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Andrew Main
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+ 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

The big issues facing SMSF trustees in 2018

Tuesday, January 16, 2018

One of the benefits of the holiday season is that we can take a longer view of how our retirement savings are going.

I’m talking about SMSF Trustees, pretty much, because the average pooled superannuation fund member doesn’t have enough of a sense of engagement to motivate them to do that.

From 2012 to 2015, I was Wealth Editor at The Australian, a job I joked was about watching other people get rich. I started out writing and editing articles designed for consumption by all retirement savers, but discovered fairly early on that they were almost exclusively being read by SMSF trustees.

Why? Because they have a lot more choice about where their money is being invested than do members of pooled funds, which have for the most part been specifically designed as a “set and forget” exercise. It’s hard to get exercised about your super during the accumulation phase if your only major focus is the total balance and it keeps climbing gradually. SMSF trustees are a great deal more engaged.

So, what are the big issues for SMSF trustees in 2018?

PROPERTY

Property prices have to be top of the list for trustees who have investment property in the mix.

Well-located residential property is pretty well bulletproof as a long-term investment but there was a report in Monday’s AFR that class action law firm Morris Blackburn is getting a growing number of inquiries from small scale investors in mortgage stress.

And that’s happening when official interest rates are at record lows and property prices have merely been easing slightly from nosebleed levels. There’s not even a whiff of a bust at this point.

It sounds daft but it is also true that the banks have been lifting borrowing rates slightly for investors, plus there are a lot of interest-only loans that have converted to interest-plus principal. That usually happens after five years. I’d have thought that anyone who bought an investment property five years ago on borrowed money SHOULD be well ahead.

The villain of the piece here is most probably the property spruiking industry, which was disappointingly unhindered by the Future of Financial Advice legislation brought in, in 2013. That cracked down on commissions for advisers payable by financial products they recommend but unfortunately property is not classed as a financial product.

Which means it’s still possible to lure blue collar workers up to the Gold Coast with a “free” flight, stitch them up with a quite probably overpriced apartment and then back the newly acquired asset into a shiny new SMSF, using a chain of supposedly unrelated middlemen. It’s not a nice practice and it’s getting SMSFs a bad name.

Which may also help to explain why the amount of money being transferred into SMSFs from pooled super funds has actually fallen in the last two years, according to the Australian Prudential and Regulation Authority, APRA.

It notes that investment flows from pooled funds to self-managed schemes fell by 5% to $6.5 billion in the 12 months to September 2017.

But let’s not throw the baby out with the bathwater here: SMSFs remain the only way you can include a specific property in your superannuation, and if for instance you have used an SMSF to buy your business premises, you are a long way ahead of any pooled super fund outcome. SMSFs can make their own arrangements, whereas pooled funds simply can’t. It’s the nature of the beast.

RATE RISE

The related issue is Interest Rates. They will probably rise in 2018, given that the market has priced in one 25 basis point rise during the year.

That’s not a lot even if, as I’ve said, a few highly leveraged savers have already started to sweat. The point to remember, particularly when you are heading for retirement, is that more people in Australia benefit from rising interest rates than fallings.

Anyone who has eliminated or even just significantly reduced their debt load, which is what should be happening as they approach the end of their working lives, will be better off in a climate of rising rates than falling. 

Media reports often neglect this inconvenient reality because bad news sells better than good news, and there’s no more common Interest Rates story than someone who’s badly stretched financially and getting more stretched as rates rise. Call it Schadenfreude, the joy at someone else’s misfortune.

What the new mood on rates means is that savers should start looking again at fixed interest. There was a report last week that the average fixed interest offering in the US is now offering a slightly higher yield than the average equity dividend stream.

That said, as rates rise, bond prices correspondingly drop, and every galah in the bond market pet shop says the long running bull market in bonds is about to end. However there are deals to be done in commercial paper, which is higher risk but offers higher yields, and don’t forget the charms of Floating Rate Notes (FRNs) whose coupon goes up in line with interest rates.

We’re likely to see an easing of property prices before we see a lift in rates, and indeed the Reserve Bank will hold off lifting rates if it sees any major nervousness in our economy, particularly if unemployment starts to climb.

And the share market?  There’s a tad more upside than downside but the lazy franked dividend trade that saw SMSF trustees load up on the big banks plus Telstra is less attractive than it was. It’s time for SMSFs to diversify a bit more widely in the equities space, even if it’s only in slightly less well known stocks with a good record of paying franked dividends.

Governments or every stripe are capable of doing silly things, most particularly putting their hand in the super jar, but I’d stick my neck out and say neither side of the House would be prepared to get rid of dividend franking. Without a great deal of advance warning, anyway.

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Industry funds face spotlight in Royal Commission

Wednesday, December 13, 2017

By Andrew Main

The subsiding of excitement that followed last week’s announcement of the Royal  Commission into banking reminded me a bit of the Amazon launch in Australia that followed not long afterwards.

In both cases, what had been portrayed (by some bankers and most retailers) as the end of civilisation as we know it turned into a slight fizzer.

Some of Amazon’s offerings turned out to be about the same price as goods already available elsewhere and we all realised the US based online retailer had had a massive blast of free publicity but was still just getting itself set up.

The banks probably don’t see their time in the spotlight in quite the same way, but managements of the Big Four will have been greatly reassured to see their share prices climb steadily all through last week.

And that was after they rolled over and agreed to support the Royal Commission.

Meaning, the cold clear light of reality puts a less scary perspective on the 2018 outlook for the banks, than the previous shivers of uncertainty about whether there would, or would not be, a Royal Commission.

I noted last week, seconds before the official announcement, that I think a Commission would be a waste of time and money, and the announcement hasn’t done a lot to change my view.

Since superannuation now represents the biggest single bag of money in Australia at $2.3 trillion, I can very much understand it being part of the Commission’s remit.

But if, as some commentators suggest, Royal Commissioner Ken Hayne is going to look into the issue of whether the industry funds should have more independent directors, that may be the wrong rabbit hole..

Contrary to the campaign that’s mainly coming from the office of Financial Services Minister Kelly O’Dwyer, it isn’t a first order issue.

You probably didn’t even notice in the excitement last week that a bill was pulled which mandated a minimum one third of independent directors on all super fund boards. Nick Xenophon’s crossbench crew said they wouldn’t support it, so it’s been taken off the table until next year.

In a neater world, the Industry funds would be copying the ASX Listing rules and moving towards the concept of an independent chair and a majority of independent directors, but as we all know, life’s seldom that simple.

The industry funds were set up in a bygone age before those ASX rules, operating instead with an equal representation model whereby each industry fund had the same number of employer representatives as union nominated trustees.

That still applies, although the employers have been a lot less noticed in the debate. That’s because they are so damn busy running their companies that most of the focus has been on the union reps. That’s the same reason why the default funds that most new employees find themselves in, are industry and not retail funds. 

And some of those union reps are drones who regard a seat on the board of an industry fund as a just reward for a long career in the union.

Some keep their trustee fees, and some send them on to the union that nominated them.

The drones know very little indeed about superannuation and they love an annual jaunt, with partner, to the relevant conference.

As Sally Patten pointed out in the AFR on Monday, it doesn’t help the industry funds’ cause that some of their funds have more than 10 trustees. She found one, which she was too polite to name, with 16 trustees. That’s more like a crowd scene than a board.

The big BUT in all this is that the industry funds have consistently outperformed the mainly bank-owned retail funds by between one and two per cent a year , and that’s what pushes the proposed legislation down the list of urgent changes required.

The reason for the disparity is not any particular genius on the part of the industry funds so much as the fact that they have a much more “sticky” membership that tends to set then forget about their accounts, often for decades. That means the funds can safely lock themselves into much longer term assets than their retail counterparts, who suffer a much higher level of churn.

There’s one possible benefit coming from all this.

Ken Hayne’s been specifically asked to see if the spending “of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations, or is otherwise not in the best interests of members.”

Like the independent directors issue, that’s still a specific swipe at the Industry funds. At least this time there’s more justification.

That silly $3 million television advertising campaign showing the retail fox eyeing up the industry fund henhouse is a shining example of misallocated funds. All the retail people want is to get equal access to young people starting out with their superannuation, which they don’t currently get because the “modern awards” system drops the new starters into a default industry fund unless they specifically choose otherwise.

And then you ask yourself, why do the big industry funds see the need to advertise on television at all, given that most of their revenue comes through like clockwork from employer contributions into those default funds? It’s the original captive market.

That’s a more relevant question to ask, and the Royal Commission has been led specifically to the top of the rabbit hole marked “sole purpose test”, as in whether expenditure is in the specific interest of financing members’ retirement.

Ken Hayne’s only been given a year to examine a number of aspects of the banking business. It’s fair to say he won’t have time to go really far into every nook and cranny of the system but a simple examination of possible abuses of the Sole Purpose Test would be one of the more useful outcomes of a Royal Commission.

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We don't actually need a bank inquiry as we know all that!

Wednesday, November 29, 2017

By Andrew Main
 
I believe that a Royal Commission into the banks in Australia, or indeed its cousin a Parliamentary Inquiry, would be a significant waste of time and money.
 
That’s not to say the banks haven’t covered themselves in a dense and odoriferous layer of ordure at different times and for different reasons in recent years. Hence this week’s polls which say a majority of respondents want to see some sort of investigation.
 
Take your pick of whichever atrocity the banks have managed.
 
Allegedly rigging the LIBOR rate comes up hot and strong, and the possible culprits worked for a spread of banks, but the CBA probably wins the prize.
 
How else can you assess the bank’s apparently Nelsonian treatment of some 54,000 alleged breaches of the money laundering laws, thanks to whoever put a $20,000 limit on deposits at those clever new Intelligent Deposit ATMs?
 
We shouldn’t of course discount the Comminsure scandal, whereby insurance payments to policyholders were withheld because the same bank (but a different division) reportedly adhered to outdated definitions.

My position is that those examples are all indicative of attitudes among bankers that vary between slapdash, brain dead and downright devious, but my key point is that We Know All That.

There is no single thread of villainy or conspiracy tying those issues together. You could argue (and many do) that banks have had a bad culture but a Royal Commission or a Commission of Inquiry, won’t find anything much worse than what we know already. Cock-ups and inept evasions? Yes, they are legion, but conspiracies are much thinner on the ground.

The most noise on this issue is coming from Canberra, where the Government is bleeding and in some disarray and the Opposition and cross benchers are keen to land some blows and what fatter, slow moving target is there than the banking industry? I get the politics, but I don’t see the policy benefit.

Last week we had a leak from Cabinet indicating that Immigration Minister Peter Dutton wanted the Government to back away from their refusal to hold a Royal Commission, because of threats by some Coalition members to cross the floor and vote in favour of an inquiry or a Commission.

Note that most of those rebels are members of the National Party, whose carelessness in vetting candidates’ citizenship is in large part responsible for the shortage of MPs’ votes that is currently dogging the Coalition.

Why do the Nats hate banks? I’d suggest it’s partly because most family owned farms have had no choice but to borrow from the banks over the years, with inevitably mixed results. Listed companies can raise equity but family partnerships can’t do that.

Also, there have been some colossally stupid lending practices. Remember the Foreign Currency Loans (FCLs) of the early 1980s that blew up after 1985 when the dollar sank?  Back then, there was a 10% differential between the 5% the Swiss and Japanese Banks wanted, and the 15% our banks were charging.

Westpac, which went on to nearly go bust in 1991, has the unhappy honour of having the “Westpac Swiss Franc Loans Affair” named after it, but Nationals senator John “Wacka” Williams of Inverell in Northern New South Wales says it was the Commonwealth Bank that facilitated the loan he took out.

The legal issue was that the local banks don’t appear to have explained with enough clarity the forex risk that borrowers were going to be carrying.

And so, when the Swiss currency climbed inexorably, the borrowers were crucified by a jump in the principal repayments that was far bigger than any saving they had made on the interest rate. In 1985 the dollar bought two Swiss francs; two years later it was worth only one. In some cases the principal to be repaid was more than twice the size of the original loan. Many farmers were badly hit, “Wacka” Williams being one of them.

No wonder he’s peeved, and he’s not alone.

But are the fans of a Royal Commission or Inquiry motivated by revenge, populist politics or the desire to create a better system? I fear there’s too much of the first two and only a notional interest in the third.

I can see the merit in Royal Commissions. The HIH Royal Commission in 2002, which I covered extensively, was able to conclude that a lot of incompetence and autocracy at the top of HIH, plus the existence of an industry in disguised loans called “financial reinsurance” purveyed by reinsurers to ailing primary insurers, combined to produce the biggest corporate disaster Australia has ever seen, at $5 billion. We suspected the first two but the financial reinsurance caper was a revelation.

The Royal Commission into Institutional Responses to Child Sexual Abuse will shortly hand down its conclusions that will inevitably and formally blow to smithereens that despicable culture of cover-up, relocation of paedophile priests and supposed defence of reputation amongst senior clergy that has now backfired completely. We knew what was going on, but not the sheer scale of the duplicitous obfuscation that had served the bishops so eerily well for decades.

And now South Australian premier Jay Wetherill is seeking a Royal Commission into water theft by irrigators from the Murray-Darling Basin. That should of course be a national issue but that doesn’t make him wrong.  The dire under-resourcing of inspectors alone in New South Wales justifies some serious action.

But a Royal Commission into the banks? No, we already know all too well what the banks have done wrong, separate silo by separate silo.

And they do too. Their reputations have been trashed to hell and beyond and, while some retail bankers’ learning curves are pretty much flat, the vast majority of them already realise they have a lot of work to do to climb out of the public image hole they have marched themselves into.

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Janus Henderson - Bastard child comes good

Wednesday, November 15, 2017

By Andrew Main

An upbeat quarterly result with higher than expected synergies and savings from the May 2017 merger has produced a share price breakout for Janus Henderson, pushing the share price close to $50 after hunting between $40 and $45 since the merger.
 
It closed yesterday at $48.40 four trading days after the announcement that in the three months to the end of September, its net income jumped by 139% compared to the second quarter, at $US99.5 million versus $US41.7 million.
 
Before the announcement the stock was just above $45.00.
 
The group has slipped under the radar slightly, not least because last week’s result came out after local news deadlines and the analyst call was at midnight Australian time to conform to US regulations.
 
But it deserves attention if only for its legacy of Australian shareholders (in Henderson) that dates from the 1990s when the blue chip London outfit was bought by AMP.
 
They snapped it up in March 1998 and integrated it, calling it AMP Henderson, and then once AMP’s other wheels started to drop off around 2000, AMP demerged Henderson again and compensated AMP shareholders with shares in Henderson, a City of London fund manager with more reach around the world than AMP itself.
 
The consequence was that Henderson was something of a bastard child, earning money in the UK and paying dividends (unfranked, alas) to its majority of Australian investors.
 
In the last 10 to 15 years they did well enough out of HHG, as it was called, particularly by comparison with the deadly dull sharemarket performance of AMP.
 
HHG dipped to $12.50 in 2009 in the wake of the GFC but ran up thereafter to $63.30 in late November 2015.
 
The logic of merging with US based Janus seems reasonably compelling, particularly as it’s 57-43% in Henderson’s favour. Not only that, but the absurd circumstance of being mostly owned by Australian retail investors has now been usefully diluted.
 
The combined group has Australian born Henderson chief executive Andrew Formica as joint CEO with Dick Weil, from Janus. It’s no longer listed in London but simply Australia and the US.
 
That co-CEO role is a nice touch because the original Janus of Roman mythology was a god with two heads, one looking forward and one looking backwards. It’s not clear which way the new joint CEOs are looking but it’s no bad thing for a fundy to be looking both ways anyway.
 
The new group revealed that during the quarter it enjoyed net inflows of $700 million Australian, but that pales into insignificance beside the fact that simple performance added $US17.2 billion to the total of funds under management, now
Standing at $US360.5 billion.
 
The claim that management makes is that 75%, 77% and 87% of assets under management outperformed their benchmarks on a one, three and five year basis.
 
That is a clear sign that they go better over five years than one, but what sets them apart slightly is that they’re prepared to say they dumped the managers of the $500 million Henderson US Growth Fund after two years of “disappointing relative performance”.
 
They stated that in the two years to November 10 the fund returned 25% but the relevant US market was up 41% over the same period.
 
How often do you hear an Australian-based manager admit the same shortcoming?
 
Digestion of the merger appears to be a bigger than expected cost short term, but producing bigger than expected savings long term.
 
The net income for the quarter on an adjusted basis, adjusted for acquisition and transaction related costs, actually came in 18% below the previous quarter, at $US114.2 million, compared with $US139.8 million.
 
Earnings per share went the same way, down 18%, but the longer-term picture looks very encouraging, in savings terms.
 
The Group has increased expectations from what it calls recurring annual run-rate pre-tax costs synergies to at least $US125 million within three years, which is a lift from previous guidance of slightly over $US110 million.
 
Some of that is also expected to come from a long standing strategic partnership in the US with French bank BNP Paribas.
 
Three of the five brokers who follow the stock in Australia have a positive rating on it, with only Credit Suisse and Deutsche Bank having it as Neutral or Hold.
 
Citi’s upgraded it from Neutral to a Buy with a target of $50.75, which admittedly it’s getting close to already, while Morgan Stanley’s got a more bullish target of $58.50 and maintains a Buy recommendation.
 
FNArena provided that information but Bell Potter, which it doesn’t include in its survey, is more bullish again with a buy rating and a target of $63 on the stock.
 
Bell Potter says the combined group is proving the merits of the merger. In addition, closing funds under management were 3.4% ahead of expectations, resulting in a meaningful upgrade to estimates and a recalibration of the growth trajectory.
 
Credit Suisse, the local Cassandra here, says the results were disappointing because of lower performance fees and higher expenses. A miss on cost estimates reflects a higher cost profile going forward, it notes.  But even Credit Suisse concedes the outlook is more positive, calculating that the upgrade to Janus Henderson’s synergy target will add 2% to next financial year’s earnings per share.
 
One or other or both of Dick Weil and Andrew Formica noted last week in a statement that “Only five months have passed since the formation of Janus Henderson, yet pleasingly we are seeing green shoots in the cross-revenue opportunities brought about by our global distribution footprint, expanded product set and collaborative culture.”
 
Sounds like they’re both looking forward. Given what happened when Henderson was in AMP’s clammy maw, that’s probably for the best.
 
I know a lot of investors are chasing franked dividends but the bigger picture says you must be more globally diversified, and dividends are only franked when Australian tax has been paid.
 
It’s a fact of life, and you could do a lot worse than own a few Janus Hendersons. After all, you won’t have to listen to a midnight analyst call. They can listen to recordings and give you the benefit of their thoughts just a day later.

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What’s Solomon Lew’s game with Myer?

Wednesday, November 01, 2017

By Andrew Main

You can accuse Solomon Lew of all sorts of things but you can’t say he’s boring.
 
His latest foray sees him doing his best to put a rocket up the management of the Myer group in advance of the annual meeting on November 24.
 
A month ago he formally sought a copy of the share register, which he is quite entitled to do, although Solly watchers note that he already knows exactly who the biggest holders are.
 
There’s his Premier Investments with the 10.8% stake for which it paid a comparatively high $101 million back in March, and Anton Tagliaferro’s Investors Mutual with a slightly smaller total, still exceeding 10%.
 
Anton said recently that his organisation had been buying in “over the last few months” which sounds like careful backfoot buying.
 
By comparison everyone knows Solly bought his stake in a one day raid in March at $1.15 a share, and on which he has so far copped a paper loss of almost $40 million.
 
So, does Solly know something the rest of us don’t about the terrific potential for perennial underperformer Myer, or is he yelling because he’s in a jam?
 
His record suggests he’s a risk taker who loves to scare the establishment but his win-loss record is not exclusively stellar.
 
Going back into the records, he took a whacking over a play he made in the late 1980s whereby a vehicle called Yannon bought $25 million worth of shares in Premier, using finance and an indemnity provided by Coles Myer Ltd. Coles Myer never disclosed the transaction despite it having lost $18 million on it. The effect of the Yannon deal was to prop up Premier at a time when it was heavily in debt from a foray into the Westfield group
 
The ASC, as the Australian Securities and Investments Commission (ASIC) was known then, investigated the case and recommended a prosecution but the Commonwealth Director of Public Prosecutions never laid charges, shutting down the investigation in early 2000. So Solly walked away an innocent man, although he had to contribute to a $12 million settlement with Coles Myer.
 
The washup of that affair meant he stepped down as chairman of Coles Myer and was subsequently compelled by chairman Stan Wallis to step down from the board entirely in 2002.
 
That doesn’t sound a lot like a win, most particularly in reputational terms.
 
Financially, he has done well from a number of leverage plays since then.
 
Between 2004 and 2007 he did very well out of holding a stake in Coles Ltd (as it became in 2006 after Myer was bought by private equity group TPG).
 
He can claim a bit more glory on that one, as it was he who encouraged the KKR private equity group to bid for Coles.
 
KKR didn’t get Coles in the end but in April 2007 Solly’s Premier Investments sold its 5.9% stake in Coles Ltd to Wesfarmers for $16.47 a share, collecting a gross profit of $1.14 billion.
 
That can’t be described as anything but a very good outcome for him.
 
His other subsequent coup was a very effective piece of greenmailing in relation to a parcel of shares in Country Road in 2014.
 
Greenmail is an entirely legal practice whereby a shareholder who owns more than 10% in a stock can hold out for the best price. Any less than 10% and the bidder is allowed to move to what’s called compulsory acquisition.
 
It was a complicated deal whereby South African group Woolworths had to pay Premier $210 million to buy its 11.8% stake in Country Road as part of a takeover bid Woolworths for David Jones, in which he also had a stake.
 
In other words, he held all the cards and that netted him well over $200 million, entirely legally.
 
So that’s some recent background. You can rightly conclude that Solly Lew is extremely smart and he loves nothing more than holding a blocking stake in a company that someone else wants to take over.
 
Which brings us back to Myer now. Solly’s complaining to anyone who will listen that Myer is badly run and that some of its stores are more like an opportunity shop than a top end retailer.
 
He recently asked in vain for two board seats after forcing chairman Paul McClintock to announce in September that rather than step down in favour of former Spotless chairman Garry Hounsell, as he had planned, he would put himself up for re-election at the November 24 annual meeting.
 
So this Solly bull is making significant inroads in the Myer china shop.
 
But, and this is a big but, where’s a bid for Myer going to come from that will justify his massive $101 million outlay on getting his blocking stake in the stock?
 
He’s muttering about calling an extraordinary meeting to roll some or all of the board, and his rumblings are made all the more valid by the fact that he has huge experience in retail and the board doesn’t.
 
But he’s already said he has no intention to bid and there’s no one else within cooee who wants to take over Australia’s number two department store group at a time when the entire retailing world has been thrown into uncertainty by the imminent arrival of Amazon.
 
Bear in mind that much of the sorrow at Myer was caused by the fact that the pre-float owners TPG cut costs out of the business then sold it for the highest price they could, which was a startling $4.10 a share, in 2009. It’s now worth around 77 cents.
 
Meaning, he might have to work this one the hard way: arm wrestle his way to a position of power on the board and then oh so slowly turn the ship of Myer round to the sort of profitability it enjoyed back in the mists of retailing time.
 
It’s a very big job and it would be a mistake to see Solly Lew as having a nice full hand of royalty cards ready to play on this one.
 
At this point, he’s popping on and off stage like a pantomime villain but he’s not doing it because he’s got a clever trick up his sleeve. He’s doing it because he doesn’t have a lot of alternatives.
 
I wrote back on September 20 when Myer shares were at 70 cents that I couldn’t see how any brokers could put a “buy” on them. Solly’s current campaign has pushed the price up to around 77 cents.
 
But unless you think he is a retail genius who will be allowed to rescue Myer’s fortunes, or you think there’s a bid coming for Myer from somewhere, it’s still a challenging proposition. I’d still avoid it.

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Private health insurance changes - snake oil or miracle cure?

Wednesday, October 18, 2017

By Andrew Main
 
Health Minister Greg Hunt’s recent moves to make Australia’s private health cover slightly more affordable have had the effect of lifting the bonnet on the system, and what they show is that there’s a mutual reliance between the health insurers and the government that’s something of a tightrope act.
 
In simple terms, the health insurers will be allowed to discount premiums by 2% for each year by which a person is younger than 30 years old, to a maximum of 10%.
 
The insurers have all stated that they will pass the savings directly on to clients, which they will have to do anyway to lift membership numbers at the lower end of the age spectrum.

The bonds that bind

This is all about pooling risk of course. But what a lot of people don’t realise is quite how tight the bonds are between the insurers and the government.
 
Just compare, for a moment, how the general insurers operate in high risk areas like north Queensland. They know very well that coastal communities are at risk of blowing away so they set their premiums accordingly. There are screams and yells from affected communities but effectively the market is working.
 
Now look at the private health equivalent. Someone in their 50s with a dodgy hip limps in to the insurer and the insurer can’t decline cover. This is clearly a pre-existing condition and the insurer’s only defence is to impose the 12-month waiting period.
 
The top cover premium might be $5000 a year but at the end of the year the member will be able to go into a private hospital for a hip operation, at a time relatively convenient to them, and have an operation worth somewhere between $20,000 and $40,000 paid for almost totally by the insurer.
 
That’s an extreme example but that’s what’s happening. The health insurers also have to get their annual premium increases agreed by the government, so it’s not a free for all by any means. As you saw, they even need permission to cut their rates.
 
The obverse of this situation is that the government has given health insurers a stick to encourage people to take out private health cover, in the shape of the tax surcharge on higher income earners who choose not to take out private health insurance. Singles earning over $90,000 a year or couples earning over $180,000 pay the Medicare Levy Surcharge of between 1 and 1.5% of income if they don’t have private health insurance.
 
Why? Because the government needs the private health insurers as much as they need the government. Any public hospital doctor or administrator will tell you that without the private hospital industry, the public system would be horribly overloaded and waiting times for elective surgery would be even longer.
 
The other inescapable reality is that as we all live longer, health spending in Australia and other developed countries is a black hole which no measurable amount of money will ever fill.
 
That sounds a bit scary but at least the relevant regulators and bureaucrats in Australia understand that, and continue to make sure our private health insurers can survive and hopefully prosper.
 
Hunt also made it clear that overcharging by the makers of prostheses is going to have to stop, in response to some serious lobbying by a very annoyed private health insurance industry.

Worst case scenario

If you really want to see what can go wrong, look at what’s happening as President Trump fiddles around the edges of Obamacare with the clear intention of having it collapse.
 
One of his moves last week was to announce that the US government would stop paying subsidies to health insurance companies that help pay out-of-pocket costs of low-income people, a key component of Obamacare.
 
Most analysts say the move will backfire, increasing health insurance premiums and forcing more people to remain on the lowest safety net system, Medicaid.
 
Conclusion? Health insurance is one of those systems that’s held together by mutual need between governments and companies and any moves to change it tend to be a bit like pulling out Jenga blocks from a wooden tower.
 
Trump, meanwhile, is starting to kick the tower on the deluded basis that his new plan will be better than Obamacare. Congress thinks otherwise.
 
Back in Australia, Greg Hunt’s move has been well received but analysts don’t expect any dramatic lift in takeup of private health insurance by the under-30s.
 
The general view is that it won’t cut their premiums by even a dollar a week and Morgan Stanley analyst Daniel Toohey calculated that even if the 20 to 30 years old age bracket lifted their participation to the 30-to-40 year old level, it would boost the customer base by a relatively modest 4%.
 
That said, it’s an incremental business. Net growth in membership among the industry last year was a mere 0.9% and a tightly run health insurer such as Newcastle-based nib makes a pre-tax profit of only 5 or 6% of premium income.  
 
The news did help the share price of nib and the other listed health insurer Medibank.
 
Medibank shares enjoyed a 5 cent rise on Thursday, the day of the announcement, to $3.04 and a further lift to the $3.10 level on Friday, where it also closed at on Monday.
 
Nib did a little better, climbing 11 cents on the announcement to $6.01 and then lifting again on Friday to $6.07, and lifting further on Monday to $6.17.
 
Call it a good reception and a small rise, followed by a minor rethink on how hard it will be to make a big difference.
 
That share price reaction does show the market is working. The health insurers are this week in a slightly stronger position than they were before, but the hard work of increasing membership is still ahead of them.
 
Greg Hunt’s changes aren’t a miracle cure for the insurers but they are a useful tweak and they show the government is listening.

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Facing up to our gas shortage woes

Wednesday, October 04, 2017

By Andrew Main

You wouldn’t read about it, as they say. Australia’s Eastern States are headed for a gas shortage caused partly by the LNG export operations based at Gladstone.

The Federal Government’s had to put the weights on the exporters to guarantee domestic supply, and meanwhile, the two most populous states in the country, New South Wales and Victoria, have pretty well closed the door on onshore exploration.

New South Wales in particular looks like a villain because it imports 95% of its gas from other states, mostly South Australia (Moomba) and Victoria.

And the other 5%, provided by AGL’s Camden project south west of Sydney, will be closing down in 2023, after the company decided not to push ahead with an expansion program because of local objections.

It’s easy to look for people to blame for this, but in reality there’ve been a number of different reasons for the problem.

In no particular order, Gladstone went ahead because at the time of planning the three separate export projects a decade ago, the global price for natural gas was around twice the domestic price, at $12 per gigajoule versus around $6.

It’s now the other way round thanks to the recent drop in global oil prices, plus the new supply coming out of Australia.

And the domestic coal seam gas drilling industry got itself offside with the farmers, because some of the drillers were extremely careless with waste water disposal, groundwater pollution, well casing and methane leaks, to name but a few.

Throw in the fact that in Australia unlike the US, freehold landowners do not own the mineral resources underground, and you have a glimpse of why public opinion has swung so strongly against the onshore gas drilling industry.

It’s worth adding that the then Santos CEO John Ellice-Flint noted a decade ago that there’s enough gas under Eastern Australia to supply domestic demand for around 200 years.

In the last few days, we’ve got to a situation where the Federal Government is making noises about cutting back payment of GST proceeds to the states that aren’t pulling their weight in terms of gas exploration. Given that it’s the States’ gas, and not the Commonwealth’s, you can see another nasty spat coming. It’s not quite blackmail, but it’s close.

Victoria has a more negative political environment than New South Wales, in that there’s a total ban on “fracking”  (hydraulic fracturing of underground coal seams) as well as a moratorium on what’s called conventional onshore gas exploration, until 2020. Note that Lakes Oil is suing the Victorian government for $2.7 billion in damages because of the Andrews government’s decision to freeze onshore permits.

Fortunately there’s still Bass Strait gas coming ashore for the time being, but that’s not infinite.

New South Wales still has one exploration licence that’s been allowed to remain live, over Santos’s very promising Narrabri project, but otherwise it’s been buying back PELs, Petroleum Exploration Licences, since December 2014. Santos got into the Narrabri project by taking over Eastern Star Gas in 2011 but has since had to spend a lot of money remediating and upgrading the project’s infrastructure.

Not only has New South Wales been the site of most public protests about coal seam gas drilling, but it also had one Ian Macdonald as Resources Minister during the Labor government that was voted out in 2011. He is now in jail for corruption, as is former fisheries minister Eddie Obeid, plus there is further legal action looming over both men in relation to a coal exploration licence in the Bylong valley, near Mudgee.

What has to happen now in New South Wales is for the coal seam gas drilling industry to resume exploration under closely monitored conditions. The state doesn’t use much gas for power generation, and won’t ever increase that as renewables take over. Gas’s share of the electricity generation market in NSW fell from 12 per cent in 2012 to 8 per cent in 2016, but industry will have a long lasting need for gas as well as domestic use. Gas plays a big role in wastewater treatment and hospital waste destruction as well as being used as feedstock for fertilisers, pharmaceuticals, plastics, paper and dyes. And how do they bake bread?

Victoria at least has the Bass Strait to fall back on but the untapped offshore gas fields are getting smaller and smaller.

NSW chief scientist Professor Mary O’Kane produced a report in late 2014

Stating that the technical challenges and risks posed by the coal seam gas industry can be safely managed.

That’s the key word, “can”. Clearly in the previous period they weren’t, and the whole concept of “social licence” by which an industry can and should gain the acceptance of society before undertaking a project, went out of the window.

Farmers concluded that because they couldn’t trust drillers to case wells properly and they weren’t being very generously compensated, then the downside for them was much bigger than the upside.

There has been talk, by the way, of legislating to improve compensation but that hasn’t happened yet.

It’s pretty startling to realise that careless Coal Seam Gas exploration in New South Wales achieved the otherwise improbable outcome of allying some of Australia’s most dyed-in-the-wool farmers with the green movement.  

The unfortunate reality for the drilling industry is that having lost the public’s confidence it’s going to take a lot of work to get it back. I’ve spoken to experts who say that a properly cased gas well will have no deleterious effect on the groundwater aquifer it’s drilled through, but try telling that to landholders for whom a reliable aquifer is the only guarantee of their prosperity.

A final point. It’s quite possible to extract gas from coal seams by using relatively new horizontal drilling technology, whereby one well head could substitute for what previously required a dozen. Not only can it be done without fracking, hence the phrase “conventional coal seam gas”, but that means there would be much less disturbance on the surface and most likely a much lower risk of disruption to any aquifer sitting above the seam. The fewer the holes, the lower the risk.

If we want to keep using gas, then both the Victorian and New South Wales state governments will have to absorb the reality that TINA, There Is No Alternative.

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Should you be looking to buy Myer shares?

Wednesday, September 20, 2017

By Andrew Main
 
Some people are, because the price has held steady around the 70 cent mark despite a grim profit result last week and news this week that CEO Richard Umbers’ salary dropped by almost half a million dollars in the year just ended.
 
Let’s assume that investors aren’t that ghoulish that they hop on board when they see a CEO’s salary go down, in this case from $1.9 million to $1.43 million.
 
So there must be another reason, and it is hard to fathom.
 
Last week the retailer turned in its worst result since it was floated on the sharemarket at $4.10 a share in 2009. The result pushed the stock to an all time low of 68.8 cents on Monday.
 
There’s always the dividend story. Analysts at Citi, the most bullish of a very un-bullish bunch of brokers, had hoped in advance of the result to see a final dividend of 3 cents a share to take the total divided for last year to 6 cents, but the announced number was 2 cents.
 
That puts the dividend back to where it was last year, at 5 cents.
 
That’s an annual yield of just over 7% but in the words of the old television series, it’s a case of “never mind the quality, feel the width”.
 
As Telstra shareholders can tell you, don’t hold a stock for its dividends when the other major metrics seem to be heading south.
 
One cruel statistic about Myer is that in revenue and earnings terms, it’s back where it started post listing. Its first reported full year profit in 2010 was $67.1 million on sales of $3.32 billion, with last week’s equivalent underlying profit being $67.9 million on sales of $3.2 billion.
 
(And last week’s result then had to throw in $56 million in write downs due to problems with fashion labels Myer owns, such as the local arm of Topshop, which went into administration in May, and its fashion brand sass & bide.)
 
But let’s not twist the knife. Let’s just wheel out a list of circumstances that will influence capital growth.
 
First, there’s the old Amazon bogey but it’s probably unfair to compare a tactile experience-type department store with an online provider.
 
It would be fairer to look at the likes of Zara, the Spanish owned women’s clothing store that has a very high pedestrian throughput. That’s because Zara’s very nimble. Not only does the chain enjoy extra lead time on seasonal trends because we’re in the other hemisphere, but it’s extremely sharp at knocking out close copies of clothes getting noticed in the media.
 
Even though Zara’s based in Spain, it can order new lines from countries like Vietnam and Bangladesh that would take less time to be shipped to Australia than they would to get to Europe.
 
It’s been in Australia since 2011 and has around 20 stores.
 
Japanese group Uniqlo turned up in early 2014, muscling solidly into the market for basic women’s (and men’s) clothes, while Swedish giant H&M arrived in the same year by opening up in Melbourne’s old GPO building.
 
My fashion spies tell me that in terms of bargains, H&M is generally cheapest, followed by Uniqlo, followed by Zara.
 
Every one of which is munching happily away on what used to be Myer’s lunch.
 
And that’s before we talk about arch rival David Jones, now controlled by the financially more powerful Woolworths group of South Africa.
 
I understand David Jones has been poaching some of the up-and-coming labels that Myer had been nurturing, signing contracts offering those labels at least twice the exposure, in terms of store numbers. It might not be that exciting to be featured in the DJs store in Wellington in New Zealand, but Myer has no equivalent.
 
David Jones has 43 stores against Myer’s 63, so the latter’s far from beaten on that score, but Myer has just announced the closure of three stores (thus generating interest from the likes of Uniqlo) and eight of Myer’s stores will include space called Myer Clearance.
 
The three to go are Colonnades in South Australia, Belconnen and Hornsby.
 
Umbers has made it clear he’s no fan of running permanent sales events in the major stores but one floor of the Roselands store in Bankstown has been given over to Myer Clearance.
 
That’s reported by the trade to be a bit of early retaliation on Amazon, and it’s certainly logical, but it doesn’t shout from the rooftops that Myer is moving upmarket.
 
In summary, Myer’s in a classic retail jam where margins are getting skinnier, and competition in what had once been a leisurely field is now getting pretty damn hot.
 
Umbers has only been in the job since March of 2015 so you can’t blame him, particularly as he apologised so beautifully last week for dishing up numbers that were short of the analysts’ expectations.
 
“I have to tell you I’m disappointed with this,’’ he told The Australian’s Eli Greenblat after revealing last week’s profit of $67.9 million, down 1.9% from the previous year.
 
When an English captain of industry tells you he’s disappointed, that’s a bit like a judge saying he’s disappointed when the accused has jumped out of the dock, legged it down the street and hasn’t been seen since.
 
In summary, there are too many negative retailing trends and hungry new competitors out there for anyone to put a “Buy” on the stock with any confidence.

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Ardent Leisure takes step in right direction

Wednesday, September 06, 2017

By Andrew Main
 
So, is Ardent Leisure a buy now that Gary Weiss and his Ariadne mate Brad Richmond have been invited to park their behinds on the boardroom chairs?
 
It can’t have done a great deal of harm, considering all the other issues that are queued up like Texas alligators to take a bite out of the shareholders’ funds.
 
The company is slowly recovering from the horrible Dreamworld accident of last October that took four lives.
 
Although Queenslanders would not have been thrilled in August to read that a review of the state’s workplace health and safety laws found that there are far fewer licensing and training obligations on fun park ride operators than there are on forklift drivers, for instance.
 
At least the law is bound to be tightened up, post the 58 recommendations that the report made, including appointing g a public safety ombudsman to oversee the sector.
 
That disaster played a big part in the staggered exits of chairman Neil Balnaves and CEO Deborah Thomas.
 
They were replaced respectively by George Venardos and ex-Nine CFO Simon Kelly.
 
Venardos has just had another upheaval to deal with in the tilt by the Ariadne crew for board representation that’s been running for most of this year.
 
I won’t go into tasteless jokes about bumpy rides but the cancellation on Sunday of the Extraordinary General Meeting called for Monday September 4 to vote on their inclusion was the final act in a messy proxy drama that didn’t make Chairman George, a long serving director, look all that canny.
 
George is the former CFO of insurance giant IAG, a careful man in a careful business, but he was wrong-footed by the assumption that because proxy advisory specialists CGI Glass Lewis and ISS recommended against installing Weiss and Richmond on the board, the institutions and retain investors would go the same way.
 
We’ll probably never know how the votes were going to go, but you can guess from the outcome. My spies in the industry say that a lot of boards use proxy advisors to do the heavy lifting in engaging with institutional shareholders rather than doing it themselves, and that it’s absolutely not correct to assume that shareholders are like sheep.
 
George’s crew were down on Weiss because he didn’t have any experience in the entertainment industry. Leaving aside that heartless aspersion on Weiss’s celebrated enthusiasm for the bass guitar, that’s not why he got up.
 
He’s a turnaround specialist, as is Richmond, who brought the Darden restaurant group in the US round in exemplary fashion a couple of years ago.
 
And boy, does Ardent need that skill set.
 
We haven’t even got to Ardent’s Main Event business in the US. It’s mostly in Texas so what used to be rock climbing walls have in some cases become ways of helping people keep their feet dry.
 
It’s not a disaster: only two out of 38 Main Event centres have reportedly suffered damage that’s going to keep them closed for more than a week or two, but it’s just another reason why people are down on the stock.
 
Another spy notes that Main Event’s quite a lot smaller than its competitor Dave & Buster’s , which has around 100 locations in the US.
 
A bright point my spy also noted was that if it all gets too hard for Dreamworld, they could do worse than get the site rezoned for residential and turn developer of a big number of apartments. A very Queensland solution, but one to bear in mind.
 
The market’s been relatively unmoved by the recent board dramas, falling just 2 cents yesterday to close at $1.90.
 
That’s nowhere near the pre-accident level of $2.87 but it’s also correct that the share price dipped to $1.55 during the recriminations earlier in the year, which saw the company declare a $49 million half year loss after writing down Dreamworld’s value by more than $90 million.
 
Among the brokers Credit Suisse deserves some sort of medal for cheering the stock on, being currently the only one of seven brokers polled by FNArena that’s got anything resembling a Buy on the stock.
 
To be achingly fair, Credit Suisse also called it a Buy in March when it was just over $1.60, so it’s consistent as well as right, for the time being at least. And its latest assessment was dated August 14, well before Hurricane Harvey turned up on the scene.
 
I understand Ariadne assembled its 10% stake by picking up stock around the $1.60 mark, so it’s well set. Credit Suisse has a 12-month target of $2.15 on the stock.
 
The least excited broker is UBS, which has a $1.60 target on the stock and a Sell rating. It’s kind enough to note that Main Event’s got good insurance coverage that will not only cover damage but also loss of earnings.
 
Back in March I wrote of Ardent that it was a stock you wouldn’t want to hurry into at this point, given that it will take a while for the bad news to lose its impact on sentiment.
 
“It’s one for the investors who may well be tempted to pick up a few on the back foot,” I wrote, all unaware that was exactly what Gary Weiss and Ariadne were doing.
 
It’s subsequently put on around 30 cents. The Ariadne influence is probably a positive but nothing earth shattering’s going to happen in a hurry at Ardent.
 
I stick to my previous advice. It’s a cautious buy.

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BHP creeps back into fashion

Wednesday, August 23, 2017

By Andrew Main

For a company that dropped short of the analysts’ earnings estimates by a lazy $US600 million, BHP came out of yesterday’s full-year numbers announcement looking pretty damn popular with lesser beings such as investors.

The big miner’s shares kicked up 35 cents at the opening to $26.05 despite the fact that the $US6.73 billion underlying profit number was below the analyst consensus of $US7.3 billion. This was compared with a previous equivalent number of $US1.2 billion. The shares traded fairly steadily through the afternoon to close 28 cents or 1.1% higher at $25.98.

BHP Billiton CEO Andrew Mackenzie. Source: AAP.

You can pick a spread of reasons why investors liked the newer numbers.

One, the company cranked up its final dividend from US14c to US43c. Put another way, the overall dividend payout lifted by 175% to $US4.4 billion and, as management loudly pointed out, that figure was well covered by earnings.

BHP’s 50% minimum payout policy would have paid out US33 cents at that level, so the decision to kick in an extra US10c a share to US43c was hardly lavish and will go down like an oyster with dividend-hungry investors.

Two, as stated above, underlying profit was up nicely. Free cash flow was up a dazzling 274% at $US 12.6 billion, the second highest ever achieved.

It wasn’t all canny management, of course. The relative weakness in the Aussie dollar and better-than-previous prices for coal and iron ore, the company’s mainstay products, clearly played a part in the positive result.

At the same time, net debt was cut during the year by almost $US9.8 billion or 40% to $US16.3 billion. You get the drift. BHP’s been focusing on sweating its assets and not diving off on any supposedly exciting new projects.

As retiring chairman Jac Nasser put it yesterday, over the last five years, the company has reduced unit costs by more than 40% and achieved more than $US12 billion in productivity gains, and he’s not even Scottish like CEO Andrew McKenzie, he of the “laser-like focus on costs”.

Just to amplify that theme, he noted that capital and exploration in the next three years won’t exceed $US8 billion a year. The latest year’s outlay of $US5.2 billion was a cut of 32% from the 2016 year’s total and while the current year will see around $US6.9 billion being spent, that’s clearly indicative of a cautious trend and retail shareholders generally cheer for caution, particularly in resource companies.

As Nasser put it, “we have reshaped our portfolio so that we focus on large, long life low cost assets that will support shareholder returns for decades to come.”

Buy that man a kilt, or tartan trousers if that’s a bridge too far.

But perhaps the strongest element for investors was the absence of bad news. Bear in mind that the previous 2016 financial year had seen the failure of the Samarco dam in Brazil in November 2015, a writedown of US onshore assets  and various global tax issues, helping produce an exceptional post tax loss of $US7.6 billion.

This latest year’s equivalent total for one-offs was a mere $US842 million, which by comparison is the sort of change you find down the back of the couch.

This year’s adjustment covered further reparation payouts over the Samarco disaster, a strike at the Escondida copper mine in Chile, and a fight with the Chilean tax authorities over withholding tax. Mackenzie could be forgiven for taking a pair of scissors to his map of South America in a bid to sleep better. Samarco alone accounted for $US381 million or close to half the annual total for exceptional losses.

They’re getting close to ending the Samarco horror but there still has to be a final settlement with the Federal Prosecutor’s Office in Brazil. That was supposed to have happened before June 30 of this year but that’s been extended out to October 30.

The element of the results announcement that professional BHP watchers liked most was that the company is getting out of onshore US operations, the millstone that the company hung around its neck in 2011 on an outlay of around $US20 billion.

It’s already written down the ill-fated shale assets by more than $US10 billion, most of that in January of last year, so as long as the company can get out at half of its entry price, the damage won’t be too bad. Isn’t hindsight a wonderful thing?

That decision lines up with the main recommendation of activist shareholder Elliott Management, the US group which has been calling on BHP to dump its shale business. It also wants an overhaul of BHPs petroleum business but one thing at a time, please.

Elliott now has a shareholding of just over 5% in BHP so it can call an extraordinary meeting any time.

Bearing in mind that the best activist shareholders are more interested in results than confrontation, Elliott could have had a win without firing a shot.

The test of this will be whether the BHP share price moves up in expectation of that shale business disposal. Certainly the trend’s looking positive.

BHP shares hit a recent low of $14.20 at the start of last year then ran up to a high of $27.89 at the start of this year. A recent dip to $22.10 in June has been followed by a mild rally to current levels, where brokers are fairly evenly divided between neutral and positive views.

BHP Billiton 1-year chart

Source: CommSec

In summary, BHP is creeping tentatively back into fashion and yesterday’s announcement will have helped the trend.

There are a million things that can still go wrong but as the old saw goes, the trend is your Friend.

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