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Paul Rickard
+ About Paul Rickard

Paul Rickard has more than 25 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005.

In 2012, Paul teamed up with Peter Switzer to launch the Switzer Super Report, a newsletter and website for the trustees of SMSFs. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and Property Exchange Australia Ltd.

Follow Paul on Twitter @PaulRickard17

Super downsizing has legs

Thursday, April 27, 2017

By Paul Rickard

Reports out of Canberra that the Government may be considering changes that would allow retirees to contribute the proceeds from downsizing the family home back into super, notwithstanding the cap on super contributions and other restrictions, should be supported in principle. Linking superannuation with housing, both integral retirement assets, is perfectly logical policy.

According to the Australian Financial Review, retirees would be able to top up their super with the net proceeds from downsizing, notwithstanding the $100,000 cap on non-concessional contributions, the $1.6m cap on the total amount of super in the retirement phase, and the need to meet work tests if over 65. The Government sees this as a measure that would free up more homes for buyers and improve housing affordability, as demand from retirees would shift towards lower-cost apartments, shared living and assisted accommodation options. 

There are two key reasons why many retirees are reluctant to downsize. The most important one is the lack of suitable housing options preferred by retirees. These include villa-style dwellings with a few square metres of garden, ground floor/low level apartments close to neighbourhood shopping centres but not on six lane highways, and modern, village-style assisted accommodation. Retirees generally want to downsize to an area that is close to family and friends, and more often than not, close to where they currently live. It is not uncommon to hear the tale that a retiree just can’t find anything suitable to downsize to, and in some cases, the downsizing actually involves an “upsizing” in cost. 

There is also the impact that downsizing can have on eligibility for the aged pension. The family home remains exempt from the pensioner assets test, but if it is sold and a less expensive home is purchased, the net proceeds crystalized will be counted as an asset. This doesn’t matter whether the asset is cash or invested in super.

Following changes to the asset test that commenced in January, a homeowner couple can have $821,500 in assets (excluding the family home) and still get a part pension. For a single, the cut off is $546,250 in assets. While home contents, motor vehicles, personal savings and gifted assets are key categories, the largest asset that impacts eligibility is increasingly superannuation balances.

Apparently, the Government isn’t proposing to make any changes to the pensioner assets test, so downsizing would still impact retirees who can, or intend to, access a part pension. This group is more than 70% of senior Australians - so the Government’s policy change would only apply to a smaller group of “wealthier” homeowners.

That said, it is a step in the right direction. With super tax free in the pension phase, the opportunity to make additional contributions should be an attractive financial incentive to consider downsizing. How it is administered or policed is another matter!

Support for accessing super to buy first home

Linking superannuation with housing makes sense to me, as both are integral to a comfortable retirement. It is just as important to own your own home as it is to accumulate superannuation savings, otherwise the superannuation savings are directed to paying rent in addition to meeting living expenses. Own your own home, require less superannuation. Don’t own your own home, require more superannuation. Hence, I have never understood why so many commentators are opposed to letting first homeowners access part of their superannuation savings.

It is interesting to note that according to Newspoll, 42% of Australians are in favour of the idea and 49% are opposed. A narrow margin, but closer than many might have expected.

And this comes after a concerted effort to ridicule the idea, from people such as the “father of superannuation”, Paul Keating, the Head of the Financial Systems Inquiry, David Murray, and of course, nearly every super fund and industry lobby group.

Paul Keating and David Murray’s arguments should be considered, but ignore anything that the super industry says. This is pure self-interest. With $1.5 trillion dollars in super investments being charged an average of 80 basis points, this generates a revenue pool of $12 billion per annum for the industry. That’s right - Australians are paying $12 billion each year in fees to their super managers. This is an industry with a huge gravy train to protect.

I have argued that letting young Australians access their super is foremost about making super more relevant to this demographic, and secondly, about improving housing affordability by helping to close the deposit gap. Access wouldn’t be open slather and would come with a stringent rule set, and importantly, the money would not be lost to the super system forever. When the house was sold, the monies would go straight back to the super fund.

If you would like to review my ideas on how such a scheme could work, click here. And for the record, the same Newspoll showed that 52% of 18 to 34 year olds support the idea - it's only us oldies who oppose it!

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Brambles delivers a modest surprise

Thursday, April 20, 2017

By Paul Rickard

The market’s reaction to supply-chain logistics company Brambles' third-quarter trading update, which saw shares jump by 5.9% yesterday to close at $10.17, is perhaps as surprising as the savaging it dished out earlier this year.

Back in January, Brambles issued a trading update for the first half year, warning of some challenges with its US pallets business and saying that it wouldn’t meet its current sales and profit guidance, the latter being full-year growth of 9% to 11%. The shares fell by 15.8% from $12.28 to $10.34. In February, Brambles announced that its half-year underlying profit had only risen by 3% and sales by 5% (both on a constant currency basis), and formally downgraded its full-year profit guidance to flat underlying profit growth, on sales growth of 5%. It also re-iterated on the challenges in its largest market (North American pallets), noting increased competitive pressures and customer destocking. The shares got hammered again, falling another 10% on the day to $9.47.

Brambles (BXB) - Oct 16 to April 17

Source: CommSec

Yesterday, Brambles confirmed that it is on track to meet its revised guidance - sales growth of 5% and underlying profit growth in 2017 to be flat with 2016. It also reported divisional sales growth results for the nine months almost identical to the rates for the half year, both on an actual and constant currency basis. For example, sales growth for the nine months for North American pallets rose by 2%, compared to 3% for the half-year period. 

So, why did the shares rally?

Probably because the market had over-reacted to the previous announcements and that there hasn’t been any further deterioration in the business. The old saying that “bad things come in threes” resonates with markets, with analysts and investors accustomed to the profit downgrade cycle which often plays out over multiple downgrades. No further deterioration was actually good news - a modest surprise!

Also, Brambles was a lot more careful with its language, and although still citing competition and lower prices, was able to point to contract wins in North America that will make a financial contribution in FY18.

Arguably, a modest surprise on both counts.

Where to now for Brambles?

Although the Brambles business of CHEP pallets and re-usable plastic containers isn’t particularly fashionable, it is the global leader in its field, which is a fairly rare thing for an Australian company. It also still just sneaks into the ASX top 20 companies, and is arguably our largest “real” industrial company and one of the few genuine “cyclicals”.

So, from a portfolio perspective, Brambles matters. It is not big enough to be a “must have”, but it is certainly worth having an opinion about.

Let’s start with the Brokers.

The brokers were taken by surprise with the January and February profit downgrades. Most feel that the issues in the USA are temporary, but some are wary and note that Brambles has also abandoned its long-term financial targets. Overall, they are neutral, with two buys, five neutrals and one sell. According to FNArena, individual ratings and target prices are as follows:

Source: FNArena,19 April 2017

While there may be some changes to the target prices over the next few days as the brokers upgrade their models for the new data, they are probably only going to be marginal. Compared to valuation, Brambles is close to fully priced.

On a multiple basis, using average FX rates, Brambles is trading on 19.7 times forecast FY17 earnings and 18.0 times FY18 earnings. The forecast dividend yield is 3.0%, with only 25% franked.

Hardly multiples or yields to get too excited about!

But, Brambles is one of those rather boring stocks that, until recently, has had a strong track record of delivering on expectations. And as a global logistics business, the tailwind of rising global growth should be good for Brambles.

Bottom Line

I think Brambles is a ‘hold’. No more bad news was a positive, as were the contract wins in North America and strong volume growth in Europe and Latin America. While Brambles has high hopes for its data analytics and digital business as a growth enabler - the so-called BXB Digital - it is not yet clear how this will generate revenue. If you are bullish on world growth, then maybe Brambles is for you, but otherwise, the best buying opportunities might have already passed by.

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BHP too quick to dismiss break-up proposal

Thursday, April 13, 2017

By Paul Rickard

It is somewhat ironic that BHP has reacted so quickly to dismiss the break-up proposal from shareholder activist Elliott Associates.This is the same company that has destroyed billions of dollars of shareholder wealth through its misjudged merger with Billiton, paying top dollar for US oil shale assets and offshore petroleum (now largely written off), and the maintenance of a flawed progressive dividend policy.

To name but a few examples.

Chairman Jac Nasser will soon be riding off into the sunset. Maybe that will crystalise a change in the Board’s approach to considering ways to increase shareholder value, but in the meantime, the normal “BHP knows best” view prevails.

That’s unfortunate (and potentially costly) for shareholders, because the Elliott proposal deserves the Board’s full attention. Judge for yourself.

And in case you think Elliott isn’t serious, visit their special “value unlock plan for BHP” website here

The Proposal

The Elliott proposal has three steps:

  • Step 1: Unifying BHP’s dual-listed company structure into a single Australian-headquartered and Australian tax resident listed company;
  • Step 2: Demerging and separately listing BHP’s US petroleum business on the NYSE; and
  • Step 3: Adopting a consistent and value-optimised capital return policy – an opportunity to monetise the substantial franking credit balance through discounted off-market buybacks.

By way of background, New York based activist investor Elliott manages two funds, Elliott Associates, L.P. and Elliott International, L.P., with assets under management totaling more than US$32.7 billion. The Elliott Funds, together with certain of their affiliates, hold an economic interest in respect of approximately 4.1% of the issued share capital of BHP’s UK-listed entity (Plc). This represents just under 40% of the aggregate BHP shares on issue, which means that Elliott speaks for about 1.6% of BHPs shares.

In relation to the first step, Elliot argues that a price distortion frequently occurs between the shares of the UK listed entity (Plc) and the shares of the Australian listed entity (Ltd). Since the merger of BHP and Biliton in 2001, and the implementation of the dual-listed company structure, Elliott says that the Plc shares have traded at an average 12.7% discount to the Ltd shares.

The demerger of South32, which saw many of the ex-Biliton assets spun off into the new company, has further exacerbated the economic asymmetry within the BHP group. According to Elliott, approximately 8.9% of BHP’s EBITDA is generated by Plc assets, whereas Plc’s shareholders hold c.39.7% of the aggregate number of issued BHP shares.

They propose a unified BHP, which would own 100% of both the Ltd shares and Plc shares. While this unified company would be an Australian tax resident, it would be listed in the UK, with Australian shareholders owning Chess Depositary Interests (CDIs). Elliott argues that unifying BHP’s current dual-listed structure would remove a number of clear inefficiencies and create a platform for BHP to deliver optimal value to shareholders. They say that BHP has a surplus franking credit balance of US $9.7bn which is largely “stranded”, and this would be easier to unlock in a unified structure. They argue that this is a remarkable “value unlock” opportunity, and that if BHP retains its current dividend payout ratio of 50% using the current structure, the balance of surplus franking credits could hit US $17.0bn by 2022! 

BHP says that it has not yet identified sufficient benefits to outweigh the significant costs which would be incurred in unifying the dual-listed company, and that the proposal would require approval by the Australian Foreign Investment Review Board. It maintains that there are some benefits of the structure, and estimates the costs of unification to be US $1.3bn or US $0.24 per share.

The second step is to demerge BHP’s US petroleum business, which comprises BHP’s US onshore and Gulf of Mexico petroleum assets. Elliott says that these businesses have not contributed to BHP shareholder value.

Elliott argues that:

  • they provide no meaningful diversification benefits to BHP as a whole;
  • there is a lack of synergies between BHP’s US petroleum assets and its mining assets;
  • the intrinsic value of the assets is being obscured by bundling it with BHP’s other assets; and
  • a demerger would allow a clear value re-rating for both BHP’s US petroleum business and the remaining core BHP business.

BHP’s US petroleum business could significantly re-rate as an independently listed business. Elliott says that it might be worth up to US $22.0bn, well in excess of the current analyst valuations.

BHP dismisses this claim out of hand, saying that there is no obvious discount in BHP Biliton’s trading multiples relative to the weighted average of relevant mining and oil and gas peers. It argues that a demerger has significant downside risk, and only limited upside potential. And of course, “BHP Billiton has disclosed the information the market needs to fully value the Petroleum businesses.”

The third step is the adoption of a capital return policy. Elliott says that BHP should use the excess cash it is generating, and return this to shareholders via discounted off-market share buybacks.

It estimates that BHP could generate US $31bn of excess cashflow in the next five years, assuming the current 50% payout ratio of net income. Rather than use this cash to make “value-destructive large-scale acquisitions, such as Petrohawk and certain Fayetteville assets”, it could via off-market buybacks pitched at a 14% discount to the market price, effectively buy BHP’s own first-class core assets at a meaningful discount.

Over the last few years, BHP has conducted two very successful off-market buybacks pitched at a discount of 14% to the current market price. Both were heavily oversubscribed, as the buyback is very tax effective to low-rate taxpayers such as superfunds. With BHP’s huge reserve of franking credits, it is well positioned to offer these programs to Australian resident shareholders.

BHP doesn’t like Elliott’s third step, because its “formulaic” approach doesn’t take into account the cyclical nature of the resources industry or the other uses of cash. It says that now is not the right time to conduct a US$6 billion buyback. Of course, BHP already has a “rigorous capital allocation framework, which balances value creation, cash returns to shareholders and through the cycle balance sheet strength in a transparent and consistent manner.”

Bottom line

In summary, Elliott says that implementation of its value unlock plan could provide BHP shareholders with an increase in the value attributable to their shareholdings of up to 48.6% for Ltd shareholders and 51.0% for Plc shareholders.

Even if this claim is true to say only 10% or 20%, it is still not insignificant and shouldn’t be sneezed at. It is probably why the shares rallied by around 5% when news of the proposal emerged. Time for the BHP Board to pause and consider its abysmal track record in managing capital, eat some humble pie and actively seek feedback from the market on the proposal. 

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Only 85 more sleeps until super D-Day!

Thursday, April 06, 2017

By Paul Rickard

There are only 85 more sleeps until the biggest changes to super in a decade take effect on 1 July. For some affluent Australians, this is going to be their last chance to get money into super. With time running out, here is what you need to do before 30 June.

1. Bring forward salary sacrifice arrangements

The concessional contributions cap will be reduced from $30,000 to $25,000, or for those who were 49 or older on 1 July 2016, from $35,000 to $25,000. Concessional contributions includes your employer’s contribution (the compulsory 9.5%), plus any amount you salary sacrifice or if self-employed, any amount you claim a tax deduction for.

If you are making salary sacrifice contributions, you will need to review these from 1 July to make sure that you are under the new cap. Also, as this is the last year of the higher cap, the obvious strategy is to see whether you can utilise the full cap in 2016/17. If cash flow permits, accelerate salary sacrifice amounts this year, or if self-employed, make the full contribution prior to 30 June.

2. Make non-concessional contributions

The non-concessional cap reduces from $180,000 to $100,000. Non concessional contributions are your own personal contributions which you aren’t able to claim a tax deduction for.

The other change is that if your total superannuation balance is over $1,600,000, you won’t be able to make any contribution at all. This is a new constraint to apply from 1 July, 2017. Super balances will be measured each June 30 (i.e. your balance at 30 June 17 will determine whether you can make a non-concessional contribution in 2017/18).

Of course, to make a non-concessional contribution, you need to have the cash on hand. SMSF members can also consider in specie transfers, which must be done at market value and can’t include certain assets such as a residential investment property (it can include shares, managed funds and business real property).

If you are selling assets to generate cash, or transferring in specie, these will count as disposals for capital gains tax purposes. You may also have to pay stamp duty, for example, on business real property.

3. Access the bring forward rule

With the change in the non-concessional cap to $100,000, the limit under the "bring forward" rule, which allows people who are under 65 to make up to three years of non-concessional contributions in one year, will fall from $540,000 to $300,000. So, if you want to get a large amount into super, do it before 30 June. And as the limit applies per person, if you have a partner, then you can effectively get up to $1,080,000 in super. From 1 July, this will only be $600,000.

If your total super balance is between $1.5m and $1.6m, your limit (under the bring forward rule) will still only be $100,000, and if your total super balance is between $1.4m and $1.5m, your limit will be $200,000.

4. Remove any excess pension balances

The law relating to the transfer balance cap of $1.6m requires anyone who has more than $1.6m in the retirement phase of super (that is, in assets supporting the payment of the pension) to remove the excess, either by a lump sum withdrawal, or by rolling it back into the accumulation phase of super. The measurement date is 30 June 17.

Transitional relief is available if your balance is between $1.6m and $1.7m - you will have until 31 December 2017 to comply. If you have more than $1.7m, you are required to comply by 1 July.

From a tax point of view, it will usually make sense to roll the money back into the accumulation phase as the 15% tax rate is still concessional. However, if you are not utilising your personal tax free threshold of $18,200, then from a tax point of view, withdrawing some or all of the excess as a lump sum and investing it in your own name will deliver a better outcome.

Capital gains tax relief is available if you are required to comply with the new transfer balance cap. This won’t be needed if you are making a lump sum withdrawal (as the asset would still be in the 0% pension state when sold), but will be required if the funds are being rolled back into the accumulation phase. If the assets are segregated current pension assets, relief can be accessed and the cost base of the asset is re-set to the market value when compliance occurs. If the proportionate method is used, the cost base is re-set to market value on 30 June.

One new provision is that SMSFs with a member who has more than $1.6m in superannuation assets and who has some of this is in the retirement phase won’t be able to use the segregated assets method from 1 July 17.

5. Check whether you want to keep your TRIS

The investment earnings of assets supporting transition to retirement income streams or pensions (TRIS) will be taxed at 15% from 1 July, rather than the current 0%. As this removes the key financial incentive to have a TRIS, you will need to consider one of three choices:

  • keep the TRIS, in which case, continue to make minimum withdrawals of between 4% and 10% of the account balance each year;
  • roll the TRIS back into the accumulation phase; or
  • If circumstances allow, consider permanently retiring.

One new provision to apply from 1 July is that it will no longer be possible to treat an income payment from a TRIS as a lump sum withdrawal and access the tax free low rate cap of $195,000. Lump sum withdrawals will still be possible, however they will not count as meeting the minimum payment standard.

With investment earnings on a TRIS now taxable, the only reason to keep a TRIS post 30 June is if you need (or want to) access some of your super early. If you don’t and aren’t ready to retire, discontinue the TRIS and roll it back into the accumulation phase.

Only 85 sleeps to go - time to get moving!

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Forget the Productivity Commission, here's how to find the best super fund!

Thursday, March 30, 2017

By Paul Rickard 

The Productivity Commission’s latest report on super might have attracted headlines, with the Australian Financial Review leading yesterday with ’Unions to lose default super grip’ and the Sydney Morning Herald with ‘Unions sidelined in radical overhaul of super’, but this report is not going anywhere quickly and it won’t impact your retirement nest egg.

That’s not to say that the super industry won’t get very passionate about it and spend money arguing respective self-interest. This is a 2.1 trillion dollar industry that has an annual fee pool of more than 10 billion dollars to share amongst the retail and industry funds. Spending a lousy few million on a TV campaign is nothing if it protects long-term access to this gravy train.

In case you missed the report titled ‘Superannuation: Alternative Default Models’, this is stage two of a three-stage superannuation review being conducted by the Productivity Commission recommended by the Financial System Inquiry in 2014 (yes, things move quickly). By the Commission’s own timetable, which involves a third stage (not yet started) and time for Government to respond, it could be at least 2020 before any of this comes into effect.

The report deals with default super arrangements, that is, when the employee does not choose the super fund where contributions are to be paid. As the employer is obliged to make contributions within a prescribed period, employers are allowed to nominate a default fund if no active choice is made. With the majority of employees not exercising their right to choose, and cozy deals between unions and employers, this had led to the dominance of industry super funds. In some cases, the industrial award specifies the default fund. For example, CBUS is the default fund for an employee in the construction industry.

With survey evidence showing that two thirds of super fund members stick to their default fund, getting access to default members is potentially very lucrative to super funds. Hence, the retail funds, which are owned by the major banks and insurers such as AMP, have been lobbying Government to open up these default arrangements to competition.

However, the Commission hasn’t yet formed a view about which is the best default arrangement. Rather, it has developed four alternative models to allocate default members to products. It has assessed these against five criteria, and compared the models to a baseline of unassisted employee choice. Following feedback and further review, the Commission may determine a preferred model.

The four models are described in the following diagram.

Importantly, employees who fail to exercise choice would only be allocated to a default product if they did not already have an existing superannuation account. Typically, these would be new entrants to the workforce (the first-timer pool), and they would retain that account (including through a change of employer) unless they actively switch.

The Commission favours the Government developing a centralised online information service, with universal participation by employers and employees, to facilitate this “once only” allocation to a default product. It describes the current arrangements that have led to the creation of multiple super accounts as an “egregious systemic failure”.  

This has major implications for the super funds, because the first timer pool of 400,000 members each year is materially less than the number of new default super accounts opened currently. Further, because they are new to the workforce (often part-time or casual), they only contribute $800m in contributions in the first year, virtually a rounding error in the super system. Expect the industry to fight this hard, and find all sorts of reasons (including cost and time) why a universal on-line system can’t be built.

How to find the best super fund

While the efforts of the Productivity Commission might lead to an improvement in super returns for the “new worker pool” as funds compete for the right to be allocated default accounts, particularly if fees become a key determinant in the model, it won’t do anything for existing super members, and in any case, is still years away. The question remains - how do I find the best super fund?

This question really should be divided into two. The first and most important question to ask is - do I have the right investment option? The second question is - do I have the right fund?

The data suggests that asset allocation, that is, the mix between growth assets such as Australian shares, international shares and property; and income assets such as cash and bonds; will have a bigger impact on the performance than the efforts of the fund manager in selecting individual investments. In a well-regulated superannuation environment, this means that the investment option is more important than the super fund.

Which option? This question can only be answered by reference to each person’s investment objectives, investment timeframe and attitude to risk. For most people, this is going to mean an investment option that is described as “balanced” or “growth” and comprises around 60% of the monies invested in growth-based assets. Millennials, Gen Y and others with a very long-term horizon and who can stand multiple market and economic cycles might even want to take a “high-growth” style option.

Choosing the right investment option applies also to retirees taking an account based pension. I am often surprised by people who retire and then suddenly go all conservative with their savings. With life expectancies growing, retirees in good health need to plan for their savings lasting 25 to 30 years, more than enough time for a couple of market cycles. Some growth assets are required!

Once we have the right investment option, let’s now turn to the attributes of the manager. Here are five factors to consider.

Firstly, investment performance, or perhaps more importantly, the consistency of performance - how has it gone relative to its peers over one year, three years, five years and even 10 years? While every adviser and product issuer is required by ASIC to warn that “past performance is not a reliable indicator of future performance”, many of us believe that it is worth considering. 

Next, the management fee. While performance figures are usually quoted net of fees, the data also shows fairly conclusively that super funds with lower fees perform better than funds with higher fees. Not always, and by no means in every case, but on average. So, if choosing between two funds which have similar investment performance, go for the fund with a lower fee.

The third factor is service, usually pretty hard to assess. Next, if insurance is relevant, then the availability, cost, and features/policy benefits of any insurance. Life insurance, TPD (total and permanent disability) and income protection cover can usually be arranged through super. The main advantages of accessing this way is that it is often cheaper (due to the fund’s buying power), premiums can come out of contributions rather than cash flow and sometimes approval is automatic (no medicals). The main disadvantage is that it can be pretty basic, and for some occupations, you cannot get the cover you need. One important point about insurance - don’t pay for it for you don’t need it.

Finally, flexibility. Some funds offer investment options where you can select the actual investments, while others make it easy to start a transition to retirement pension at no additional cost.

There are two really good comparison websites. Super Ratings rates more than 500 super and pension fund investment options and issues platinum, gold, silver or other ratings. Chant West uses a star system to rate 150 super funds and 90 pension funds.

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TPG - executing on strategy, but out of favour

Thursday, March 23, 2017

By Paul Rickard

Listed telco TPG Telecom delivered a very solid first-half result on Tuesday that beat expectations, but that wasn’t enough for brokers Ord Minnett or Credit Suisse, who immediately downgraded TPG to “lighten” and “underperform” respectively. While the telco business is a tough game at the moment, the downgrades and negativity about the sector are a reminder about how quickly market sentiment changes, and potentially, creates opportunities for contrarian investors. 

Notwithstanding the broker downgrades, the share market was a bit more positive, with TPG’s shares closing yesterday at $6.79, up 2.6% since the result was announced. But the share price is still down more than 47% on the high of $12.93 achieved just last July!

TPG Telecom (TPM) - March 2016-March 2016 


Source: Nabtrade

TPG’s share price woes aren’t unique, with other telcos under pressure due to concerns about pressure on margins. The ASX telecommunications sector, which is largely Telstra plus Vocus and TPG, had a horrid start to 2017. After being the worst performing sector on the ASX in 2016 with a return of minus 7.1%, it is already down another 6.9% (including dividends) this year.

So, is there any light at the end of the tunnel for TPG, and is it a “contrarian” buy?

First half result

TPG reported underlying EBITDA growth of 13% to $417.6m for the first half. This was achieved on revenue growth of 7% to $1,235m.

Each of TPG’s three Australian divisions grew revenue and increased EBITDA. The consumer business, which is largely a broadband business under the TPG brand, increased EBITDA by 8%, while iiNet, which TPG acquired in late 2015 and is mainly broadband and fixed voice, grew EBITDA by 26% to $141.7m. The corporate division, which includes the old AAPT business and provides data/internet and voice services to corporate customers, grew EBITDA by 8%.  

Highlights of the result included:

  • The contribution from iiNet (organic EBITDA up by $14.7m);
  • Group broadband subscribers growing in total to 1.9m (up 69,000 on 31/1/16 and 43,000 on 31/7/16). There are now 388,000 subscribers on the NBN, up 112,000 over the last 6 months;
  • TPG’s new FTTB (fibre to the basement) service, which attracted 24,000 customers;
  • Broadband ARPU (average revenue per user) remaining relatively stable. For example, TPG  ARPU for NBN fell from $67.40 to $67.10 compared to the corresponding half in 2016, while iiNet ARPU for NBN rose from $70.90 to $72.80 over this period; and
  • Strong sales of on-net data and internet services driving growth in the Corporate Division.

The company re-affirmed guidance of underlying EBITDA for the full year of $820m to $830m.

The Brokers

The Brokers see potential upside in the stock, with the current consensus target price at $7.89 representing a 16.1% premium to the current share price. However, their recommendations are quite varied, with three buys, three sells and two neutrals. According to FNArena, individual recommendations and target prices from the major brokers are as follows:

Many brokers think that the guidance is conservative, and although it will be more challenging to extract synergies and cost reductions from the iiNet business in the second half, TPG should come in at the top side of the range.

Another upside are spectrum auctions and a decision on mobile roaming by the ACCC, which brokers say may be a catalyst for TPG to build a mobile business. Currently, TPG has a small mobile business, effectively reselling and rebadging services from Optus (and moving to Vodafone). While this could be a long-term opportunity, the brokers are worried about the capital expenditure to develop and roll-out a metro centric mobile business. TPG has also recently acquired spectrum in Singapore and plans to build a network in that market.

The major concern for the brokers is the potential for a margin crunch, as broadband subscribers are migrated off TPG’s and iiNet’s ADSL networks to the NBN. With Telstra, Optus, Vodafone and TPG becoming retailers and NBN the monopoly wholesale supplier, brokers fear that ARPU will decrease as the four major providers and new entrants compete for subscribers. While the wholesale margin will also not be available on customers who switch to the NBN (TPG’s new FTTB service will compete head on with the NBN), there will be an opportunity to “upsell” customers to a higher margin plan that provides higher download speeds. 

My view

The risk with margin crunch is real and it is unlikely that the market is going to stop worrying about this in the short term. It is not really “new news” and I am not sure why the market wasn’t concerned when the share price got close to $13.00, but “group think” prevails and the telco sector is on the nose. Time will tell how this plays out.

That said, TPG is executing well and the almost halving of the share price is an incredible re-assessment of value for a company that is meeting its targets.

TPG is reasonably priced, trading on a forecast multiple of 14.0 times FY17 earnings and 14.3 times FY18 earnings (the brokers are forecasting earnings to fall marginally in FY18). But I am a believer in management track record and TPG boasts a strong record. Although growth has been partly driven by acquisition, the following charts are quite impressive. 

And while the opportunities for mobile networks in Singapore and/or Australia are likely to require capital and may take some years to show fruition, David Teoh and his team at TPG are very competent operators.

A contrarian buy.

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

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Super charging the housing market

Thursday, March 16, 2017

By Paul Rickard 

I have argued for some years that young people should be able to access part of their super to help fund the deposit on their first home (see articles in Switzer Daily here and here). And just when I thought the “housing affordability” debate was getting a little weary and needing to catch breath, Treasurer Scott Morrison reignited it by floating the idea that accessing super early could help.

Of course, the super industry put vested interests to one side and came out strongly against the idea. Sally Loane, the CEO of the Financial Services Council, which is a lobby group for the retail super funds, said that “we do not support diluting people’s retirement nest eggs to solve a housing affordability issue”. The Association of Super Funds of Australia urged the government to “tread warily”.

But retirement “liveability” doesn’t just depend on a person’s super savings, it depends almost as much on whether the person is a homeowner or a renter. While accessing super early is not the panacea to housing affordability - new supply is probably the major issue - there is no ‘in principle’ reason why a compulsory system of saving like super can’t work “hand in glove” to help participants address their other retirement challenge.

Moreover, I am a big fan of making super more relevant to the young - one of the biggest and least talked about issues confronting the super industry.

Making super more relevant

Without a purpose, super doesn’t have a lot of value. For a 25-year old who faces the prospect of retirement in 50 years’ time in 2067 at age 70 or 75, super adequacy is a problem that is in the “never never”. Retirement is just so far out. There are far more pressing priorities, like finding a place to live, finding a partner, building a career and the myriad of life challenges.  

With capital city house prices, in particular Sydney and Melbourne, now at such high levels, the deposit gap is a huge challenge for many young Australians. Raising the 20% deposit of $80,000 on a home worth $400,000 (well below the median house price in those cities) is no small ask – and if part of a super balance can help here, this will give super an immediate purpose. There is a reason now to make contributions.

Secondly, it will encourage young Australians to think about their super – how the funds are invested, what returns they are getting, how many super accounts they have. The fact that there are 28 million super accounts - roughly two accounts for every working Australian - chewing up fees and costs shows how irrelevant super is to many people. 

Finally, it will put pressure on the high fees charged by our super managers. More interest by superannuants means more scrutiny on the super managers and ultimately, downward pressure on fees. Further, young adults might start to question the absurd proposition of life insurance that many are forced to take and pay for – despite not having a dependent in sight. 

How would early access to super work?

There are several models about how early access to super might work - here are my thoughts. Importantly, it is not open slather, and it is capped.  

Firstly, the amount a young adult (under 35) could withdraw would be capped – say a lifetime limit of $50,000. And they wouldn’t be able to withdraw their entire super – the amount taken for a deposit would be no more than 50% of their super balance.

Next, the amount withdrawn would be paid directly by the super fund to the property vendor. Finally, and importantly, the super fund would take out a charge on the property – let’s call it a ‘super caveat’ or ‘second mortgage’, such that if the property was sold, the super monies would be returned in full to the super fund before any monies from the sale were repaid to the member.

What are the arguments against?

Setting aside the argument that it is not the purpose of the super system (which to me sounds like one generation paternalistically lecturing the next generation), the other arguments raised are that it will crush a person’s super savings in retirement and it could inflate an already hot property market.  

The former is put out by the super industry lobby, who of course abhor anything that might upset the super fee gravy train. They have produced some pretty horrific numbers that assume that the funds will be lost forever to the super system – usually for 40 years - and ignore the fact that the average mortgage turns over every four years and Australians move home every seven years. Under my model, if the house was sold or mortgage discharged, the super fund would be repaid in full.

And will accessing super really inflate a booming housing market? Well, if any of the scare-mongers had bothered to look behind the numbers, they probably would have come to the conclusion that whatever pressure there will be, it is some way down the track and not that impactful.

According to APRA¹, the average superannuation balance for a person aged from 25 to 34 is $16,191. If they hold two accounts, this puts the balance at $32,000. A 50% cap would see $16,000 available for the deposit – not much more than the First Home Owners’ Scheme and a long way short of the $80,000 deposit needed.

And if they started from scratch and say earned $100,000 per year and their employer contributed $9,500 into super, after contributions tax of 15% and earnings of 7% pa, it would take around seven years to get to a balance of $80,000.

Any impact on the property market is going to be relatively minor and some way (years) down the track.  

Give young adults a go

Let’s give young adults a hand by allowing them to access part of their super as a deposit for their first home. At the same time, let’s give them a reason to value the super system. The arguments that it is inconsistent with the purpose of the super system or that it will inflame the property market don’t really stack up.

¹  Australian Prudential Regulation Authority Annual Superannuation Bulletin June 2016

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Product Road Test - Investing in Urban Renewal through URB

Tuesday, March 14, 2017

While I don’t particularly like the name, I think an investment in the URB Investments IPO is worth considering. And I want to disclose up front our interest in promoting the idea - Switzer Financial Group may earn a selling fee of 1.5% on the value of successful applications placed through us.

With this out of the way, let’s move onto the investment opportunity.

URB Investments Limited

URB Investments Limited is an investment company that will be listed on the ASX. Its aim is to capture long term value by investing in a diversified portfolio of equity securities and direct property assets that have exposure to urban renewal and regeneration.

Through an IPO (Initial Public Offer), the company is seeking to raise gross proceeds of between $75m and $300m by issuing shares at a price of $1.10.

Urban Renewal

Urban renewal and regeneration is the transformation of existing urban areas to accommodate much denser and generally mixed use environments. It can generate a number of benefits including new infrastructure, better use of existing infrastructure, increased productivity, additional expenditure and new employment opportunities.

URB will invest in assets that have exposure to population growth, population density, major infrastructure investment, housing growth, new employment, revitalisation of town centres, re-zoning and use of land changes, education services, healthcare services and tourism growth.

The Investment Portfolio

The company will develop a portfolio of equity securities and direct property assets, with the equity portfolio to comprise at least 50% of the investment portfolio. The equity component will comprise a diversified portfolio of 20 to 40 securities listed on the ASX that have exposure to urban renewal and regeneration.These will be combined with investments in direct property.

Initially, URB will own a 49.9% interest in three properties which have a combined value of $59m. These assets, all located in Sydney, are:

  • Kingsgrove Property, purchased for $15.9m. This is a logistics/industrial property, currently leased to a single manufacturing company until August 2017. In close proximity to Sydney Airport and Port Botany, URB says that the property has the potential to benefit from sub-division into smaller industrial lots, or re-zoning from industrial to residential;
  • Prestons Property, purchased for $20.0m. This is a 69,422 sqm undeveloped block of land zoned for industrial use in south-west Sydney, close to the junction of the M5 and M7 tollways. The plan is to construct a logistics warehouse and distribution centre for a pre-committed logistics tenant;
  • Penrith Property, purchased for $23.1m. This is a 6,400 sqm property that is close to Penrith railway station and town centre which is used for office and retail with 22 existing leases. URB believes that Penrith is set to undergo a shift in land use by virtue of infrastructure projects in the next 5 years, and the property will benefit from active management of the tenancy (increased income) and possible change to a mixed use site (residential, retail and commercial).

The remaining 50.1% of each property will be owned by Washington H Soul Pattinson and Company Limited (Soul Pattinson). A trust will be used to hold the assets, with Soul Pattinson and URB having pre-emptive rights over each other’s units. Pitt Street Real Estate Partners Pty Ltd (PSRE), the real estate advisory division of Soul Pattinson, will manage the properties. The current intention is that the properties will be sold within 5 years.

The Investment Manager

URB has appointed Contact Asset Management to manage the Investment Portfolio in accordance with URB’s investment strategy. Contact is led by Tom Millner and Will Culbert, and currently manages the BKI Investment Company (ASX: BKI), a listed investment company that has grown to approximately $1bn in size.  Contact says that BKI’s total shareholder return (inclusive of dividends and franking credits) over the 13 years to 31 January 2017 is 11.3% pa.

Robert Millner, a Director of Soul Pattinson, is the Chairman of Contact.

Contact will be paid a management fee of 0.50% pa (plus GST). In addition, it will be entitled to a performance fee of 15% of the out- performance above a 12 month increase in the NTA per unit of 8%. For example, if the NTA grows by 10%, Contact will receive a fee of 0.3% of the funds under management (15% of (10% - 8%)).

PSRE, which is led by Hugh Williams and Mike Hercus, will be also paid fees for managing the property assets (paid at the unit trust level). Under a co-investment agreement, URB will have the right to invest on an equal basis with Soul Pattinson in direct property assets originated by PSRE. URB can also source property assets itself, but must give Soul Pattinson the opportunity to invest in these properties in the same proportion and same terms.


The Product Disclosure Statement (PDS) describes a number of risks. In addition to the normal market, people and performance risks that go with any managed investment, two specific risks to call out are that this is a new company with no operating or performance history, which will be investing part of its funds in direct properties. These in turn have their own illiquidity, valuation and development risks.

The PDS says that the objective of the Company is to create “long term value” for investors, and provides this explicit advice: “Investors are strongly advised to regard any investment in the Company as a long-term proposition (7 years or more).”

Details of the Offer

The Company is seeking to raise a minimum of $75m and a maximum of $300m in gross proceeds by the issue of shares at $1.10. A minimum of 68.2m shares will be issued, increasing to 272.7m shares if the full amount is subscribed.

For every share subscribed, the Company will also issue one “free” option which is exercisable into one fully paid ordinary share at $1.10 up until 7 April 2018.

On listing, the NTA (net tangible asset) value per share is expected to be approximately $1.065. The difference to the subscription price effectively represents the costs of the offer (broker selling fees, legals, ASX costs), less a deferred tax asset.

Offer dates and key details are set out below.


In regards to dividends, the Company is making no specific forecast as to the amount. However, it says that its long-term target is offer investors sustainable and growing fully franked dividends and a yield that is competitive within the listed investment company industry. It will aim to pay out between 50% and 70% of net operating profit as ordinary fully franked dividends, and will consider declaring special dividends when it receives special investment gains or income.

My View

This is a relatively unique and interesting investment opportunity that may suit long term investors who feel they have enough invested in banks, Telstra and the resource companies and want something a little more targeted. The urban renewal theme will certainly resonate for city dwellers. It is, however, not going to be the first stock into a portfolio, nor is it going to be a stock that you “bet the house on”.

A long-term time horizon will be required.

The Company is very closely associated with the Soul Pattinson group. Soul Pattinson has committed to subscribe for a minimum of 10% of the shares being offered, is the co-owner of the direct properties (50.1%), is the owner of the property management and advisory company PSRE and owns 20% of the Investment Manager, Contact. Investors need to be comfortable with the related party issues and fee arrangements.

But unquestionably, the association with Soul Pattinson is also a strength. Worth considering.

As always, please read and review the PDS thoroughly before making any investment decision, and if in any doubt, seek appropriate professional advice.

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.

URB provides an opportunity to invest in the rapidly growing theme of Urban Renewal and Regeneration. Invest directly alongside Soul Pattinson, one of Australia’s oldest and most respected investment groups. Click here to download a Prospectus and invest online.

Switzer Financial Group AFSL 286 531 may earn a selling fee of up to 1.5% on all successful applications placed through us.

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Housing affordability is bad news for investors

Thursday, March 09, 2017

By Paul Rickard

The latest buzz words for politicians are “housing affordability”. Whether it is NSW Premier Gladys Berejiklian making a bizarre statement at the start of her premiership that she wanted to ensure that “every average hardworking person in this state can aspire to own their own home”, or the Victorian Premier Daniel Andrew’s showbag of promises to put “homebuyers first” including cutting stamp duty for first home buyers and imposing a vacancy tax, politicians from all sides now have housing affordability at the top of their agenda. According to The Australian, Treasurer Scott Morrison is framing a budget that is aimed at boosting the Government’s stocks in middle Australia and has vowed to address housing affordability.

I am all for “housing affordability” too. I have children and grandchildren, and probably like most people, wonder how my offspring will save the monies to own a home in Sydney or Melbourne, or for that matter, in any of our capital cities. Wanting houses to be more affordable for first home buyers and the young is a bit like “world peace”. We all support the idea. However, because Governments like to tinker with price levers, rather than deal with the underlying problem of housing supply, they generally muck things up. And this is exactly what is going to happen if the Victorian Premier gets his way.

Moreover, investors are going to be hurt by some of Andrew’s changes. And, because we haven’t heard the end of the negative gearing/capital gains tax discount debate, it is inevitable that there will be more changes to come.

Andrew’s showbag of promises

Premier Andrews has announced six initiatives in the name of “housing affordability”. Firstly, abolishing stamp duty for first home buyers for purchases under $600,000 from 1 July. There will also be a concession on a sliding scale for homes between $600,000 and $750,000. The exemption and concession will apply to both new and established homes.

25,000 Victorians are expected to “benefit” by saving around $16,000 in stamp duty. Many economist and realtors argue that the “benefit” will be fleeting or negligible because first home buyers will suddenly have an extra $16,000 for the deposit and with the multiplier, this will lead to a surge in prices in this price bracket. In other words, the cut in stamp duty will be more than eaten up by the increase in housing prices.

For first home buyers purchasing a new home in regional Victoria, the first homeowners grant will be doubled from $10,000 to $20,000. This will be available to first home buyers building a new home valued up $750,000, and is expected to “benefit” 6,000 first home buyers.

More crazily, the Government will pilot a $50m scheme, HomeVic, where it will co-purchase homes with first home buyers who can’t save a big enough deposit, taking an equity share of up to 25% in these properties. 

To pay for these initiatives, the Andrews Government is introducing a tax on vacant residential properties. Under the guise of encouraging owners to make their property available for purchase or rent and thereby allowing Melbourne’s housing stock to be used efficiently, this tax will apply from 1 January 18 to vacant properties located in the inner and middle suburbs of Melbourne. The tax of 1% will be assessed on the capital improved value of the property. For example, if the property has a capital improved value of $500,000, the applicable tax will be $5,000.

Subject to some exemptions for holiday homes and deceased estates, a property will be classified as “vacant” if it is unoccupied for more than six months within a calendar year. And who will determine if it is vacant? The State Revenue Office says that it will be a “self-reporting system” with liability resting with the property owner, who will be expected to inform the State Revenue Office when their property triggers the tax.

The Government is also killing off a stamp duty concession that applies to off the plan purchases. From 1 July 2017, the off the plan stamp duty concession will only be available for those who qualify for the principal place of residence or first home buyer stamp duty concession. 

For an investor buying off the plan in Victoria, they currently pay stamp duty on the land value, rather than on the full contract price (that is, the land value and the cost of any construction or refurbishment which occurs after the contract date.). This concession saves them thousands of dollars. From 1 July, they will pay stamp duty on the full value. 

On the positive side of the ledger, the Victorian Government has announced that it will make up to 100,000 lots of land available within the next 2 years in key growth corridors. Planning of 17 new suburbs is underway, with the Government “slashing the time it takes for land to be shovel-ready”. The map below shows the suburbs.

This release of land sounds good, but the proof will be in the delivery. And whether it is actually an acceleration in the supply of land is hard to say, because there is no data on what the Government has achieved over the last few years.  

Bad news for investors

Clearly, the new vacancy tax will be an impost on some apartment investors, while the cancellation of the concession on stamp duty for “off the plan” purchases will increase transaction costs. Both initiatives can’t be good for investors.

The worrying thing about a new tax like the vacancy tax is that while the initial rate of 1% doesn’t look prohibitive, the history of property taxes in Australia is that cash-starved, lazy state governments have a habit of increasing them. If the property market turns down and the stamp duty gravy train ends, the rate of 1% could be increased without too much political pain to 2%, or 3%, or 4% ...

And if investors aren’t concerned about the changes in Victoria, notwithstanding the high chance that some of them will be copied by other states, they should be concerned about the “housing affordability” debate and the pressure on Governments, both Federal and State, to be seen to be taking action. The negative gearing debate hasn’t gone away, and there must be almost an even money chance that there will be some change to the capital gains tax regime. While interest rates stay low, this is a much bigger issue for investors than negative gearing.

Invest carefully.

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