26 May 2018

News this Week

What we Liked?

Santos (STO) – Has rejected Harbour

Energy’s ‘best and final’ offer to buy all

shares at A$6.95 valuing the company at

$14.4bn. Santos says “the offer price was too

low and the control premium was inadequate,

and having a US-dollar based bid put too

much foreign exchange risk onto the 120,000

retail shareholders in the company.” To add

to it, Santos has made significant

improvement in its performance so much so

that it is expecting to reach its 2019 net debt

reduction target of $2 billion more than a

year ahead of schedule. Whilst a short term

disappointment, the medium-long term

fundamentals are still promising.

Westfield shareholders have approved the

takeover of Frank Lowy’s shopping centre

empire by Unibail-Rodamco. It’s the end of an

era for Lowy who has bailed out at the perfect

time. Right when Amazon is destroying

shopping malls because their tenants, i.e.

small retailers, simply cannot compete with

the online e-commerce giant. Some mall

operators are using the vacant space for

mixed use such as fitness, spa or

entertainment services. Categories that can’t

be disrupted. Others are looking to build

apartments.

Victoria is leading the way in

construction with construction work done

rising 0.2% in the March quarter. It means

there is still quite a lot of work going on in the

construction sector and that’s a good sign for

construction dependent companies.

China’s aim is to become a major space

power by 2030 and has started off its

mission by launching a satellite that will

establish a communication link between a

planned lunar probe and Earth. It is designed

to explore the far side of the moon.

BWX shareholders might see some relief

after the company received an unsolicited

preliminary, non-binding, indicative and

conditional proposal to acquire 100% of the

shares for $6.60 per share. Pre-bid price is

$4.41. Shares are up 35%. Fonterra has raised its farmgate milk price

forecast for the current season by 3.1% to

$4.68 per kgMS. Higher milk prices is good

news for farmers who have struggled with

low milk prices during 2015 and 2016. What we Disliked

Toys ‘R’ Us Australia was placed into

administration this week after Anchorage

Capital withdraw from a sale auction. The

retailer simply could not compete with the

prices that Amazon and Walmart charge

because it relies solely on toys. It’s yet

another victim of the Amazon disruption

effect and spells bad news for bricks and

mortar retailers who have high overhead

costs.

The RBA has issued a warning on China’s

ballooning debt problem and shadow banking

system. The concerns are that if left

unabated, the high level of leverage used to

fund its growth model could create economic

shock for Australia when China transitions to

a service economy.

Tensions on the North Korean peninsula

are rising after US President Trump

cancelled a summit with Kim Jong-un. The

threat of war is back on the cards again. The

meeting would have been the first time a

sitting US president met a North Korean

leader. Trump felt there was "tremendous

anger and open hostility" displayed in North

Korea's most recent statement. This is the

reason he cancelled.

What is Seed Capital

and how does it work?

At Wattle Partners, we do a lot more than investing

in stocks and shares. One of the unique offerings

that separates us from the banks and wealth

management firms, is the ability to offer our

clients the opportunity to participate in venture

capital. Tech start-ups that disrupt the status quo

have all come from venture capital. These include

Amazon, Apple, Facebook and Google. All starting off

as a tiny operations in a garage or dorm room

but transforming into the unicorns through

funding.

That has given investors the opportunity to access

unlisted start-ups and take part in seed funding.

Seed funding are funding rounds that begin with

a “seed capital” phase and follow with A, B, and

then C funding. These are stepping stones for the

final step which is an IPO on the ASX.

How does seed funding work?

Investors will ask for an equity stake in the business

in return for their investment. That’s the usual

process. A valuation of the company is derived at this

point.

Seed Capital

This is the initial money required to start the start-

up / new business. Think of it like an analogy for

planting a seed for a tree. This is the first round that

is required to plant the seed or the idea for the start-

up. The aim is to grow the seed into a green money

plant. Seed capital can come from the founder

personal or from family, friends and investors. The

amount is generally small and the valuation is

plucked from the air.

Series A

At this stage the start-up is not just an idea but will

has a business plan and business model to show that

it can monetise its idea. Thorough testing has already

been completed. Series A is used to raise

approximately $1 million to $15 million.

Sophisticated, angel investors & venture capital

firms.

Series B - Build

Is the all about the development phase, taking the

business to that next level where is will start to

generate money. Capital raised hovers around $7

million to $10 million. Series B is usually done by the

same investors as the earlier round with the addition

of a new wave of bigger investors.

Series C - Scale

This is the guts of the business. The business should

be operating profitably by now. This is the expansion

stage. Investors will tip in funds to try and double

their return. It’s all building scale, quick and big.

Capital raised can be from single digit to hundreds of

millions in this final round. This stage is usually in

preparation for a future IPO. Private equity firms,

VC funds, hedge funds and investment banks invest

here.

IPO – Public Listing on the ASX

This is the final stage. The exit. It’s the crucial and

final moment for a start-up. And it's a sign of success.

Usually done through a stockbroking firm or an

investment bank. The company negotiates a deal

with the firm on how much money it wants to raise

and how many securities are issued. Ownership is

transferred to shareholders. Board of directors

assigned. Capital raised can be anywhere from $20

million to $1 billion.

As you can see there is quite a process from the first

seed capital stage to the exit IPO stage. The

difference between these rounds will help you

evaluate the potential opportunity as an investor. In

Australia there are tax advantages for investing in

start-ups.

Entities that acquire newly issued shares in

an Australian innovative company may

receive a non-refundable carry-forward tax

offset of 20% of the value of their investment

subject to a maximum offset cap amount of

$200,000. A total annual investment limit of

$50,000 applies to retail investors.

Also investors may ignore capital gains

realised on shares in qualifying Early Stage

Innovation Company that have been held for

between one and 10 years.

It should be noted however that investing in start-

ups is very risky, highly speculative, and investments

should not be made by anyone who cannot afford to

risk the entire investment. So you really need to

think carefully about the risks associated before

making any investment decision. That aside,

investing in start-ups can be very a lucrative and

profitable was to multiply your cash over just a few

years.

What we were reading

this week

Electric Buses Will Take Over Half the World Fleet

by 2025

In this article, Bloomberg New Energy Finance’s

latest Electric Vehicle Outlook believes e-buses are a

faster growing market than electric cars. In-fact the

report says the number of EV buses will triple within

seven years and majority of them will be in China.

Why the ‘new age’ businesses are still too expensive

An interesting article from Roger Montgomery on

why he believes the smaller ‘new age’ companies such

as Kogan are still too expensive and don’t stand a

chance against the likes of Amazon. Whilst we like

Kogan and think its business is complementary to

Amazon, it’s great to read opposing views and

opinions.

Changing the shape of retirement

Bennelong Funds Management talk about Prospect

theory being the bedrock of modern behavioural

finance, particularly as it applies to our investment

decision-making.

3 Stocks from the Herd

In this section we provide readers with three stocks

that have attracted the interest of the broking

community or the ‘herd’. Broker recommendations

tend to be biased and highly optimistic. We try and

breakdown these barriers and give our own honest

opinion. When assessing these companies we take

into account the upside and downside risks and

determine whether the company is worth adding to

your portfolio. We also look at the company’s

fundamentals and thematics to come up with a final

decision.

Telstra (TLS)

Company Overview

Telstra (TLS) – Is Australia’s largest provider of

telecommunications and information products via its

range of businesses namely fixed broadband, mobile,

data, IP, network application & services, digital

media and international. Telstra provides

telecommunication product and services to consumer

and business customers in Australia. This month

Telstra provided an update on trading for FY18 and

re-affirmed guidance but with EBITDA to be at the

bottom end of its guidance range.

Broker View:

UBS (NEUTRAL $2.80) – The broker has a bearish

view on the telco saying rising competition and debt

have deteriorated Telstra’s credit position. UBS

thinks progressive cuts to the dividend from FY20

will be needed but it should hold steady at 22c for

FY18-19. Target reduced to $2.80.

Unconventional View

We disagree with UBS. The broker see further

downside in the telco emanating from rising debt and

its inability to compete in a hotting up sector. TPG

Telecom, Vodafone, Optus and Vocus are all vying for

the same space and same customer. This means

rising competition could force these telco’s to compete

on pricing and data. It hasn’t been an easy week for

Telstra after its entire 3G and 4G networks went

down leaving customers across the country unable to

make calls or use data due to a glitch. It’s the third

time this month it has happened. Whilst the network

is back up, life goes on. But it is a little embarrassing

for Telstra who charge its customers a premium to

access its reliable failsafe network. Will it cause

mobile subscribers to switch carriers? We don’t think

so. The only other alternatives are Optus or Vodafone

and their networks are far inferior to Telstra’s.

Telstra’s outage caused issues across Australia.

Telstra’s guidance update is what has caused shares

to fall 15% this month. The trading update was

disappointing but free cash flow guidance surprised

on the upside. Telstra’s underlying earnings in the

2017 financial year will be at the lower end of its

guidance range of $10.1bn-$10.6bn. With its share

price hitting its lowest level since December 2010,

what else could possibly go wrong?

We think all the downside is now well and truly

factored into the share price. Expectations for Telstra

are low at a time when Telstra is cost cutting,

unveiling new unlimited plans, becoming more

competitive and investing heavily in its network. All

positive things going forward. All Telstra needs to do

is meet expectations. It has already started to come

in aggressively with its unlimited data plans.

Trading on a PE of 8.55x, a ROE of 23% and a gross

yield of 11.99%, Telstra is looking mighty cheap and

TLS

$2.77

PE FY0 8.55x Dividend 8.39% 52 Week High $4.47 Short term 0%

PE FY1 10.09x Gross yield 11.99% 52 Week Low $2.72 Long term 4%

ROE FY0 25.59% Franking 100% Price 1M % -10.52% RSI 18

ROE FY1 23.24% Debt / Equity 118.86% Price 1Y % -37.66% PEG Ratio NaN

EPS FY0 0.32c EPS FY1 0.29c EPS Growth -10.52% Market Cap $32.59bn

$4.23 Current Ratio 0.86

StockOmeter Telstra Corporation Ltd

Intrinsic Value

33

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

33

attractive. The stock is stuck in a sentiment hole, but

if it releases a positive result come August, the stock

will quickly re-rate.

Fairfax Media (FXJ)

Company Overview

Fairfax Media (FXJ) – Is a media group with a range

of publishing news, information and entertainment

businesses that deliver content via newspaper,

magazine, online formats and radio broadcasting. In

Australia, mastheads include The Sydney Morning

Herald, The Age, The Australian Financial Review,

The Canberra Times, The Sun-Herald, Stock and

Land and The Land. Domain Group is its other main

revenue generator. Founded by Fairfax it was listed

on the ASX in 2017. Fairfax retain a 60% ownership

of shares. The division comprises of Real estate media

and services business.

Broker View

Deutsche Bank (BUY 85c) – Its recent trading update

highlighted better than expected revenue which

means the print advertising business has stabilised.

Unconventional View

We disagree with Deutsche. It’s been a rough ride for

Fairfax. The company has gone from being a

potential takeover target last year, to being nearly

annihilated. FXJ is only barely surviving. After

offloading the company’s Domain business, the only

profitable division, all that is left is its newspapers

business i.e. Australian Metro Media which includes

all the mastheads The Age, SMH, The AFR and the

Canberra Times. With an audience of 11 million the

company has started to move its content online and

charge for it. A bit late to the party?

The problem is, why would anyone pay for a

subscription fee when they can get content for free

through any of the other news outlets? The print

news business has been in structural decline since

2010 about the time that digital media started to take

off. Iconic Australian newspaper titles such as the

SMH and The Age are struggling to attract

readership, despite a growing readership

(population). People were simply moving online and

Fairfax wasn’t able to monetise this change. In 2016

the company posted a $1 billion loss because of write-

downs and redundancies. It was bleeding cash and is

still bleeding cash. Impairment charges were all tied

to challenges facing the print-media industry. Like

all the other newspaper publishers in the world,

Fairfax was not coping with this structural change.

Fast forward to today and we think FXJ is stuck in a

dying industry and will be another victim of tech

disruption. It’s the business model that is broken.

Content is king as Bill Gates once put it. Real money

is being made from content on the Internet. Last

week we wrote an article which went into depth the

digital content driven transformation that is

$1125m

$126m$474m

$0m

$500m

$1000m

$1500m

Domain (60% FXJstake)

MacquarieMedia (54.5%

FXJ stake)

Implied FairfaxBusiness

Sum of the parts valuation (FXJ $1.7bn)

FXJ

$0.74

PE FY0 44.05x Dividend 4.19% 52 Week High $0.82 Short term 15%

PE FY1 12.91x Gross yield 5.99% 52 Week Low $0.59 Long term 49%

ROE FY0 16.25% Franking 100% Price 1M % +7.25% RSI 44

ROE FY1 15.27% Debt / Equity 28.39% Price 1Y % -7.59% PEG Ratio NaN

EPS FY0 0.06c EPS FY1 0.05c EPS Growth -17.51% Market Cap $1.70bn

$0.81 Current Ratio 1.00

StockOmeter Fairfax Media Ltd

Intrinsic Value

36

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

36

currently upon us, click here. Newspaper and TV

advertising sales have tumbled sending the earnings

of Fairfax down south. The sole reason is because

content is being created online by giants Google and

Facebook and their capturing the lion share of every

advertising dollar that was once in broadcasting.

FXJ’s recent trading update showed that Australian

Metro Media i.e. newspapers fell 2%. For that reason,

we simply cannot see how FXJ can join the ranks of

these tech titans. What we’re seeing is the demise of

an entire industry and unfortunately FXJ is in the

firing line.

Lend Lease (LLC)

Company Overview

Lend Lease (LLC) – Is an international property

and infrastructure group with operations in

Australia, Asia, Europe and the Americas. Its core

business is designing, developing, constructing,

funding, owning, and co-investing in property and

infrastructure assets. Its portfolio includes the

development of inner and outer urban developments,

apartments, commercial offices, retail centres,

healthcare facilities and retirement villages.

Broker View

Ord Minnett (LIGHTEN $17.00) – The broker notes

that Lend Lease has taken on two big projects in

Milan worth a combined $6.5bn. Ords prefers

Stockland Group (SGP) to LLC as it expects rising

bond yields, US tax cuts and high AUD to work

against the sector in the short term.

Unconventional View

We disagree with Ord Minnett. We’ve been avid

followers of LLC for some time, in fact we hold LLC

in the Wattle Value Model portfolio. LLC has had a

great run, shares up almost 15% over the last six

months and we think there is further upside to go.

LLC recently was awarded the Property Council of

Australia’s top award for its design and

sustainability features at the Barangaroo South

project. It’s been an iconic project for LLC but what’s

next? LLC has a huge pipeline of projects in its

portfolio. It has been hard at work winning projects

in Europe and Asia especially in Italy and Britain.

The company has already won two major projects in

Milan and is the preferred bidder for the $7 billion

Haringey Development Vehicle project in London.

LLC invests 14% of its capital in Europe but is

intending to raise that to 20% driven by large urban

regeneration projects and infrastructure deals.

Europe makes up for 17% of revenue. At the same

time, LLC is also looking to take on Asia. It has

signed up a $302m senior living community in

Shanghai China and is targeting major urbanisation

projects in Beijing, Shanghai, Tokyo, Kuala Lumpur

and Singapore. The Asian business is still in its

infancy, but the upside potential is absolutely huge.

LLC

$18.33

PE FY0 13.89x Dividend 3.63% 52 Week High $18.74 Short term 39%

PE FY1 13.96x Gross yield 5.19% 52 Week Low $15.11 Long term 43%

ROE FY0 11.06% Franking 0% Price 1M % +2.86% RSI 60

ROE FY1 13.48% Debt / Equity 35.87% Price 1Y % +9.43% PEG Ratio 2.66

EPS FY0 1.36c EPS FY1 1.33c EPS Growth -2.60% Market Cap $10.71bn

$23.78 Current Ratio 0.58

StockOmeter LendLease Group

Intrinsic Value

49

NO GOOD

NOT BAD

BUY

GOOD

DEEPVALUE

49

So far Asia only contributes 3% of 1H earnings but

with projects in Singapore and Kuala Lumpur on the

way, this figure will rise. With more than $15bn in

the construction pipeline from London and Milan,

LLC’s outlook is promising. We think the

fundamentals look great and LLC is an attractive

buy.

Faster payments

between the Banks

It was on Mother’s Day that my mother reminded me

of the $250 I still owed her. I can honestly say, I had

totally forgotten. Of all days. So, I decided to settle

the debt. I mean, it was the least I could do,

considering it was Mother’s Day. She told me not to

stress, the closet ATM was at least a 15-minute drive

away. I laughed and said “No one uses cash these

days, I’ll transfer it to you. Simple.” Her response

was “I don’t want to wait for 5 days for the cash to

clear.” I laughed. Five days? I then asked for her

phone and registered her mobile number as her pay

ID. I transferred the money and within a few seconds

it was sitting in her account. Presto. She was amazed

and a little overwhelmed at the speed and efficiency

and at how simple the entire process was. The rest

of the conversation was about how she could now use

this technology to help in her own business.

It is rare these days for people to carry cash, all

transactions are conducted electronically or through

tap and go (pay pass) for the simplicity of our lives.

My friends and I make use of internet banking by

paying each other instead of meeting up and

exchanging cash or going into the bank and making

deposits. Although internet banking has simplified

our lives, there is still the burden of obtaining each

other’s payment details like the BSB and account

number. While this is convenient, there is still the

risk of transferring money to the wrong person. For

example entering incorrect payment details. Finally,

we all can say goodbye to painful payment delays and

obtaining payment details.

The New Payments Platform (NPP) introduced by

banks will allow my friends and I, to send and receive

money 24 hours, 7 days a week regardless of

weekends, public holidays and whom we bank with.

This new innovative payment service is called Osko

by BPAY, the benefits include:

Faster payments: Giving customers and

businesses the ability to transfer money to

other financial institutions who have Osko in

minutes.

Simpler Payments: Forget your BSB and

account number, just provide your mobile

number or email address to get paid to.

Smarter Payments: Personalise payment

messages with up to 280 characters,

including emoji’s.

Safe and secure Payments: It’s backed by

BPAY and you will receive confirmation your

payment is going to the right person.

In order to make payments using Osko we need to

create a pay ID, this can be our mobile numbers,

email, ABN, or even landline phone numbers

depending on our bank. Once a pay ID is created we

will have the option to choose an account we want

linked so money can be drawn. Payments are made

when we enter the Pay ID and once the recipient’s

name pop ups, we then confirm the payment and hit

the send button, money is then transferred in “real

time” and the person whom we’re paying gets the

money instantly. We all want to make faster

payments without the hassle of cash, this method has

come in handy at times when I’ve had to split a late-

night cab fare or when I’m at a restaurant which

‘doesn’t do’ splits bills, therefore I’ve been able to pay

without the trouble of waiting for the money to clear.

Banks are slowly moving away from BSB and account

numbers as it can be a tedious and want to make our

live more stress free.

Organisations which adopted this payment service

are:

NPPA (New Payments Platform Australia)

SWIFT

RBA FFS (Fast settlement services)

BPAY

Indue

Internationally there are payment platforms which

works exactly like Osko such as PayPal which people

primarily use for online shopping. I remember using

EBay first time when I was 18, online shopping had

just hit the market, and everybody was sceptical

about providing their credit card details over the

internet. I was buying a digital camera with my

mum’s credit card and PayPal was the avenue to

protect my payments. My mother was losing her

mind about online fraud and I told her “mum, your

payments are going through PayPal which are

verified and protected from online scammers.” Funny

enough now, there are parcels being sent to our house

every week as she loves online shopping. Given the

high reputation that PayPal for upholding credit card

security, it also allows us to transfer money to friends

and family with emails addresses or mobile numbers.

Everyone whose used EBay can rely on PayPal’s

security measures plus there are no sign up fee.

Technology has also advanced where Apple and

Samsung pay has become a trend in the market to

make payments more efficiently, my banking details

can be stored on my phone and I simply tap onto the

EFTPOS terminals to make payments without

having the need to carry my wallet or bank cards.

Apple Pay also allows the option to transfer money to

friends and family using your debit and credit cards

stored, you authorise the payment with Touch ID and

your contact will receive the money in their Apple

Pay Cash Account. In conjunction, Samsung Pay

works exactly the same where it uses a “Samsung

Wallet” which stores all your card details where you

can also send money to friends and family who have

the feature set up on their phone. I remember it my

dad’s birthday and my brother and I were out

shopping to find him a gift the night before, we

decided to buy him a new phone which was valued at

$950. Coincidentally, I had forgotten my wallet at

home and luckily my brother had driven us, I told

him to cover the cost and I would transfer the money

to him instantly. Luckily, we both had Samsung

phones so I just held my phone next to his and the

money was transferred him instantly.

Third party platforms like AliPay that are based in

China, operate as an online medium for us to shop,

pay bills and book holidays. They function differently

by working in favour with the buyer online to ensure

their items are genuine before releasing the money

held onto the seller. Just like PayPal their vision

aims to minimise online fraud as compared to

providing faster and easier transactions.

Merchants have also come up with clever innovations

for customers to shop online more effectively by using

third party platforms such as Afterpay and Splitit.

Afterpay goes by the slogan of “Shop now. Enjoy Now.

Pay later” where you pay for your purchases over four

equal instalments every fortnight. I remember I

bought a 10LBS bag of protein powder which was

$200, I didn’t have the money as I was waiting for

payday, thank god the store offered Afterpay, so

therefore I paid $50 every fortnight, how convenient

is that.

This is works in favour of the merchant and buyer

and is a good way to increase sales and encourage

spending. Splitit is an international payment

platform with slogan of “If you Split it they will buy”

which works very similar to Afterpay but the

customer has the option to choose how many

instalments they want to make as compared to four

instalments. Both these platforms have a very clever

way to boosting the economy through encouraging

GDP (Gross Domestic Product) and increasing their

profits.

The New Payments Platform (NCC) introduced by

banks will work favourably for us as we won’t need to

collect BSB and account numbers and have the risk

of sending money to the wrong person. On the other

hand, payments can be made with our Pay ID’s which

is used to match our payee’s. Additionally, funds will

can be wired instantly ‘real time’ without waiting for

weekends, public holidays or being a third-party

bank for money to clear. In conjunction, my parents

who weren’t brought up with technology can also

make payments to friends and family without driving

15 minutes to the nearest ATM or waiting 5 business

days for funds to clear, this way they can stay up to

date with technology and have their lives simplified.