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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

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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Coca-Cola loses fizz as Woolies gives Mount Franklin varieties the can

Wednesday, July 26, 2017

By Andrew Main

The bad news seems to keep on coming for Coca-Cola Amatil, whose shares were knocked down 2.6% to $8.26 on the opening yesterday thanks to a report in the AFR’s Street Talk column. 

The paper said that three of the five varieties of CCL’s Mount Franklin mineral water brand are about to be removed from Woolies’ shelves to make way for cheaper private-label products.

This comes on top of an announcement by Woolies in early July that it wouldn’t be stocking Coca-Cola No Sugar, which CCL says is the biggest launch of a new Coca-Cola product in the Australian market since Coke Zero came on over a decade ago in 2006.

Coca-Cola Amatil is a stock whose share price was over $10 as recently as late April. It's now bumping around in the low $8s after a first-half profit warning, followed by these recent lurches. CCL shares closed down 3.9% yesterday at $8.23.

Coca-Cola Amatil (CCL)

Source: CommSec

Woolies isn’t CCL’s only outlet of course. Indeed, did you know that Rekorderlig Cider, Coors beer and Jim Beam whiskey are also distributed locally by CCL?

But we’ve all been brought up on those stories about how the 2-litre bottle of Coke was the big retailer’s fastest-moving stock item. The only change of consequence lately has been that because people like to put a drink in their handbag or backpack, they’ve moved away from the giant bottles, but Classic Coke is still Woolies’ biggest seller.

The good thing about looking at a big retailer’s decision about stock is that there’s almost always a logic to it, or should be. 

Woolies revealed in April that it was holding off stocking Coca-Cola No Sugar because sales of Zero were actually doing very nicely, thank you. No Sugar has been rolling out elsewhere since mid June.

Image: Cans of Coca-Cola No Sugar. Source: AAP

In case you are wondering, and I was, the difference between Zero and No Sugar is that the latter has been extensively tested to taste pretty much like Classic Coke. So now you know. I understand that Woolies also pointed out to CCL that you can’t just plonk a new product on their shelves without something else having to give.

So is there a Big Picture conclusion for us to reach here?

In terms of yesterday’s news about Mount Franklin, CCL doesn’t seem to think so. Spokesman Patrick Low noted in a release yesterday that “it reflects Woolworths’ decision to reduce the availability of multiple brands across several manufacturers, and simultaneously expand the ranging of their private label water.’’

He also took the opportunity to trumpet that Mount Franklin sales by Woolies have grown by 8% at the retail level year-to-date. If you look at that statistic from Woolies’ perspective, then, they must have big margin expectations for the bottled spring water they were selling yesterday for 25 cents a 600ml bottle (if you buy a pack of 24).

What’s clear is that CCL is fighting a number of distribution battles, none of them particularly material on its own, while at the same time doing what it can to mitigate a more ominous trend.

Which is that in developed countries, we are slowly but surely weaning ourselves off sugary drinks.

A further complication is that demographics are also against them, since older people don’t go much on fizzy drinks, and as you know, the average age of the population is rising.

So what do the analysts think? They haven’t sprung into action over the latest ripple but they’re actually pretty sanguine about the stock recovering somewhat this year from the dud 2016 year, when EPS fell, earnings fell 37%, and the only reason the dividend grew slightly was because the payout ratio jumped from 84% to 139%.

Credit Suisse lifted it to Outperform from Neutral back in April, noting bravely that the analysts didn’t think the profit warning at that time was a harbinger of structural decline so much as temporary headwinds. Those headwinds might well be able to blow a dog off a chain at the moment.

More realistic and up to date are the likes of Macquarie and Morgan Stanley, both of which reassessed the stock as of July 7, when it emerged that Woolies wouldn’t be stocking No Sugar.

Macquarie noted the decision to launch No Sugar might have been overly ambitious, adding balefully that CCL lost to Pepsi the contract to supply drinks to the Domino’s Pizza franchise as from September.

Morgan Stanley, which expects the CCL share price to ease to around $8 in the next 12 months, didn’t see Domino’s as a disaster as it represents less than 1% of CCL’s Australian revenue. And it concluded that the decision not to stock No Sugar is aimed at reducing complexity and cost as Aldi grows its market share, which says a lot more about Woolies than CCL.

Both brokers were neutral on the stock. Given that the only broker upgrade I could find was Credit Suisse’s back in April, you’d have to conclude that there will need to be a jolt of positive news on the stock before the current price slide is likely to be arrested. 

At the moment, the outlook for CCL is dominated by the long-term negative trend on fizzy drinks and the other positives can’t yet make up for that.

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Has Flight Centre's share price already flown?

Wednesday, July 12, 2017

By Andrew Main

It’s hard to avoid aviation clichés when you see what has happened to Flight Centre’s (FLT) share price in the wake of last week’s profit upgrade.

The shares climbed 10% from $40 to $44 in a day despite the fact that management was effectively reiterating a previous guidance that it was looking at an underlying net profit before tax of between $325 million and $330 million for the year to June 30.

That would be a lift of between 2.5 and 4.9% on the 2015-6 year’s result. Most of it was psychology, clearly. As a Citi analyst report noted, it took five downgrades in three years before the Brisbane-based group managed the positive report. Banging your head against a brick wall then stopping, seems an apt analogy.

That’s a bit snarky considering the broker concluded Flight Centre would enjoy double digit earnings upgrades in the 2018 year just begun, and 2019.

Flight Centre had previously talked about earning between $320 million and $355 million for the year just ended before getting an attack of nerves over what it called “challenging” first half conditions, and cutting guidance back to $300-$330 million.

We’ve got a situation now where most of the brokers are finding the stock either a bit fully priced or overpriced. According to FNArena, there’s only one, Ord Minnett, that’s actually stuck a “buy” on it since last week’s news.

But the investors are piling in.

I’ll have a go at explaining why.

As a fundy just told me, there’s a lot of cash around at the moment looking for a home, and any stock that smacks of solid earnings and a bit of growth has got the retail investors lining up.

It does the stock no harm that it’s a household name: Flight Centre has a reported 2800 shops and businesses in Australia. All that bright signage and lively “destination board” arrangements in the shop windows count for a lot of consumer sentiment.

But there are definitely some clues around that cheap airfares have not been making it easy for Flight Centre.

For a start, the British Pound has had the vapours since the upheaval of the Brexit vote. As the company put it, “FLT’s UK operation will deliver another record profit in local currency, although the significant falls in the British currency’s value during the past year will adversely affect translation to Australian dollars. 

Looking at the first half nerves, the company was hit by what it called “unprecedented” airfare discounting in Australia, the US, India and Singapore. That, plus the Pound’s woes, meant that the company suffered a 32% drop in half-year pretax profit from $146.3 million to $113 million.

So you can see it’s been a very strong turnaround story in the second half, with pretax profit almost tripling, which management partially attributes to a cost cutting exercise that  has included some mid level redundancies.

One statistic that gives a really clear picture of how the company operates is the ratio of sales to profits, or Total Transaction Value (TTV) to PBT. It’s no surprise that budget air ticket shops don’t operate on vast margins, but how’s this? If the company hits $330 million for the year, that will be on TTV of just over $20 billion.

In other words, for every $1000 of tickets it sells, it’s earning pre tax $16.50 or 1.65%.

If you make the heroic assumption that they sold around $10 billion of tickets in the “challenging” first half, then the margin shrinks to 1.13%.

The good news is that a sharp focus on costs does wonders for the bottom line of such companies. The Ords analyst, who incidentally is new to that job, has put a $48 target on the stock thanks to a stabilisation in airfares and an improved earnings outlook.

That said, other brokers see the stock as fully priced, particularly as it closed yesterday at $44.80.

Morgans keeps it as a HOLD on that basis, while Macquarie says it will Underperform due to what the broker sees as continued softness in airfares in FY18. It sees margin decline in the medium term coupled with valuation pressure, thus seeing risks skewed to the downside. The theoretical price target is $28.70, which is not what holders want to see.

Citi has also had a close look at the skinny margins at Flight Centre but has concluded that ratio should climb from 1.6 to 1.9% over five years.

That looks like a Himalaya of a mountain to climb, but if you want to split some arithmetical hairs, that’s a rise of more than 18% in that ratio. If they can also lift overall sales, and you can assume that’s front and centre of planning, then there’s a turbo effect, a double whammy on the upside..

Jumping outside the square for the moment, analyst group CapitalCube says the stock is sharply undervalued and has an implied value of $55.77.

“Its current price to book ratio of 3.29 is about median for its peer group,” says a note dated July 10, referring to peers such as HellowWorld and Webjet, the latter being the most expensive in CapitalCube’s estimation.

It sees Flight Centre as having room to grow faster. “Compared with its chosen peers, the company’s annual revenues and earnings change at a slower rate, implying a lack of strategic focus and/or lack of execution success,” it notes.

My conclusion? The stock’s had something of a relief rally thanks to the upgrade and is now sitting at the top of most analysts’ price estimates.

Long term, it’s probably an interesting proposition but at these levels, traders would probably conclude that this bird has flown. 

Source: ASX. Data as at Wednesday 12 July, 2017

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

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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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