Investment Matters

What Matters this week

On Monday, we saw the government announce an ACCC probe into bank competition.  The enquiry will investigate the banks’ failure to pass on the RBA’s recent rate cuts, which is sure to be money well spent, just like the Royal Commission …

Fear not, it appears investors are coming to the rescue of your favourite Donut King, Gloria Jeans or Michelle Patisseries franchise.  This week Retail Food Group (the franchisor for the aforementioned brands) announced that it will be raising $190 million (before costs) to repay and restructure its debt and provide for working capital.  This will cut the company’s leverage to almost a quarter (from 6x FY20 EBITDA to 1.2x) giving it an opportunity to turn around a model that has come under significant challenge.

Harvey Norman hit a wall this week when conducting a deeply discounted (circa 40%) capital raising.  The company, which looked to raise $174m through a non-renounceable 1 for 17 rights issue, fell $8m short of the mark.  The proceeds will be used to repay debt, despite the fact the company has had a payout ratio (the dividends it has paid as a percentage of its net profit) in excess of 100% of late.  Those dividends, of course, were fully franked …

Nick Scali provided some confirmation that the impact of recent interest rate and tax cuts (as well as changes to serviceability criteria for home loans) are yet to flow through to consumer spending.  The company announced that like-for-like sales are down by 8% for the financial year to date, due to “difficult trading conditions” that have seen store traffic reduce by 10-15% in October.  As a result, the company is now expecting to deliver a net profit after tax of $17-19m, in contrast to the $25m it had previously flagged.

In other news, the much-touted IPO of Ahmed Fahour’s (former Australia Post and NAB CEO) Latitude Financial failed to get off the ground.  The credit card, loan and insurance provider was set to launch at a market cap of $3.17bn.  Yet by mid-week, the IPO had fallen over.  And that was after the offer price was discounted from $2 per share over the weekend (implied 5.2% dividend yield) to $1.78 (5.8% dividend yield).  This added to a number of recent examples where the private market (in this case KKR, Deutsche Bank and Varde Partners) and the public market have fundamentally been unable to find a value they both agree upon.

Speaking of dislocated valuations, the week for two of the big five “WAAAXs” – (Wisetech, Altium, Appen, Afterpay and Xero) was, in a word, concerning.

Investment bank UBS broke ranks this week, initiating coverage on Afterpay by stamping it with a “sell”.  At a price target of $17.25 (vs a price of $35.24 per share at the beginning of the week), the broker’s recommendation read more like “run”.  The investment bank highlighted the company is likely to face regulatory scrutiny in the future, the thesis being that regulation may change so that the fees it charges merchants (3-7% of transaction costs - which it currently does not allow to be passed on) may be passed onto consumers (as they are with credit and debit card schemes).  This would result in consumers vicariously (through costs being passed on) paying an effective annualised interest rate of between 19 to 49 (on a $150 transaction), which is significantly higher than the 12-20 per cent interest rates currently pay when using credit cards.

Late Thursday, Wisetech was placed in a trading halt after (what has become a rather common occurrence over the last few months on the ASX) a short seller “attack” by J Capital Research, a company that “looks at over-valued companies throughout the world”.  In a nutshell, the company’s 31-page thesis alleges that through the magic of accounting and serial acquisitions, WiseTech has made its profit and revenue growth appear higher than it really is.  For instance, the report alleges that Wisetech’s “true” organic growth rate is 10%, vs the 25% it claims.  This would mean that 80% of the company’s revenue growth is therefore acquisitive (i.e. related to acquisitions) meaning that without acquisitions the company would struggle to grow at anywhere near the rates it has recently.  There will be many that will be waiting, popcorn in hand, to watch the price action that ensues once trading in the company resumes (ditto for the other billion-dollar technology company currently under scrutiny and in a trading halt - iSignthis).

And if in 1994 you were forced to put all your eggs in one basket, an investment in CSL would now require a much bigger basket.  The company this week celebrated its 25th year of being listed on the ASX.  A $1,000 investment in the company when it debuted in June of 1994 would now be worth $31,638, a compounded annual return of 25.9%.  That’s a number that would make even Warren Buffet blush, with the company handily outperforming the market’s 9.4% return over the same period.