers? Let’s assume that Amazon has more immediate fish to fry than the new vehicle business in Australia.

Local new vehicle suppliers such as AP Eagers and Automotive Holdings will have to be nimble to avoid having too many cars of the wrong type in stock, but that’s hardly a new issue for them.

Just don’t expect their profitability to grow in a nice straight line.

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Is the price right for Fairfax?

Wednesday, May 17, 2017

By Andrew Main

There’s a moment in every takeover situation when the target’s response moves from “don’t be ridiculous” to “mmm” and in the case of the joint TPG/Ontario Teachers’ tilt at Fairfax Media, we’ve just passed it. 

As of late on Sunday, the bidding group (which also involves one other mystery party) lifted its bid from 95 cents for some of the business, to $1.20 a share for all of it. 

The latter values the whole group at $2.76 billion, compared with the original cherry-picking tilt at $2.2 billion.

The first bid was for the best known elements, being the major newspaper mastheads, the Domain real estate group, and some other assets such as the events business and all of Fairfax’s digital business except its half of the Stan streaming venture.

It’s interesting to note that the bidders apparently referred to their first 95 cent bid informally as “Domain Co” which tells you emphatically which bit’s the dog and which bit’s the tail.

That’s been further amplified by the revelation in yesterday’s The Australian that Domain founder and CEO Antony “The Cat” Catalano was having back-channel chats in Melbourne with TPG’s man on the spot, Joel Thickins, before Thickins even met with Fairfax chairman Nick Falloon.

All of which suggests that while we’re unlikely to see any dramatic official action in the next few days, the mumbling from insiders at Fairfax - who like to chat about what’s going on - will rise in volume to a level where Falloon and/or CEO Greg Hywood will have to bring the Omerta rule to bear.

For a start, Hywood wants to float Domain to increase overall value while Catalano doesn’t just want to keep the real estate arm in-house, he reportedly wouldn’t mind running the entire Fairfax operation. 

Just on Monday, Fairfax board member “Hungry” Jack Cowin was saying that negotiations are moving to getting the “right price” for the business, which at least has the merit of being true. He’s got three million reasons (worth $3.6 million and rising) to be interested in the outcome. 

It’s going to take a while as the bidders don’t want to go hostile and can only now get to do their due diligence on the books. Any decision by the board to accept will require a unanimous recommendation by directors and then there’s the little matter of the Foreign Investment Review Board.

Those of us who were around when Fairfax was refloated in 1992 can remember how Canadian proprietor Conrad Black railed loudly against being limited to 15%, despite the fact that he controlled the whole outfit and chose the board. (Doesn’t that seem like a very long time ago?).

Nostalgists should note that we’ve now got a new bunch of Canadians knocking on the door, but they are much less aggressive. TPG is almost certain to break the business up, whereas the Ontario Teachers’ Pension Plan is a very well run outfit that usually prefers a passive role in long term assets such as infrastructure. A strange pairing but the Plan managers clearly see a bargain ahead.

Just looking down on the deal from above, of course it’s a shame that Australia’s longest established major newspaper group is now firmly on the block, but the obverse of that is that it’s good someone wants to buy it.

This is an outfit that’s in the process of cutting around 25% of its reporters from the Australian Financial Review, the Sydney Morning Herald and the Melbourne Age, and has given up pretending it’s good for journalism. Hywood’s more recent line was more about keeping the business going, which is also true.

And the share price performance has been a relief of sorts for those rusted-on holders who can remember the price at $5 back in the good old days of classified advertising. 

It opened up one cent yesterday at $1.15, having been below 85 cents as recently as late January, and closed more than 3% higher at $1.18.   

So, is it a buy? There’s basically a floor of $1.20 under it as long as the sale process goes through. As of this week, the big institutional holders are expecting to see a higher price, say $1.40. Most of the big brokers are getting warmer on the stock, off a very tepid base. Citi, for instance, has just lifted its call from sell to neutral but has an earnings based target of exactly $1.20 on the stock, up from 85 cents.

No one’s been talking much about earnings but there is a lot of blue sky above Domain, which is valued by most experts at almost $2.2 billion on its own. The parts of Fairfax are still probably worth more than the whole.

There are, of course, advantages in Domain retaining a connection with the newspaper business from which it emerged, which could still happen if Domain was floated and Fairfax retained a stake.

So if the deal did fall over, and I haven’t even mentioned there could be problems ticking off the sale of Fairfax’s New Zealand assets to a foreign buyer, there’s blue sky around from a number of assets headed by Domain, that sadly don’t include the major mastheads. They’re valued by most analysts at zero as that’s where they are ineluctably heading. 

I’ll never forget the advice I got a few years ago from a senior Fairfax executive who shall remain nameless. I asked him if I should buy some shares and was told ”they’re not for putting in the bottom drawer.”

That was good advice, as relevant today as ever. Fairfax is a beast that will have to change no matter what, but it is probably still undervalued. The big point for investors is not to be sentimental about what it was, but instead to be hard headed about what it might be.

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ANZ lifts first-half cash profit by 23%: Is it a buy?

Wednesday, May 03, 2017

By Andrew Main

Shareholders in ANZ Bank yesterday enjoyed the satisfaction of seeing the group’s half-yearly result produce an unchanged 80c a share fully-franked interim dividend, while building a bigger buffer than previous between what it earns and what it pays out.

Earnings per share rose 22% on a cash basis from 96 cents to $1.17.

Kiwi CEO Shayne Elliott, appointed early last year, was able to announce a 23% rise in cash profit to $3.41 billion, although analysts had been hoping to see a figure closer to $3.45 or even $3.5 billion.

The statutory reported profit was up 6% from $2.73 billion to $2.91 billion.

The market gave its traditional Bronx cheer welcome to any result coming in under expectation, even slightly, by marking the shares down 97 cents on the open to $31.98.

The shares recovered but still closed down 70 cents, or 2.12%, at $32.25.

Considering some analysts had been hoping to see the shares move up through the $33 mark, it was a thin performance and what’s more, the other banks felt the draught. NAB and Westpac will be reporting in the coming days and where one bank goes, so generally do the others, so all the banks were marked down.

Back in November, the bank reported a drop in cash profit for the 2015-6 year of $5.9 billion, down 18%.

The outlook statement from the bank yesterday was hardly a ringing endorsement for current conditions, noting that “the environment for banking remains constrained, with intense competition and pressure on margins, subdued lending growth, rapidly changing customer expectations and increasing regulation.”

Don’t all rush, then, even though the bank has limited bad debts to a loss rate of 25 basis points, which is 11 points below the level at the end of the last financial year in September 2016. 

CFO, Michelle Jablko, spoke a worthwhile truth by noting that if a bank wants to build up its capital base, as they all do thanks to Basel III, it’s going to see its margins squeezed and that’s exactly what happened. 

Specifically, ANZ was able to claim that its common equity tier one ratio had risen from 9.8 to 10.1% in comparison with the half to March 31 last year, a double figure triumph that will get quite a lot of air time. Mr Elliott said this was the first time the key indicator had been above 10%. 

Meanwhile, the Net Interest Margin, the gap between what the bank pays out and what it earns, was squeezed down from 2.07% to 2%. While that looks initially like an unworrying 7 basis points, it can also be portrayed as a drop of 3%.

That is an underlying point to remember. While critics always seem to bleat about banks making “obscene” profits, they don’t look to see that the amount of money the banks make for their shareholders is actually a tiny fraction of the amount of money they move in and out. In ANZ’s case, it reported $580 billion in gross loans out, up from $566 billion, while customer deposits were up from $447 billion to $468 billion.

Intercepting less than $3.5 billion in cash profit in the latest half, as the bank has done, suddenly doesn’t look that exciting.

Overall, there’s an atmosphere of caution and discreet retreat from higher-risk areas, moving where possible out of Credit Risk Weighted Assets. The Bank cut by $8 billion the sale of its institutional assets, while at the same time, beefing up retail and commercial, i.e. smaller scale CRWAs by $2 billion. The fewer CRWAs a bank has, the higher a capital adequacy ratio it can claim.

ANZ is clearly nervous on some commodity lending, for well-publicised reasons.

Back in December, Mr Elliott made it clear ANZ would not be financing the controversial Carmichael coal mine in Queensland, to far less flak than Westpac just walked into. Maybe he was just a bit more subtle about it.

And let’s not forget that it’s been retreating from previous CEO Mike Smith’s favourite stamping ground, Asia. In October, it announced it would sell its retail and wealth business in five Asian countries, over 2017 and early 2018, to Singapore’s DBS Bank.

ANZ didn’t make much yesterday of the fact that that they’d booked a $265 million net loss on the deal but again, no one’s complaining too loudly in a world where corporates are in retreat from anything that smacks of risk.

With margins under pressure, asset sales do wonders for capital ratios.  For instance, the subsequent deal announced in January to sell a 20% stake in the Shanghai Rural Commercial Bank for $1.83 billion on its own lifted ANZ’s tier one capital ratio by 40 basis points from 9.6 to 10.0.

ANZ bought in originally in 2007 for $318 million but followed that up in 2010 with a further $250 million infusion in a rights issue.

The other statistic than bankers love is ROE, Return on Equity, and despite the increased hurdle created by the bigger amount of equity the bank has, ANZ yesterday reported it had risen by 130 basis points from 9.7% to 11.8%.

But it’s the very lack of ROE (not that the bank publishes that number) that is causing ANZ to put its Wealth business on the block for around $4 billion.

Like most bank bosses, Mr Elliott has spotted that, after a comfortable decade or so, wealth businesses are now much more circumscribed in the products they can sell thanks to the recent FoFA legislation, and it still costs a lot to keep the doors open and the clients properly advised.

As a consequence, the ROE they are producing is less than before, and in particular, less than the banks are used to earning from their bread and butter home lending business, which is a classic “set and forget” operation in terms of administration costs.

ANZ’s Wealth Australia earned net $123 million in the latest half, down from $157 million in the second half of last year and $176 million in the previous corresponding period.

ANZ is not alone among the banks in finding wealth a slightly declining industry, which causes a lot of experts to wonder who all the buyers are going to be, and at what price.

So, is ANZ a buy? It’s more of a dull but worthy core holding for yield-hungry investors, really. Current yield is a tad over 5% but that goes up handily for investors in pension mode. Of the eight brokers surveyed by FNArena, not one has a negative slant, although there are a few HOLDS.

And the 12-month target prices are in a very narrow band between $29 and $32, which suggests that there won’t be much to get excited about in the near term. To corrupt the old tailor’s advice, never mind the growth, feel the yield.

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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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