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.