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

Janus Henderson - Bastard child comes good

Wednesday, November 15, 2017

By Andrew Main

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


What’s Solomon Lew’s game with Myer?

Wednesday, November 01, 2017

By Andrew Main

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


Private health insurance changes - snake oil or miracle cure?

Wednesday, October 18, 2017

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

The bonds that bind

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

Worst case scenario

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


Facing up to our gas shortage woes

Wednesday, October 04, 2017

By Andrew Main

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Should you be looking to buy Myer shares?

Wednesday, September 20, 2017


Ardent Leisure takes step in right direction

Wednesday, September 06, 2017

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


BHP creeps back into fashion

Wednesday, August 23, 2017

By Andrew Main

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

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

BHP Billiton CEO Andrew Mackenzie. Source: AAP.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BHP Billiton 1-year chart

Source: CommSec

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

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


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

Wednesday, July 26, 2017

By Andrew Main

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

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

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

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

Coca-Cola Amatil (CCL)

Source: CommSec

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Has Flight Centre's share price already flown?

Wednesday, July 12, 2017

By Andrew Main

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

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

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

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

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

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

But the investors are piling in.

I’ll have a go at explaining why.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Metcash surprises short sellers

Wednesday, June 28, 2017

By Andrew Main

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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