Mark Draper

Mark Draper

In the last 5 years Telstra shareholders have had little to cheer about as they have watched the NBN punch a hole in earnings, resulting in a share price slide and dividend cuts.  That is now changing.

In the recent profit result, not only did Telstra forecast earnings growth for the first time in 5 years, but also outlined a timetable to change its legal structure by splitting the company into 4 parts.

The proposed legal structure within the Telstra Group, expected to be completed by December 2021, includes:

  • InfraCo Fixed, which would own and operate Telstra’s passive or physical infrastructure assets: the ducts, fibre, data centres, and exchanges that underpin Telstra’s fixed telecommunications network.
  • InfraCo Towers, which would own and operate Telstra’s passive or physical mobile tower assets, which Telstra is looking to monetise given the strong demand and compelling valuations for this type of high-quality infrastructure.
  • ServeCo, which would continue to focus on creating innovative products and services, supporting customers and delivering the best possible customer experience. ServeCo would own the active parts of the network, including the radio access network and spectrum assets to ensure Telstra continues to maintain its industry leading mobile coverage and network superiority.
  • International, will be established under a separate subsidiary within Telstra Group and includes subsea cables

 

After being negative on Telstra for years, Gaurav Sodhi (Analyst, Intelligent Investor) believes the new structure is a good move.  He says that there are a lot of assets within Telstra that aren’t being adequately valued.  Separating them will recognise the value of infrastructure style assets that can generate stable, recurring revenues, resulting in a far higher valuation than the present share price.  Sodhi’s sell trigger of $5 on Telstra provides some guidance on the value he sees.

The Towers business carries a modest asset value of just $300m on Telstra’s balance sheet after heavy depreciation.  Once towers are in place and connected to the fibre backhaul, they are expensive to replicate and therefore extremely valuable.

Experience overseas shows that Telstra is following a well trodden path as it seeks to increase shareholder value.  Will Granger (Analyst, Airlie Funds Management) says that mobile tower companies can trade at EBITDA multiples (earnings before interest, tax, depreciation, amortisation) ranging between 21-27 times earnings.  Telstra by comparison currently trades on an EBITDA multiple of around 8 times.  Granger believes through a partial or full sell down of these assets, Telstra can realise this valuation arbitrage and increase shareholder returns.

Gaurav supports this view by referencing American Tower which is listed in the US.  It is the largest tower business in the world which bought AT&T’s long distance phone lines years ago and used them to host mobile infrastructure and are today valued at over US$100bn.  American Tower trades at over 20 times EBITDA while AT&T trades at just 7 times.

Granger adds that Vodafone spun off its mobile tower assets in March of this year on an EBITDA multiple of around 20 times.

Granger sees few downsides for the proposed restructure other than Telstra risking their network advantage if the mobile towers separation is not properly structured.

Sodhi agrees and said that American Tower and Crown Castle have been so successful because they host multiple networks from a single piece of infrastructure.  They have been able to scale nicely.  For Telstra’s tower businesses to do the same, Telstra would have to allow other networks access to those sites.

There is a clear trade off here.  In order to maximise the value of its infrastructure, Telstra needs to allow other networks access to it.  If it does that, it risks its network superiority.  Sodhi believes that Telstra is likely to opt for a lower value for its infrastructure to protect its network superiority.

The ACCC is another risk to this restructure.  Sodhi says that while its been hard to predict the reaction of the ACCC in recent years, he doesn’t believe there would be too many objections.  A split of the towers and infrastructure assets potentially opens the door to other networks also utilising those assets which could even the playing field.

Telstra has been a serial underperformer over the past 5 years, but investors must be forward looking and responsive to new information.  The split is new and its happening this year, and investors may do well to reconsider Telstra.

 

 

This article was written by Mark Draper and appeared in the Australian Financial Review during the month of April 2021.

In the last 5 years Telstra shareholders have had little to cheer about as they have watched the NBN punch a hole in earnings, resulting in a share price slide and dividend cuts.  That is now changing.

In the recent profit result, not only did Telstra forecast earnings growth for the first time in 5 years, but also outlined a timetable to change its legal structure by splitting the company into 4 parts.

The proposed legal structure within the Telstra Group, expected to be completed by December 2021, includes:

  • InfraCo Fixed, which would own and operate Telstra’s passive or physical infrastructure assets: the ducts, fibre, data centres, and exchanges that underpin Telstra’s fixed telecommunications network.
  • InfraCo Towers, which would own and operate Telstra’s passive or physical mobile tower assets, which Telstra is looking to monetise given the strong demand and compelling valuations for this type of high-quality infrastructure.
  • ServeCo, which would continue to focus on creating innovative products and services, supporting customers and delivering the best possible customer experience. ServeCo would own the active parts of the network, including the radio access network and spectrum assets to ensure Telstra continues to maintain its industry leading mobile coverage and network superiority.
  • International, will be established under a separate subsidiary within Telstra Group and includes subsea cables

 

After being negative on Telstra for years, Gaurav Sodhi (Analyst, Intelligent Investor) believes the new structure is a good move.  He says that there are a lot of assets within Telstra that aren’t being adequately valued.  Separating them will recognise the value of infrastructure style assets that can generate stable, recurring revenues, resulting in a far higher valuation than the present share price.  Sodhi’s sell trigger of $5 on Telstra provides some guidance on the value he sees.

The Towers business carries a modest asset value of just $300m on Telstra’s balance sheet after heavy depreciation.  Once towers are in place and connected to the fibre backhaul, they are expensive to replicate and therefore extremely valuable.

Experience overseas shows that Telstra is following a well trodden path as it seeks to increase shareholder value.  Will Granger (Analyst, Airlie Funds Management) says that mobile tower companies can trade at EBITDA multiples (earnings before interest, tax, depreciation, amortisation) ranging between 21-27 times earnings.  Telstra by comparison currently trades on an EBITDA multiple of around 8 times.  Granger believes through a partial or full sell down of these assets, Telstra can realise this valuation arbitrage and increase shareholder returns.

Gaurav supports this view by referencing American Tower which is listed in the US.  It is the largest tower business in the world which bought AT&T’s long distance phone lines years ago and used them to host mobile infrastructure and are today valued at over US$100bn.  American Tower trades at over 20 times EBITDA while AT&T trades at just 7 times.

Granger adds that Vodafone spun off its mobile tower assets in March of this year on an EBITDA multiple of around 20 times.

Granger sees few downsides for the proposed restructure other than Telstra risking their network advantage if the mobile towers separation is not properly structured.

Sodhi agrees and said that American Tower and Crown Castle have been so successful because they host multiple networks from a single piece of infrastructure.  They have been able to scale nicely.  For Telstra’s tower businesses to do the same, Telstra would have to allow other networks access to those sites.

There is a clear trade off here.  In order to maximise the value of its infrastructure, Telstra needs to allow other networks access to it.  If it does that, it risks its network superiority.  Sodhi believes that Telstra is likely to opt for a lower value for its infrastructure to protect its network superiority.

The ACCC is another risk to this restructure.  Sodhi says that while its been hard to predict the reaction of the ACCC in recent years, he doesn’t believe there would be too many objections.  A split of the towers and infrastructure assets potentially opens the door to other networks also utilising those assets which could even the playing field.

Telstra has been a serial underperformer over the past 5 years, but investors must be forward looking and responsive to new information.  The split is new and its happening this year, and investors may do well to reconsider Telstra.

 

 

This article was written by Mark Draper and appeared in the Australian Financial Review during the month of April 2021.

Wednesday, 24 March 2021 08:07

Why the 10 year bond rate matters

The most important number right now for professional investors is the 10 Year Bond rate.

The 10 Year Bond rate is an important anchor point for investors as a ‘risk free rate of return’ that is used in valuation models to calculate the value of assets including equities, property, infrastructure and fixed interest investments.

In short, lower bond rates result in higher asset values and by contrast, higher bond rates result in lower asset values.  Since 1994, investors have enjoyed the tail wind of falling bond rates, but the tide has turned since the last quarter of 2020 which has seen Australian 10 year rates rise from around 0.7% to around 1.7%.  That is a 140% increase.

In valuation terms, Arvid Streimann (Head of Macro, Magellan Financial Group)  says that a 1% increase in 10 year bond interest rates generally result in a 9% decrease in the capital value for 10 year bonds and around 15% for equities.

The factors influencing movements in bond rates according to Streimann are expectations of inflation and real economic growth.  Rising bond rates generally imply increased economic activity.  In recent times however Central Banks have artificially lowered long term rates through their Quant Easing (aka money printing) programs.

The chart below shows the difference in government bond prices for both a 1% and 2% rise in long term rates.

 Source:  Bloomberg

Investors in funds that are called ‘conservative’ or ‘stable’ usually have a high exposure to bonds and are at risk of loss from rising rates and would be wise to review these investments given the landscape has changed.

Streimann says that the impact of rising bond rates on the equities market is more nuanced.  He points out that equity valuations fall due to rising bond rates but not all equities are treated equally.  Those companies with higher levels of debt suffer a double whammy as they also receive a drop in earnings as they pay higher interest costs over time.  Vince Pezzullo (Deputy Head of Equities Perpetual) says that expensive growth stocks are more vulnerable to rising bond rates as they have distant prospective profits that are now discounted at a higher rate than before.

Pezzullo believes that if rising bond yields are signalling economic recovery, then cyclical exposed value stocks including energy, financials and mining, are likely to be beneficiaries as their business models have the most to benefit from the upswing in the economic cycle.  Streimann highlights the banks as a potential beneficiary of rising bond rates as they tend to earn higher rates of return on their loan portfolios which can boost profits.

The other issue for equity investors is that not all investors use the same bond rate when valuing assets, and some investors don’t use this valuation method at all.  Investors need to have an appreciation of the bond rate assumption being applied when reading research reports.

History generally doesn’t repeat itself unless people have forgotten about it.  The last time bond rate movements caused extensive market damage was 1994 which is a long time ago.  Pezzullo says the similarity to then and now is that markets were relaxed about the low inflation economic recovery, while the US Federal Reserve decided to push ahead with a surprise interest rate rise as growth accelerated.  During 1994, the Australian 10 year bond rate rose from around 6% to  over 10% resulting in short term damage to bonds and shares.

Streimann says the main difference between 1994 to today is the level and speed of communication courtesy of the internet, from the Central Banks.  It’s all about expectation versus reality and the Central Banks are articulating the economic indicators such as the unemployment and inflation rates required to be reached before raising rates.  This lowers, but doesn’t eliminate the probability of a bond market led panic.

Bond markets are currently stating that they believe Central Banks are likely to raise rates earlier and possibly higher than Central Banks have said on the back of an inflation scare.  The question is whether the Central Banks are willing to view an inflation scare a transient and leave rates low.  Investors would be wise to stay tuned to the communication coming out of the Central Banks for any changes in message.   Either way investors must prepare for an investment landscape with rising long term rates.

 

 

The article was written by Mark Draper (GEM Capital) and appeared in the Australian Financial Review on Wednesday 24th March 2021

As Mayfair 101 investors can attest, there is no point chasing higher rates of income if it is not sustainable or results in capital destruction.  

Here are 4 key qualities that investors can look for when researching a company, infrastructure or property trust in order to assess the sustainability of income.

Dividend Payout Ratio

Hugh Dive (Portfolio Manager Atlas Funds Management) says that generally anything above 80% suggests that the current level of the dividend may not survive the inevitable variabilities in profits from the economic cycle.  Though this can be industry-specific, a regulated electricity utility such as Spark Infrastructure can handle a higher payout ratio due to greater certainty of earnings than a mining company such as Alumina.  Spark Infrastructure offers investors an income yield of around 6.3% based on the current share price.

Financial Health of the company

If a company is highly geared, there is a greater risk that the dividend may be reduced or cut to placate its bankers when economic conditions worsen.

Franked income = tax payments

While companies can make a range of aggressive accounting choices that can boost their earnings per share (and dividend per share), a company is unlikely to maximise the tax they pay to the government. Firms that pay franked dividends have significantly more persistent earnings than firms that pay unfranked dividends. It indicates that a company is building up tax credits by generating taxable earnings in Australia. This measure is not useful for companies such as CSL and Amcor who generate large proportions of their profits outside Australia and therefore cannot pay fully franked earnings.

Growing income

Roger Montgomery (CEO Montgomery Investment Management), sums it up by saying that the key is not the search for a high yield, but for a growing income.  There’s a very strong correlation between rising levels of income and share prices so investors who can put together a portfolio of businesses whose earnings march upwards over the years will find the market value will do likewise and they win twice.

SCA Property, a listed property trust with exposure to non-discretionary retail by owning 91 suburban shopping centres anchored by long leases to major supermarkets with low gearing, is an excellent example of an investment displaying these characteristics according to Dive.  Dive also points to packaging giant, Amcor as a sustainable dividend payer given it pays out 65% of profits as dividends and the nature of packaging earnings is stable. 

Montgomery highlights National Storage REIT, Waypoint REIT and Ingenia Communities as sustainable income plays.  He also suggests that Transurban and Sydney Airport will again provide high levels of sustainable income once the vaccine rollout becomes more advanced and economies reopen.

Listed investment companies (LIC), managed by high quality management teams with good performance track records should also be on the radar for yield hungry investors.  Many listed investment companies allocate profits from good years into a profit reserve account so that in poorer times, the dividend may be maintained.  The level of profit reserve account is freely available to investors in the financial accounts of the LIC published half yearly.  

Platinum Asia LIC and Perpetual Equity Investment Company LIC have rewarded investors with a 5% fully franked dividend in the last 12 months.  Both of these LIC’s have material profit reserve accounts established.

Care should be taken not to pay a premium for LIC’s which is relatively straight forward as most LIC’s publish their asset backing regularly.

Dive believes the biggest potential trap for investors is looking at a company's historical yield and making an investment decision based on this single measure. 

Telstra for many years paid close to 100% of its earnings as dividends and some years borrowed to pay its dividend.  This continued until the NBN blew a hole in earnings and Telstra cut their dividend from 31 cents per share in 2016, over time to 16 cents per share in 2019.  Those who invested in Telstra when it was around $6 in 2016 based on historical dividends have seen their capital dwindle in their blinkered search for income.

Better than cash yields are on offer in today’s market, but care needs to be taken to avoid the ‘dividend traps’.

 

Every month, Mark Draper (GEM Capital) writes for the Australian Financial Review.  This article appeared in the paper edition of the Australian Financial Review on Wednesday 24th February 2021

Wednesday, 27 January 2021 08:06

Investment themes for 2021

The latest IPO and tech company might be exciting, but there are more important themes investors should be paying attention to in 2021.

The dire predictions of 2020 that house prices would collapse, credit growth would fall by 8% and unemployment would reach levels not seen since the 1990’s recession don’t appear to have eventuated.

Instead, Roger Montgomery (CEO, Montgomery Investments) says “I expect property prices to rise.  Investors should know that the single most important driver for short and medium term property prices is credit availability”.

Hugh Dive (CEO, Atlas Funds Management) points to the ABS data released recently which showed credit growth in November 2020 was a record $24bn, up 5.7% from October.

Dive expressed that house price growth and credit growth leads him to select the banking sector as an outperformer in 2021.  He adds “banks are well capitalised due to asset sales and dividend restrictions and changes to the credit code in March will reduce the costs of lending”.  These set the scene for banks to report stronger than expected earnings in 2021 from higher operational profits and potentially writing back some of the bad debt provisioning.

Montgomery says investors should look for companies that generate annuity style income as they are likely to be attractive to international pension funds seeking higher returns than fixed interest.  

He adds “While an Australian investor might believe the shares of a company or REIT with a durable income yield of 5% represents fair value, an international pension fund might be content with a 2.5% yield.  Consequently, prices for stable income earners could jump.”

Nathan Bell (Head of Research, Intelligent Investor) is backing the theme around the reopening of the global economy through investments in Sydney Airport and Star Entertainment.  “Both will benefit as vaccine adoption increases, and as their respective revenues and earnings start getting back to normal, so will their dividend payouts” he says.

Warren Buffett once said “do not take yearly results too seriously. Instead, focus on four or five-year averages”.  The best investors are those who can imagine how the world is likely to be in the future, instead of how it is today.

The share market overall has showed great resilience to COVID, but there are some sectors that warrant great caution.

Nathan Bell suggests “taking profits on anything that relies on higher iron ore prices.  Eventually Brazil iron ore producer Vale will start getting production levels back to something more normal following a slowdown from COVID and mine safety issues, which is likely to bring down iron ore prices.”

There are plenty of signs of excessive excitement in the market including Bitcoin and Tesla valuations, Robin Hood and the frenzied activity in IPO’s.  Matt Williams (Portfolio Manager, Airlie Funds Management) highlights “In Australia this exuberance is manifested by the ever increasing number of companies joining the burgeoning buy now pay later sector and other tech focused IPO’s”.

Dive reminds us of the tech bubble of 2000 where Nortel had a market cap of $280bn and was 35% of the Canadian stock market (TSX), and other tech stocks such as Research in Motion (Blackberry) were larger than major banks such as the Royal Bank of Canada.  He says “one of the similarities between 2020 and 2000 is that investors are being told how all of these companies were going to change the world and not to worry about current valuations or risks on the horizon”.  

Dive completes the trip down memory lane saying that Nortel filed for bankruptcy in 2009 and Blackberry’s smartphone market share has dropped from 20% in 2009 to 0.02% today.

The buy now pay later sector is almost expanding weekly and now has a combined market capitalisation of $40bn.  This combined valuation warrants careful examination when compared to the overall forecast loss of $82m for the sector in 2021.

Buy Now Pay Later companies

Company Market Cap $M Expected profit in 2021 $M Dividend Yield
Afterpay 37,643 +26 N/A
FSA Group 135 +16 3%
Humm Group 540 +67 2%
Laybye 242 -16 N/A
Money 3 580 +3 N/A
Openpay 200 -22 N/A
Quick Fee 82 -4 N/A
Splitit 512 -45 N/A
Sezzle 748 -46 N/A
Zip Co 3,103 -60 N/A
       
Total 40,681 Loss of $82m 0.04%

 

The financial markets are currently presenting investors with a two tier market containing both very expensive and some reasonably valued opportunities.  This is a time for caution and well researched investing. 

 

This appeared in the Australian Financial Review on 27th January 2021.

Tuesday, 01 December 2020 08:42

Sydney Airport / Spark Infrastructure

The Investment Case

The four most dangerous words in investing are “this time it’s different” (Sir John Templeton).  The ghosts of the last tech boom, referred to as the dot-com bubble in 1999 seem to be restless, with some eerie similarities to today’s obsession with technology stocks and high valuations.

Douglas Isles (Investment Specialist, Platinum Asset Management) says “the current mania in technology stocks is not about the big names but about the breadth of companies trading on high valuations.”  This is seen in the table below which shows market capitalisation compared to GDP in the US share market, and compares the record level 170% to previous bubble episodes.  This valuation indicator has become popular thanks to Warren Buffett who in 2001 said “it is probably the best single measure of where valuations stand at any given moment”.

The cyclically adjusted price to earnings ratio, commonly known as CAPE, is another valuation measure applied to the US share market.  CAPE is defined as price divided by the average of ten years of earnings, adjusted for inflation. 

Isles says “the maths tells us in aggregate there will be considerable disappointment. But also, like 1999, the more interesting thing is the opportunity in companies that are not part of the mania. In 1999, the sectors being shunned were labelled the old economy.  Today the shunned sectors include emerging markets and cyclical stocks”.

There are of course differences in today’s technology stocks according to Nathan Bell (Head of Research, InvestSMART), who says “the dominant tech companies are perhaps the best businesses that we’ve ever seen and are extremely profitable.”  

Hugh Dive (Portfolio Manager, Atlas Funds Management) says that “Apple, Amazon, Facebook and Google are actually generating revenues and growing profits”.  He adds “what we haven’t seen in 2020 is the plethora of concept companies raising large amounts of capital solely based on having an idea that is similar to a hot theme”.

That said, the seven Buy Now Pay Later stocks trading on the ASX could arguably be described as an example of this phenomen.

Bell sees the flood of Initial Public Offerings (IPO’s) of untested business models where the business owners are selling heavily as a sign of a heated market.

Other ‘red flags’ that investors would be wise to consider include the record fund raising in the US into SPAC’s (Special Purpose Acquisition Company).  A SPAC is a company with no commercial operations that is formed to raise capital through an IPO for the purpose of acquiring an existing company.  Bell says SPAC’s are where investors essentially sign a blank cheque in the hope that management will find something useful to do with the money while Isles believes they look very much like the ‘cash boxes’ of the 1980’s.

Dive’s key red flag is “the re-emergence of novel valuation methods such as ‘price to revenue’ in order to value companies that are generating losses, and are expected to continue to generate losses for the near future before miraculously swinging into steep profit growth”.

Highlighting Dive’s point about the behaviour of investing into loss making companies, US investor Joel Greenblatt says “If you bought every company that lost money in 2019 that had a market cap of over $1 billion, and so there are about 261 of those, and you bought every single one of those companies, you’ll be up 65% so far this year”.

Similar to 2000, in 2020 we are being told not to worry about valuations either due to the effect of lower interest rates, or that companies have a long growth runway.  Dive highlights “the valuations of AfterPay (61x revenue) and even more mature and widely used companies such as Zoom (136 x forward earnings) assume both that current growth rates are maintained for numerous years, consumer tastes don’t change and that new competitors won’t emerge.  The lessons of the previous tech boom showed these assumptions to be heroic”.

Bell believes that “low interest rates can justify somewhat higher valuations than the past, but not 100 – 150% in my view.  Valuation still matters and very few tech stocks will justify current expectations over the long term”.

Microsoft’s peak share price in 1999 was US $59.97 which implied a price earnings multiple of 76.  The following year the share price fell more than 60% and it took until 2016 for the share price to trade above the 1999 levels.  Little wonder the ghosts are restless.

 

 

This article appeared in the Australian Financial Review during November 2020.

Bell Potter have produced a special report on developments of COVID-19 focussing on the virus itself with particular reference to Europe and the US.

The report looks at infection rates and death rates, comparing the first and second waves.

The analysis considers the likelihood of reaching herd immunity.  Complete with statistics and graphs the report is designed to assist investors reach their own conclusions about what may be in store for the world with COVID-19.

Download your copy of the report by clicking on the report below.

 

Friday, 04 September 2020 09:05

Best of the Best - August 2020

The Investment Team at Montgomery Investments have produced their bi-monthly "Best of the Best" report.

This edition focuses on:

- Why it's time to focus on quality businesses

- Optum - Hidden GEM in US Healthcare

- Nanosonics has a long runway for growth

- Three reasons we continue to like Woolworths

 

Download your copy of the report by clicking on the report below.

 

Friday, 04 September 2020 08:56

What we learned from reporting season

The only thing certain about the future right now is that the future is uncertain.  So as we complete one of the strangest company reporting seasons we have ever seen, investors should reflect on the company profit announcements to see what they can learn about what may lie ahead 

Matt Williams (Portfolio Manager, Airlie Funds Management) says that while overall profits were down 20% compared to the previous year, the dire predictions in late March proved to be too bearish and there are now more profit upgrades than downgrades.  He said “The economy has strongly outperformed the accepted bearish scenarios of late March, retailers have produced phenomenal numbers”.

“The COVID-19 pandemic has not been uniformly bad for all Australian companies.  Travel related companies and listed property trusts with shopping centre assets have had a tough 6 months, while electrical retailer JB Hifi, hardware and office retailer Wesfarmers, AfterPay and Domino’s Pizza all saw record revenue over the past 6 months, benefitting from consumers being quarantined at home” according to Hugh Dive (Senior Portfolio Manager, Atlas Funds Management).

Nathan Bell (Head of Research & Portfolio Management, Investsmart) picked up on the travel sector which saw airlines and travel retailers at the epicentre of the COVID-19 storm.  “You could hear the desperation in Alan Joyce’s voice as he pleaded for state borders to reopen after announcing a $4bn loss”.  Bell also highlighted the almost 100% drop in passenger numbers since COVID-19 emerged for listed Sydney and Auckland airports.  He is of the view that leisure travel ultimately recovers and even if business travel only recovers to 70% of past highs due to a permanent shift to online meetings, both airports represent good value at current prices.  “People are once again going on holidays in the northern hemisphere, which is another good omen for this pair of airports.  Vietnam, Taiwan and Korea recently reopened their domestic borders and passenger numbers are now 10 – 20% above 2019 levels, suggesting pent up demand” he adds in support of the investment case for a rebound in airports.

Food and alcohol retailers (such as Woolworths and Coles) reported solid results as they benefitted from changing consumer purchase patterns, but they now trade at huge valuations.  Their valuations suggest future returns are likely to be far more muted if not negative should the impact of Job Keeper payments and people raiding their super funds wear off.

Dive points to the fact that “cash flows from the government were a significant feature of the August results season, albeit one that was understandably not highlighted by management when they presented their results.  JobKeeper and higher JobSeeker payments have helped companies such as JB Hifi and Afterpay as cash flows from the Government have supported retail sales despite the significant rise in unemployment”.  Investors would be wise to resist extrapolating the impact of these Government payments over the past 6 months into the future.

While the Telco sector reported earnings hits from lower global roaming charges and reduced retail sales during lockdowns, the 5G networks will cover the majority of the population in the next 12 months which represents revenue growth opportunities.  More rational mobile pricing should also help the Telco’s.

Banks reported much lower profits due to a mix of low credit growth, low interest squeezing margins and increasing bad debts.  Bell says of the banks “the bull case for Australia’s largest banks rests on them trading at large premiums to book value despite reporting single digit return on equity figures.  If this happens, Australia will be the exception to the rest of the world.  We don’t see why Australian banks are an exception as more people deleverage in the years ahead and property investors look beyond property for large capital gains”.  Ultimately the loan repayment deferrals will also need to be bought to account as well.

Williams said that in his discussions with company management, the key themes about the future were:

-       What happens at the end of the Government stimulus where retailers would appear most exposed.  

-       Opening up of state borders

-       Economic reform

With around 70% of companies either not issuing future earnings guidance or withdrawing earnings guidance, coupled with some market sectors trading on extremely high valuations, the job of assessing investment value is difficult.  The best opportunities ahead are less likely to be found in this years’ reporting season stars.  

 

This article was published in the Australian Financial Review during the month of September 2020.

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