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

Aurizon’s pulling its horns in and shareholders are happy

Wednesday, August 14, 2019

Memo to corporate treasurers: if you want to keep shareholders happy, there’s nothing quite like an open ended share buyback, as shown this week by rail haulier Aurizon.

The company formerly known as QR National turned in an annual result that was down in every major respect, starting with a 15% drop in statutory net profit and concluding with a 12% cut in total annual dividend.

And the share market reaction? AZJ shares climbed 17 cents or almost 3% during trading on Monday to a new high of $5.96, where it stayed overnight. The stock price has had a solid run in the last 12 months, climbing 28% and that was before this week’s jump.

Management announced it would buy back up to $300 million worth of stock  over the next year on market, at prices and on dates of its own choosing.

They wouldn’t quite put it this way, but that proposal basically puts a floor under the stock.

In terms of reducing the company’s capital it’s pretty small beer: my calculations are that the company’s buying back 2.5% of its $1.99 billion capital.

But what it does say is that the company doesn’t want to do anything silly with spare capital, preferring instead to hand it back to shareholders.

That’s a significant plus because almost every time Aurizon has diversified away from its core business of hauling metallurgical coal around, it’s done less well.

To be fair to Aurizon, it also beat consensus estimates for its all-important underlying earnings before interest and tax (EBIT), coming in at $829 million against expectations of $799 million. That was despite the latest result being 12% below the previous year’s number of $941 million.

CEO Andrew Harding said on Monday that it’s decided not to split its “above rail” and “below rail” operations, following a year-long strategic review, preferring to restructure the two divisions so they each manage their own debt arrangements.

It had a number of regulatory and legal wins, most particularly a resolution in May of its UT5 dispute with the Queensland Competition Authority over how much it could charge the users of its rail network.

It also finally got a $20 million payment out of former client Clive Palmer in relation to haulage done for his Queensland Nickel operation. The bill he was sent was for $88 million but Aurizon had the whole sum carried as a bad debt, so it’s a win of sorts. To judge by recent courtroom action, getting a payment of any size out of Clive Palmer is something of an achievement.

I’ve got form with Aurizon, having written about it pre its 2010 float and noticed that it was far more popular with retail investors than institutions.

The float was subject to a bookbuild and it opened at $2.54, just a tad above the retail investors’ price of $2.45, against a background of professional investors saying it was going to be something of a dud.

It turned out that some of the darker muttering around the float had come from rival operator Asciano, which operated the Pacific National rail haulier. The latter was subsequently sold in August 2016 to a consortium of international pension funds after a complex takeover that provided clear evidence that global fund managers simply adore anything that even looks like a steady infrastructure play. It’s arguable whether it really is, given its history of hither-and-yon expansion, but they are welcome to that view.

While it’s no firecracker, the Mums and Dads who stayed aboard the train from float date have doubled their money, and I haven’t included dividends.

Those grew until this year at around 27% a year since the first skinny dividend of 0.037 cents in 2011, the latest being an effective annual dividend of 23.8 cents, down 12% from the FY18 level of 27.1 cents.

The company pays out 100% of its profits in dividends, which are 70% franked.

Which suggests that this company is really good to its shareholders, although it’s a worry that it is quite so lavish with its earnings.

So what’s the outlook for Aurizon? Mixed.

For a start, it lost two of its biggest shareholders, Unisuper and the Children’s Fund in the last six months. That may explain why the share price has kicked up sharply in recent weeks, post their exit, to new highs.

I understand they sold out for environmental reasons and there is not a lot a coal haulier can say to defend their position nowadays.

Aurizon started out almost exclusively hauling metallurgical coal, of the sort used to make steel around the world, from the Bowen basin to the Queensland coast.

The Sunshine State has the best quality met coal (also called coking coal) in the world, and although a lot of protesters don’t differentiate between different types of coal, the market certainly does.

And in simple terms, most big investors and banks understand the need for metallurgical coal but are less enamoured nowadays of steaming coal as used in electric power generation, and whose eventual demise keeps being predicted.

Aurizon’s problem is that nowadays it actually carries more steaming coal than metallurgical coal, by a ratio of 55 to 45%. Why?

Because the haulier expanded its operations into the Hunter Valley in New South Wales some years ago and most of the coal there is steaming coal, so Aurizon has basically cut off its ability to toot the whistle about its met coal core business.

And it’s fair to say there’s a major question mark hanging over steaming coal’s future, and with it, Aurizon’s chances of maintaining its coal tonnage numbers.

Fortunately Aurizon makes almost as much from running railway networks as running trains, which is a lot like the apocryphal entrepreneur in the California gold rush of 1849 who did much better than most of the miners, by selling  shovels.  

Conclusion? Aurizon may be entering a purple patch, as long as it doesn’t expand into unknown territory.


How high can our flying kangaroo soar?

Wednesday, July 31, 2019

I have long subscribed to Warren Buffett’s jest that the destruction of value over the decades in the global airline industry has been so bad that it might have been better to shoot down the Wright Brothers while they were testing their Wright Flyer biplane in North Carolina back in 1903.

Just think about it for a moment. How many things can go wrong for an airline? Global health scares, mutinous pilots, cabin staff and engineers, unhappy customers, accidents, terrorism, unreliable aircraft and of course fuel prices, just for starters. And how about disputes over airport access, late deliveries, international politicking using airlines as bargaining tools, and unfair competition from subsidised state airlines? The list of nightmare scenarios is a long one.

Not forgetting of course that in a high cost, low margin business, which is basically what airlines are, a bad management decision can tip an airline into the red in a matter of weeks.

Still curious? Not only does it now turn out that Buffett’s Berkshire Hathaway now has significant holdings in the four major US airlines, but Qantas seems to have dodged almost all of those negative bullets in recent times.

And Australian investors are climbing over each other to buy stocks that aren’t on excessive price earnings ratios, have a relatively positive earnings outlook and a good history of fully franked dividends.

Patrick Hodgens, an ex-Macquarie bank fund manager who recently founded the Firetrail Investments group, was recently quoted as saying that if Virgin raised its airfares to remain competitive in the domestic market, Qantas would most likely match that move.

If that happened, he said, Qantas might be able to lift its earnings by up to 30%.

Hodgens subsequently addressed a presentation in Sydney last week at which he made his bullish sentiments on Qantas very clear, saying the stock was on less than nine times forward earnings.

“We value the stock at more than $10 a share,” he said.

He also noted how assiduous the company has been in buying back stock, pointing to the fact that according to the third quarter trading update, the company has bought back no less than 28% of its stock since 2015, with inevitable benefits for earnings per share.

The latest buyback, announced in February and completed in May, spent $305 million buying back just under 30 million shares, leaving capital of 1.59 billion shares. That’s a cut of more than 15% in the size of the cake, this calendar year alone.

The company paid shareholders an interim dividend of 12 cents a share  in March, fully franked.

Firetrail runs an absolute return fund and also a “High conviction” long-only fund, of which Qantas is clearly a constituent.

Hodgens is talking his book of course, and enjoyed teasing his audience by outlining its recent record and then challenging his audience to name the stock he was describing.

But he’s not alone in seeing an upbeat outlook for what we used to call our national carrier.

Most international airlines are on around 11 times, it would seem, and here we are with an airline that not only has a hammerlock in the domestic passenger business, but is starting to make earnings headway via its international alliances and operations.

Just adding to the list of dodged bullets, Qantas doesn’t have any Boeing 737 Max 8 aircraft that have been so ostentatiously grounded following disastrous crashes of near-new aircraft, firstly in Indonesia in October last year, and then in Ethiopia in March.

Indeed Qantas CEO Alan Joyce was reported in June to have been ready to buy some 737 Max 8s to upgrade Qantas’ domestic fleet, so confident is he that Boeing can fix the software problem that has caused all the grief.

Qantas affiliate Jetstar is just as fortunate, having plumped for the relatively vice-free Boeing 787 Dreamliner and the equally safe Airbus A320 as the backbone of its fleet.

The brokers aren’t quite so positive on the stock. Of the six surveyed by FNArena, three are neutral, two have a buy on it and one has a sell.

The stock price certainly isn’t too demanding, sitting now at around $5.85 after hitting $6.87 a year ago. Concerns about fuel prices appear to be the big negative, although jet fuel prices haven’t kicked anything like as much as expected.

Morgan Stanley’s sitting on the fence but notes the frequent flyer loyalty programme could provide support for a re-rating, once there is broader support for the earnings profile.

Credit Suisse leans to outperformance, thanks partly to an expected lift in corporate travel demand now the Coalition has won the election, but most particularly because weaker rival Virgin Australia is looking to cut capacity.

And Macquarie leans exactly the opposite way, talking about revenue per seat kilometre growth being likely to ease as this new financial year rolls out.

Citi’s got it as a buy because the broker expects Qantas to have generated international growth of 6.1% in the half just ended. That compares with less inspiring domestic earnings numbers, producing an expected 5% overall drop in pretax profit in the result coming just around the corner.

Perhaps the biggest fillip to investor enthusiasm is a consensus view that the dividend will lift from 17 cents for the 2017-18 year to 23.7 cents for the latest year.

And while the consensus PE for the looming result is 10.1 times, an expected slight lift in earnings per share in the 2019-20 year should bring that back under the magic 10 mark to around 9.6 times.

The brokers collectively expect a modest growth in earnings per share from 56 cents last year to 57.1 in the year just ended, moving up to 60.1 cents for the current year.

Conclusion? The expected hike in fuel prices has not occurred, leaving Qantas shares looking a mite under-priced, if you think that situation will continue. And there aren’t a lot of under-priced blue chips around at the moment.


Don’t just sit on cash: if you do, you’re going backwards

Wednesday, July 17, 2019

Do you despair of those unfortunates who turn up on the TV news and current affairs programmes bewailing some dire financial fate they have suffered?

I certainly do, although after hearing about the Gold Coast financial planner who put his entire savings into a Nigerian scam, I am beyond surprise.

This isn’t a complaint about the poor victims, it’s a grumble about how they got into that jam.

The capacity for people to mis-invest their hard-earned savings in one way or another, then turn up with a sad story, is a dispiriting business for the many of us who have spent years trying to save investors from their own folly. You know, diversify, increase your financial literacy and if an offering looks too good to be true, it probably is.

But the latest manifestation the other day was an elderly couple looking particularly glumly at the lousy interest rates they have been receiving on their term deposits at the bank. It looked suspiciously as though they had put ALL their spare capital in the bank.

That uninspiring circumstance certainly cannot have come as a bolt from a blue. The latest cut in official rates from 1.25% to 1% was the trigger for the story (on the ABC), but crikey, low deposit rates have been with us for a long time.

Bear in mind that until June 5 of this year when the rate came down to 1.25%, the Reserve Bank’s official rate had sat unmoved at 1.5% since 3 August 2016, or almost three years. To be pedantic, that meant 30 consecutive announcements with no move at all. To call low rates a surprising new phenomenon is a major stretch.

Conclusion: anyone in Australia who’s been sitting on anything more than a modest exposure to bank deposit rates, let’s say 15% of their savings assets to be generous, has been stoking a modest bonfire of value destruction.

I say that because even the current low annual rate of the Consumer Price Index, at less than 1.5%, is more than most banks are paying depositors.

As Peter Switzer has pointed out many times, Self Managed Super Funds in Australia are holding an average of more than 20% in cash.

Why? Maybe because they are cautious but certainly because it’s easy. It’s often a symptom of regular contributions and irregular investment decisions, basically.

It’s clearly time for those SMSF investors to start looking elsewhere for yield.

But where?

A recent article in the New York Times mentioned TINA, which stands for There Is No Alternative (to equities, in this case).

That’s a concern because the moment it looks as though there’s only one asset class worth investing in, which at this point appears to be the equity market, it’s going to be a seriously crowded trade.

So, be careful. Our share market is close to its all time high, which in the case of the ASX 200 index was 6828.7 set on 1 November 2007.

Often savers keeping doing whatever they were previously doing, in the face of clear evidence to suggest that’s not such a great idea. The irresistible force of inertia.

The big task for Australian retirement savers and retirees is to look closely at their asset allocation and ask themselves whether they are fully justified in having so much cash doing virtually nothing.

An allocation of 20% to cash is a massive ball and chain pulling down the performance of the other assets.

The next thing they should do is get some advice about which shares they should buy that have a solid earnings history and pay fully franked dividends. It’s easy to default to the banks, and right now they are running pretty hard in terms of a climbing share price, but even now they are paying retiree owners a yield of close to 10% a year by the time you include the benefits of franking.  That’s independent of capital growth, which of course cannot be relied on.

Unless the retirees have been living under a rock, they will know that if they aren’t earning enough to pay tax, they will still qualify for a refund of the tax already paid on those dividends. That’s because it was ALP policy to abolish those refunds and in the wake of the recent election loss, the ALP has abandoned that policy.

How good, to paraphrase our Prime Minister, is that? Dividend franking was essentially devised to help retirees and if they don’t take advantage of it, they only have themselves to blame.

But they shouldn’t just go for yield. That’s what stuffed the investors who went for high yielding debentures, put out by organisations with names like Banksia Securities. That one keeled over in 2012.

Some investors apparently thought it was a bank when it was actually a glorified solicitors’ mortgage fund based in a Victorian country town and named after a plant.

In this low interest environment, if anyone’s offering you more than 5% annual yield on an unlisted product, it may well be a lot further up the risk curve than it looks.

Higher yield has always meant higher risk, and nothing’s changed.


What’s the best way to invest in Aussie small caps?

Wednesday, June 05, 2019

While there are about 2,200 stocks listed on the Australian market, more than 95% of the value is made up of the top 200 stocks by market capitalisation.

That leaves a lot of tiddlers but there’s a case to be made for the Small Ordinaries, as the relevant market index is called. That “small cap” grouping is made up of stocks that are outside the Top 50 but which are among the top 300 stocks by value, or capitalisation.

There’s a lot to be said for buying a basket of small stocks, on the reasonable premise that even if one or two in 10 turn out to be duds, hopefully a bigger proportion will turn out to more than double their valuation over your holding period.

Why invest in small caps?

Note, by the way, that you don’t buy small cap stocks for their dividend: you buy them for capital growth. Most of them are in the growth phase, or what they call the growth phase, and they squirrel most of their modest free cash back into the company rather than paying dividends.

After all, if you hold a blue chip like BHP, it’s unlikely to double in value from say $35 to $70 any time soon, but there are lots of small cap stocks that manage strong growth and which can often run up (quadruple) from say 50 cents to $2 a share.

What are the risks?

That’s the good news: the bad news is that smaller cap stocks are harder to follow than the majors, as they don’t get much media coverage.

They are also less liquid than the blue-chip stocks. That is a risk to any passive Exchange Traded Fund (ETF) focussed in that area, as ETF managers have to buy and sell stocks regularly to maintain the correct weightings in their fund. If they can’t, they run into what is called Alpha Risk, which is where the basket no longer represents what its managers said it would represent: too much of one stock and/or not enough of another.

That’s the risk in passive small cap ETFs but we’re beginning to see the emergence of active small cap ETFs (including our own, ASX:IMPQ), which have a broader remit than just following an index.

They’re not as cheap to manage as passive funds, which do just follow indices, but they do have the significant advantage that a well-informed active ETF manager can screen out suspect stocks and focus on the ones that he or she thinks have the best growth potential.

This article is the opinion of the author, Andrew Main, and is not financial advice. Speak to your financial adviser or broker for more information. Don’t forget to always read the Product Disclosure Statement (PDS) for the active ETF you are invested in. To find out more and download the PDS, please visit


Is it time to buy bank shares?

Thursday, May 30, 2019

You could be forgiven for having stood on the sidelines recently wondering whether to buy shares in the big Australian banks, but some of the planets are starting to line up on the positive side.

Seldom in the past few decades have banks been as much under the gun as they were in the Hayne Royal Commission, and rightly so, as it turned out.

So, looking forward, is this a good or a bad thing?

That depends on two things: one, just how much reparation are they going to have to shell out and two, have they learned their lesson?

I’d stick my neck out and say that some of the class actions by people complaining that the banks underestimated their outgoings are a bit hopeful, for instance. If they got carted out that’s a shame but what happened to the doctrine of personal responsibility? The borrower’s equivalent of caveat emptor?

The number of people who went bad after their loan applications were incorrectly filled in is just a fraction of the number who repaid their loan as required.

As far as learning a lesson is concerned, nothing focuses a banker’s mind so much as having to pay out millions of dollars to atone for sins past. They spent a while behaving like rabbits in the headlights and now they’re starting to work it out.

Until the Election, it was almost a default position for the mainstream media to write articles imposing sackcloth and ashes on the banks, given the egregious behaviour uncovered in terms of charging dead people for advice et cetera.

But the banks’ outlook has brightened since then, thanks to a couple of imminent measures and a near certain drop in interest rates at the next RBA meeting on June 4.

The most dramatic effect was on Monday May 20, the first trading day after the election, when the entire banking sector staged a rally of close to 10%.

That wasn’t the result of a lightning reappraisal of the banks’ medium-term outlook, it was the result of a mad scramble by short sellers to cover.

It was fun for existing shareholders to see, for instance, Westpac jump more than 10% in two days, most of that as soon as the market opened after the election. It didn’t feel like the real world but by and large those prices have held since.

Why do we love bank shares? Let me count some of the ways.

One, in letters of fire, is the benefit of fully franked dividends. That for instance turns NAB’s 7% dividend yield into a grossed up 10%, a return you would be nuts to go past if you are a “buy and hold” investor, which is what most of us are despite claims to the contrary.

And as we learned at the Election, Labor’s defeat means it will be at least three years, if not more, before the notion of abolishing franking refunds for zero taxpayers ever comes up again.

Two, and this is more controversial, we love them because lots of Mums and Dads love them (as in, see above), and because they make up such a big element of our market.

That means investors rush the banks because everyone else is rushing them, which isn’t actually a justification but it does mean the Trend is your Friend.

At the moment, financial stocks represent just over 30% by value of the ASX200, which in turn represent over 80% of the overall share market by valuation. The next biggest category, Mining stocks, is only just over half the size at 18.3%.

Next, APRA has decided to relax the requirement that new mortgage borrowers should be able to service an interest rate of 7%, well above current levels. That has to help new lending and it’s the banks that have been agitating for a cut.

The banks’ fortunes will as usual be dependent on home lending, and it’s interesting to note that the auction clearance rate in Sydney jumped last weekend to 69.9%, the highest rate since April last year, and the national average was 62.6%.

The property brigade reckon anything above 50% represents a stable market, but on a less bullish note it’s also clear that we haven’t yet experienced the full washup for the overall 10% drop in Melbourne and Sydney property prices over the last 12 months. Mortgage stress has not yet turned into loan delinquency but you’d be a fool to suggest it won’t.

The Morrison Government’s proposal to replace mortgage insurance for some 100,000 first home buyers with a commitment to underwrite the difference between first home buyers’ 5% deposit and lenders’ requirement for 20% is another move that looks exciting at first glance.

But it remains to be seen how motivated the banks will be to welcome first home buyers who are going to have to borrow not 80% but 95% of the property price.

I’d put that down as a neutral factor since, underwritten or not, we don’t want to see banks’ bad loan percentages climbing to any measurable degree.

The bankers might like to have potential losses reimbursed but they would prefer not to endure the losses in the first place.

What other negative factors are there out there?

Failure to maintain the dividend is the biggest bogey.

The banks already have a high payout ratio at around 82% and, given profits are likely to ease in the short term  because of remediation costs and other rationalisations, they may be tempted to pay out an even higher percentage.

Choosing between a higher payout ratio and cutting the dividend looks an uncomfortable prospect, to be frank, so there may be another shoe to drop there.

Where are the banks going to find new sources of profit?

Aside from new home lending, that’s a hard one. They’re all ready for the looming drop in interest rates, with the official rate likely to drop to 1.25% on Tuesday June 4, but the big question is, where will they get cheap finance?

Our wobbly dollar isn’t helping them with any chance of raising funding offshore.

Our 10-year bond rate is now at 1.7% but the US equivalent rate is now 2.2%, so there won’t be a lot of bargains there.

Our Bank Bill Swap Rate (rate at which banks lend to each other) most recently dropped from 1.65% to 1.56%, which infers cheaper funding locally, plus of course bank deposits are substantial despite the miserly rate of interest they pay…and getting more miserly.

If the banks can maintain a 200-basis point margin on their home lending they will be doing very well, but there are no guarantees on that score. Put simply, if everything goes well they should be able to maintain margins, but maybe not grow them.

Conclusion: as a long-term bet the banks are probably a safe place to go but don’t go chasing them: there are some breezy headwinds looming in the medium term in areas such as dividend maintenance and finding new sources of profitability.


What’s the “fair dinkum” lowdown on power?

Thursday, May 16, 2019

I never thought I’d be feeling sorry for the big energy companies but the Morrison government’s policy of painting them as villains looks likely to backfire very noisily.

That’s assuming the Coalition is still in power after this weekend, which seems less than a 50-50 possibility.

My gas industry spies say that the electric power providers of the scale of Energy Australia have basically decided not to invest any money in gas-powered electricity generation until they get a bit more certainty. It sounds weird but they appear to be expecting to have a better relationship with a Labor government.

And as the power generation picture stands at the moment, there is a big enough time gap looming at the moment, say around 20 years, between the time we really start to phase out coal, and can bring in fully despatchable renewable power, such that gas fired “peaking” power can still play a role.

Gas turbines are much quicker to fire up than coal-fired boilers and can step in when demand is strong and until we get battery storage completely sorted, renewables can’t make up the difference.

Yes, gas produces CO2 emissions but they are one third as much as the equivalent emissions from coal-fired generation.

There are a myriad reasons for this caution among the energy companies but you could start by looking at a couple of proposals from the Morrison government that smack more of the Fidel Castro model of government than anything more evolved.

To whit, two serious attacks of interventionism, and we’re not even going near the “big stick” threats aimed at supposed price gouging by the major suppliers.

One is the proposal to spend many billions of taxpayer dollars on 4,000 megawatts’ worth of new power generation, source so far unspecified, in a bid to bring power prices down. That’s the equivalent of about one and a half coal-fired power stations.

You might remember the phrase “fair dinkum power” that Scott Morrison coined and has been the subject of some satire since.

Bear in mind that in the face of clear evidence that the cheapest new source of electric generation in Australia will be solar, there are Coalition supporters in Queensland demanding a new coal-fired power station.

They are pretty much led by Liberal National Party Senator, Matt Canavan, who if you don’t mind is a mineral economist.

The second proposal, introduced last week, is to introduce a “wholesale price target” aimed at making sure major users of electricity don’t let the bulk price of electricity exceed $70 per megawatt hour by the end of 2021.

The Coalition’s Federal Energy Minister, Angus Taylor, again is a person who should know better than to say some of the things he’s said, such as about CO2 emissions not having risen, when in fact they have.

Last week he told a NSW Business Chamber meeting that the 4,000 megawatt proposal will “put the big energy companies on notice” and that they will know “you either get us to that price of below $70 per megawatt hour or we will use those (policy) levers to get us there.”

The good news for consumers is that the wholesale price is expected to go down slightly in the coming years.

Mr Taylor’s opposite number, Mark Butler, noted that even without the dumped National Energy Guarantee (NEG), the government’s modelling had projected wholesale prices of around $48 per megawatt hour anyway.

The irony of all this is that according to experts, Liberal icon John Howard had a good Emissions Trading Scheme proposal in 2007 which, had it been adopted, would have been better than anything we’ve seen in the 12 years (yes 12) since.

Kevin Rudd, the Greens and then Tony Abbott ended up jinxing that proposal before it came to life.

Once elected in the Ruddslide of 2007, Rudd was apparently more interested in politics than policy, which meant tormenting his then opponent Malcolm Turnbull. The Greens meanwhile voted it down because they said it didn’t go far enough, proving that the perfect can indeed be the enemy of the good.

You don’t need an explanation of Tony Abbott’s views.

So what’s actually happening now in terms of gas-powered electricity?

Just looking at the major markets of the East Coast and South Australia, it’s a case of “not dead, only sleeping.”

In terms of drilling, it’s depressing. Queensland is exporting most of its conventional gas as LNG, via the various Curtis island trains near Gladstone, leaving overseas processors to make more of the profits.

New South Wales has a marked gas deficit but, because of protests, the only live exploration project is the Santos operation near Narrabri. Pretty well all others have been banned but Santos at least is selling gas forward now, which is a promising sign. AGL is talking about importing natural gas, which ought to be laughable if they weren’t serious. It’s widely believed there’s enough gas under Eastern Australia to keep us all going for at least 200 years.

And in Victoria, onshore gas drilling of any sort, never mind fracking, is banned.

What about new gas-fired power? Energy Australia had been looking in NSW to expand its Tallawarrah plant near Port Kembla, as well as planning a new plant at Marulan, half way between Sydney and Canberra.

But apparently it has spiked the Marulan project for the time being and notes that if the Federal Government forces AGL to keep its old Liddell coal-fired station past its planned closure date of 2022, the investment case for gas expansion would collapse.

Gas consultancy Energy Quest notes that over the last three years gas-powered electricity generation has grown by 19.7% in South Australia and 61.8% in Victoria, while at the same time production has dropped sharply in Queensland (down 68.6%) and New South Wales (down 73%).

Energy Quest also notes that if Liddell closes in 2022 as AGL has planned, that would turn things around sharply for gas-powered generation in New South Wales.

As you can see, there are a lot of moving parts to the gas-fired electricity caper but one of the biggest obstacles to its expansion would be building a new coal fired station, thus emitting more than twice as much CO2 per unit of electricity generated, or keeping Liddell open past 2022.

It doesn’t look as though logic gets much of a look-in in Government thinking at the moment.


Warren Buffett says conventional newspapers are “toast”

Thursday, May 02, 2019

It’s not exactly hot news that the newspaper industry is pretty much on the ropes globally but when investment legend Warren Buffett announces that most conventional papers are “toast”, as he did a few days ago, it’s worth paying particular attention.

That’s because the Oracle of Omaha spent a fair bit of the last decade swimming against that particular stream, picking up local papers in the US on the assumption that local news is still of great interest to most people.

He’s swung now to the view that it’s the big newspapers that are most likely to survive, such as The New York Times, The Wall Street Journal and The Washington Post, all of which he also reads.

Their big advantage, in his eyes, is that they have devised a digital product and associated business model that will take them well past the end of the newsprint age. The others haven’t, he believes.

His BH Media business has quite a spread of more than 80 publications but the jewels in that dented crown are the likes of The Buffalo News and the Omaha World-Herald, the latter being a brave title in these straitened days.

What seems to have tipped him over the edge into pessimism has been the enormous inroads made by online advertising, not only in the bigger publications but also the smaller local papers.

Buffett’s well-tried theory of buying businesses is that they should ideally have a “moat” around them to discourage competition but geographical coverage, as in the moat once enjoyed by local papers, no longer cuts the mustard.

As any smartphone owner can tell you, if you can pick up a 4G signal even in some more remote locations, you can identify local services, restaurants et cetera without going near the printed page.

In other words, local papers in the US (and Australia) have gone or are going the same way as street directories.

Of course people still want to read local news but the demise of the advertising based model has meant that there’s far less money around to pay the reporters.

Not only that but “It upsets the people in the newsroom to talk that way, but the ads were the most important editorial content from the standpoint of the reader,” Buffett said a year ago, and he’s still saying versions of the same comment. 

That’s a bit harsh, but he should know.

How much less money?   In the US, the Pew Research Centre says that newspaper advertising revenue dropped from $US49 billion to $US18 billion in the decade between 2006 and 2016.

Buffett made his gloomy “toast” reference in an interview with Yahoo! Finance, quite probably as a plug for the fact that the same organisation will be live streaming the Berkshire Hathaway meeting from Omaha, Nebraska, this coming Saturday May 4. (Our Sunday).

Buffett told Yahoo! Finance that in previous years he had estimated newspapers’ chances of survival on the basis of “survival of the fattest”, given that the fattest papers carry the most advertising. There are a lot of skinny papers out there  now.

He’s clearly planning an announcement at this year’s annual meeting about Berkshire’s newspaper operations, which currently cover 30 different markets in the US.

Not that they matter in the Berkshire accounts: Berkshire turned in an operating income of just under $US25 billion, repeat billion, just for the last quarter of 2018.

As Buffett put it in his usual understated way, the newspaper assets “are not of great consequence in the Berkshire Hathaway accounts”.

Buffett has regularly said his company had bought the various newspapers at “reasonable prices”, although in my view there will have to be writedowns at some point, perhaps very soon.

At the 2018 annual meeting, his offsider Charlie Munger said the decline in advertising revenue had happened faster than he and Mr Buffett had predicted.

“It was not our finest bit of economic production,” he told shareholders.

He said they had bought the newspapers “because we both love newspapers” and because US newspapers tend to keep politicians honest.

There are now around 1,300 daily newspapers in the USA, down from 1,700 five years ago.

“We’re going to miss those newspapers if they disappear,” Munger said, displaying more sentimentality than we are used to from Berkshire Hathaway management.

He’s allowed to be a bit nostalgic. He was born on 1 January 1924 so he’s now a sprightly 95.

Berkshire last year effectively conceded it was not set up to actually run newspapers, handing over management of most of them to a specialist called Lee Enterprises, which Berkshire pays $US5 million a year.

Lee will also get a share in the profits, assuming there are any. Lee is based in Davenport, Iowa.

The deal does not include Berkshire’s newspaper The Buffalo News or its television interests. Berkshire bought that newspaper back in 1977, before almost all of the others. More sentimentality, perhaps.

What does this all mean for Australia? In simple terms, we tend to go where the US has already been, and we don’t have the luxury of having octogenarian businessmen happy to throw money at the printed product out of nostalgia.

Kerry Stokes, who runs all the major papers in Western Australia as part of his Seven Media group, is a mere lad of 78 and while he’s a big buyer of Victoria Crosses to donate to the Australian War Memorial, he’s less of an easy touch when it comes to media assets. 

It’s all looking pretty damn bleak.

Perhaps the most apt summary of the Australian newspaper business occurred on the Thursday after Easter, when two pages of Nine Entertainment’s Sydney Morning Herald found their way into an early edition of News Corp Australia’s Sydney Daily Telegraph.

It was a printers’ mixup because the two rival papers now share News’ print works at Chullora, following Fairfax’s decision to close up its printing operations there in June of 2014, since when it has been toll printing at News’ adjacent operation since then.

That’s not to say there’s a merger on the horizon: just that the oldest major newspaper in Sydney has seen fit to close its own biggest print operation as a cost saver. That’s hardly a vote of confidence in the printed version.


Doing away with mortgage broker commissions is “absolute rubbish”

Thursday, April 18, 2019

If ever any one individual was going to have a go at Commissioner Ken Hayne’s sceptical conclusions from his Royal Commission into the banks et cetera, it is former ASIC chairman Greg Medcraft.

Medcraft is now comfortably ensconced in the 16th arrondissement in Paris as a senior executive in the Organisation for Economic Co-operation and Development, the OECD, from which he can comfortably lob small fireworks back to Australia in defence of his tenure from 2008 to 2017, most of that as chairman of ASIC.

He chose a recent interview in the Australian Financial Review with Monash University’s Professor Justin O’Brien to launch his first salvo, saying Commissioner Hayne’s recommendation to do away with commissions for mortgage brokers was “absolute rubbish”.

There were two odd aspects to his making that particular claim. One is that the mortgage broker commission issue has already been by far the most highly criticised of all the 76 recommendations that Hayne made, so Medcraft has come late to a noisy party.

Two, that issue is one of the remotest of the areas where he might choose to defend his record. He knows a lot about mortgages, since he used to specialise in bundling them together in a process called securitisation, but during his tenure he left the subject of broker commissions relatively untouched, preferring to focus mainly on lenders’ failure to check borrowers’ living expenses.

You probably don’t need reminding that Commissioner Hayne’s final report took  ASIC firmly to task for preferring closed door negotiation to full body contact courtroom action. Maybe Professor O’Brien buried the lead to the story but I’d have thought Medcraft’s response to Hayne’s criticism might have got a bit more air time.

Medcraft said that the retired judge’s recommendation that ASIC should litigate more and use enforceable undertakings less would not necessarily create the deterrence that regulators want, because the wheels of justice spin slowly.

“You have to look at this holistically because it is no use giving the regulator more penalty powers if the courts are not equipped to deliver timely and effective results,” he said.

“If you spend five to seven years in the courts, people forget why you took the case on initially.”

He didn’t say it but the textbook example of this was the Jodee Rich case, in which the founder of failed telco One.Tel won a civil case that was initiated in 2001, had its first hearing in September 2004 and its final hearing in 2007. Justice Robert Austin threw the case out in November 2009.

One.Tel tragics certainly remembered the case, which reportedly cost ASIC more than $40 million including Rich’s costs, and Medcraft has a point. ASIC filed the case while he was still working for French BankSoc Gen in New York, so he basically inherited a running sore, which ASIC just had to keep financing until the case reached its painful conclusion.

It not only preceded his tenure but also that of the previous chairman, Tony D’Aliosio, who chaired ASIC from 2007 to 2011, and it even preceded the appointment of the chairman before that, Adelaide accountant Geoff Lucy, in 2004.

The prize may have to go to David Knott, who chaired ASIC from 2001 to August 2003, and launched the case in December 2001. That’s five chairmen ago!

At least ASIC, which is now chaired by recovering investment banker James Shipton, has been given $400 million in the Budget to take more legal action against the banks.

But to come back to Medcraft’s “absolute rubbish” view of abolishing commissions, he’s certainly put himself in the position of making the sharpest criticism yet of any recommendation made by the highly respected retired judge.

Medcraft’s line is that it would be anti-competitive to abolish the commissions, since it would leave potential borrowers to shop around for the best mortgage rate on their own account, most likely without advice. There are mortgages and mortgages, particularly when it comes to interest-only payments and honeymoon rates, so it’s probable that ordinary punters could come unstuck in some way.

Surely there has to be some middle ground between what the judge recommended and Medcraft’s position? Neither man is short of grey matter.

They’re not even arguing the same point, anyway.

Commissioner Hayne didn’t like commissions because they are paid to the broker by the lender, most usually a bank, without the borrower being informed.

His schtick is transparency and there hasn’t been a lot of that in the sector. He’s not bananas about intermediaries, either.

He suggested it would be more transparent if it was the borrower who paid the lender, rather than the broker paying the lender, on the reasonable basis (I assume) that nothing focuses the average person’s mind so much as being asked to pay a bill.

As I say, Medcraft doesn’t want to see the banks getting it all their own way in lending, and of course the mortgage brokers have been howling blue murder at the possible extinction of their business.

How about making it very clear to the borrower that the bank is paying a commission to the broker, or a one-off fee, or whatever it is, and identify what that fee is?  If necessary, levy a charge of some sort on the borrower, perhaps (yet another) establishment fee, so they pay attention?

Whatever the future holds for the mortgage broking industry, if the industry adds value, it deserves to survive, if under more of a spotlight than it has been used to.

Clearly, if the borrower discovers that the fee being paid is more than the saving on a new mortgage being established, they’ll be less ready to use the services of a broker.

While the relentless campaign to stamp out commissions, particularly trailing commissions, is going to keep going, we will still have people such as stock brokers and insurance brokers, I’m sure, but on one firm condition.

They absolutely have to add value, and the people paying commissions have to understand what those commissions are, and why they are paying them.


Has Wesfarmers boss, Rob Scott, seen something in Lynas that the rest of us haven’t?

Thursday, April 04, 2019

Wesfarmers’ unexpected bid for rare earths specialist producer Lynas Corp is the sort of wheeze that causes old financial journalists and analysts to spark up and start guessing about what’s really going on.

Wesfarmers CEO Rob Scott certainly shook the investment community last week by offering $1.5 billion for the trouble plagued Lynas, albeit very conditionally.

As Paul Rickard wrote so colourfully in Switzer Daily last week, “Is Wesfarmers a buy or has its MD had a brain explosion?

I won’t argue with Paul’s conclusion that Rob Scott’s company isn’t necessarily a buy at present, but I would suggest that Scott has seen something in Lynas that the rest of us haven’t.

One, he’s got a lot of spare cash to play with post the spinoff and market listing of Coles, and money is something Lynas has by comparison struggled to find, at least at the same rates of interest.

Lynas mines its rare earths at Mount Weld in WA but processes them in a purpose built $800 million facility at Kuantan in Malaysia, or tries to.

The big headache is that the Malaysian Government is unhappy about two sorts of waste that Lynas is producing, one being just over a million tonnes of what’s called neutralisation underflow residue (NUF), the other being less than half that amount, at 452,000 tonnes, of slightly radioactive water leached purification residue (WLP).

Most particularly, it’s given Lynas until September 2 to get the latter residue out of their country.

My erstwhile colleague Matthew Stevens, now at the AFR, says the estimate for taking the WLP gunk away and storing it somewhere sensible is $130 million.

And he notes that the current management of Lynas has said it may have to suspend production within six months, given that the September 2 deadline is “unachievable”.

It’s at this point that Rob Scott and Co have come along with a $2.25 a share bid described by the Lynas board as “highly conditional, indicative and non binding.” 

Scott could scarce but agree that it’s non binding, given that it’s contingent on Lynas retaining its licences “for a satisfactory period following completion of the transaction”, whatever that means, plus plus plus. He’s hedging his bets.

As are share market investors.  They marked down Wesfarmers shares from just over $35 pre the bid, to around $33 during the week, followed by a tepid bounce to $34.47 yesterday.

It’s never a surprise when a bidder’s stock loses a bit of altitude while analysts juggle numbers but it’s fair to say that on this occasion the prices of both bidder and biddee have underwhelmed.

Lynas shares initially kicked up from a pre-bid level of $1.55 to a high of $2.17, which is still eight cents below the bid, and are now bumping around that level.

Clearly the arbitrageurs, who hop into a stock that’s been bid for and hope to see a higher bid emerge, are keeping their powder pretty dry.

Rob Scott appears to be in no rush to do anything like that, pointing out in a note on Friday that the $2.25 a share offer assumes that the licensing drama can be satisfactorily resolved.

“Our proposal and the premium in the offer price assume a sustainable solution is delivered to overcome the current regulatory issues that have weighed on Lynas for many years and we look forward to hearing the company’s solution”, he said.

That’s a mite cheeky, since the Lynas crew clearly don’t have one.

But it got me thinking. It’s widely known that Chinese companies control around 80% of the world’s supplies of rare earths, and clearly Lynas has an open goal in front of it, if it can keep going. Rare earths are particularly important in magnets that have myriad high tech uses.

The Lynas board has said it’s not impressed by the bid, saying it had “concluded it will not engage with Wesfarmers” etcetera.

But what is Lynas doing in Malaysia anyway, and couldn’t it process the material elsewhere?

The key to the drama may well be that the relevant Malaysian authorities gave Lynas a 12-year tax holiday some six years ago when the plant was being planned.

Beware of Greeks bearing gifts, the Trojans used to say after the mishap with the wooden horse full of soldiers.  

So what about processing the material onshore?

As far as I understand it, it probably wouldn’t be practically feasible to process the rare earths on site at Mount Weld, which is about half way between Perth and the Northern Territory border.

Wesfarmers’ well established chemicals and explosives base is at Kwinana, just south of Perth.

Turning out fertiliser, explosives and industrial gases isn’t quite the same as processing rare earths but you get the drift: if anyone’s going to come along and try to turn Lynas round, Wesfarmers has a good claim to being the potential saviour. Western Australia’s not short of real estate and indeed Lynas originally planned to process the stuff at Northam, some 50km inland from Perth.

The $1.5 billion being put on the table is a bit dwarfed by the massive deleveraging delivered by the spinoff of Wesfarmers’ Coles holding, which dropped several billion dollars into Wesfarmers’ coffers last November.

In summary, Wesfarmers has been looking a bit tentative since scrapping its attempt to “bunningise” the Homebase empire in the UK.

That’s no excuse for wasting money closer to home, but you could make an argument that Wesfarmers has bought itself a call option in its Lynas bid that it will only exercise if the licensing cards fall the right way. And even if anything goes wrong thereafter, it does have a tentative Plan B in potentially processing the rare earths somewhere near Kwinana.

Conclusion: I’m not as pessimistic as Paul was but I can see there are a lot of moving parts in Rob Scott’s proposal. I’d only make a tentative dabble in Wesfarmers based on this new bid.

And Wesfarmers is unlikely to throw in a higher bid any time soon, so you can probably give Lynas a miss unless you are playing a long game and can make light of the current difficulties.


Which way is the price of petrol heading?

Thursday, March 21, 2019

For a while there late last year it looked as though the international oil price was high and heading higher, with the Paris based International Energy Agency announcing in October that “expensive energy is back”.

It’s dangerous to regard your local servo as a litmus test for global energy prices, but since then the price of unleaded petrol in Australia’s major cities has dropped by more than 20 cents from $1.59 to $1.38 a litre.

We’re back to only grumbling slightly about fuel prices. So what happened?

I’m as interested as anyone, having highlighted the high price of fuel for Switzer Daily on October 24 based on the fact that global oil supply was only just running ahead of demand at 100.2 million barrels a day against supply of 100.1 million barrels.

It now turns out that the US is heading for the status of being the second biggest exporter of oil in the world after Saudi Arabia, thanks to the shale revolution, according to the IEA’s hot-off-the-press  “Oil 2019 Analysis and forecast to 2024”.

The new report says that the US increased its liquids (as in oil) production in 2018  by a record 2.2 million barrels a day and that what’s more, the US will account for 70% of the increase in global production capacity between now and 2024.

“Towards the end of forecast, US gross exports will reach 9 million barrels per day,” says the new report, “overtaking Russia and catching up on Saudi Arabia.”

Clearly this is taking a more objective view than the research I saw late in 2018, which wouldn’t of course have been able to include a US production figure for the year.

Perhaps the development that wrong-footed the IEA the most in recent years has been that OPEC, the producer cartel assembled in 1974, is no longer the source of extra “swing” production to meet higher demand, while a raft of non-OPEC countries such as Norway, Brazil, Canada and most recently Guyana, will add another 2.6 million barrels of oil a day in the next five years. Add that total to the US production numbers and you get an increase of 6.1 million barrels a day, all from non-OPEC countries, by 2024.

The IEA was founded in 1974, by the way, to monitor the newfound strength of the traditional middle eastern oil producers, so you can see that the oil production boot appears to have changed feet.

Of that 6.1 million barrel increase, 70% or a whopping four million barrels a day will come from the US.

Back in October the IEA was assuming that most of the increase in US production would be eaten up by consumption, which is the biggest in the world at 20 million barrels a day, but its latest report estimates that by 2024 the US gross exports will come to 9 million barrels a day.

Because of different grades it also imports a lot of oil, particularly from Canada, so don’t confuse net with gross.

By comparison the old OPEC producer group includes current laggards like Iran and Venezuela which are actually going backwards because of sanctions. Net net, as they say, it means that OPEC’s effective production capacity is expected to actually drop by 0.4 million barrels a day by 2024.

You won’t need to take your shoes and socks off to see that global oil production  is expected overall to increase by 5.7 million barrels a day by the end of the five year forecast. That’s less than demand, as you will see.

Of course a lot can go wrong between now and then but that’s an increase of more than one million barrels a day, per year.

So what about demand?

If we’d been expecting demand to peak thanks for instance to the wholesale adoption of electric cars, we’ll be disappointed. The IEA understandably points to China and India as the source of much demand growth, noting that any reduction in industrial demand in those countries is more than made up for by increased consumer activity, i.e. cars.

The new report interestingly expects new oil demand to outstrip new supply by 7.1 million barrels a day versus 5.7 over the five year forecast period, but the monitoring group seems pretty sanguine about that imbalance.

You could be forgiven for thinking the IEA really doesn’t know what demand is going to look like, because it has to be harder to predict than supply. There are even more variables than with supply, which tends to be tailored to demand anyway. The best takeaway from that is to assume that petrol prices are much more likely to rise than fall by 2024.

We do know that the rise in demand for jet fuel, particularly in Asia, is going to join with extra demand for petrochemicals for plastics et cetera (remember them?) to push demand out further.

The global market for jet fuel is currently around 7.45 million barrels a day but that will reach more than 9.5 million barrels a day by 2040.

And electric cars? Sales are moving up but they still only represent a small percentage of sales overall, never mind the existing vehicle fleet.

Global sales of plug-in electric cars were estimated at 2.1% of new car sales in 2018, but once you include existing fleets the total ratio is about one plug-in electric car per 250 cars on the road.

Interestingly, China has the biggest stock of plug-in cars and light goods vehicles with over 2 million of them now on their roads, and that will of course rise.

Where’s Australia in all of this? Not only are we pretty much of a rounding error but we long ago ceased to be oil exporters, thanks to the gradual run down of Bass Strait reserves.

The latest set of numbers I could extract from Australia’s Department of Energy show that we’ve just dropped below production of 100 million barrels a YEAR to 98 million for the year to June 30 2018, versus for instance 161 million for the same period in 2010-11.

And that’s even including condensate, the liquid that comes up with natural gas. Take that out and the total drops by almost half.

Conclusion: we’re going to have to get used to being out on a limb as regards our oil needs. The only consoling thought I could find in the IEA report was its note that ongoing fuel efficiency is going to slow the global rate of growth in petrol demand to less than one per cent a year overall. But that will be dwarfed by petroleum use growth in developing countries, up two per cent a year.



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Is it time to short the big banks?