Investment Matters

What Matters this week

This week we had a reprieve from the volatility that has characterised much of October although overall volatility remains high (as shown below by the VIX – a measure of the ASX/S&P200’s volatility).

  XVI

 

Corporate Travel Management went on the attack of short sellers as VGI Partners published a “short” 176 page report taking aim at the company. The report outlined alleged issues around growth (a high reliance on acquisitive growth) questionable accounting (revenue recognition, testing of goodwill for impairment, discrepancies between cash flow and income statements) and disclosure (phantom offices globally, no patents on their technology). Corporate Travel came out with a rebuttal which the market did not take comfort in – with shares down 27% on Wednesday as they came out of a trading halt.  At the very least, the report signals the company has some issues around disclosure – which unsurprisingly has made investors nervous (as they should).

Online retailer Kogan was dealt a blow, down 33% on the back of a wide earnings miss. The company reported a significant slowdown in sales of its branded products as a result of legislative changes (that require overseas online retailers to collect GST) and a weaker Australian dollar. With an even playing field, it seems it's prices have become a little less competitive.  Oddly enough, the report came a little under two months after directors Ruslan Kogan and David Shafer sold down a combined $40m worth of shares (granted they did take delivery of a significant number of shares after the end of a voluntary escrow period in August – but their fortuitous timing still makes you wonder...).

Harvey Norman was under attack this week after the Australian Shareholders' Association (ASA) flagged several concerns around investments in non-core businesses, loans to franchises and as well as a chummy boardroom. Many of these criticisms are not new - scrutiny from the ASA has followed the company for several years. Last November, the company narrowly missed its first 'strik'e after 23% of shareholders voted against the adoption of its remuneration report (a vote of 25% or more constitutes a strike). Shares were down 23% for the calendar year at that point, and are down almost 21% since then – if shareholders are judging management based on share price performance I do not like their chances.

More signs that retail is having a bad start to the year with fast growing/fast fashion jewellery retailer Lovisa posting a disappointing result. Comparable store sales to October were down 0.9% year on year compared to a growth in comparable sales of 6.8% for FY-18 (their target range for growth is 3-5%). Another reminder that if you are willing to pay up for companies with valuations that imply high growth, you better hope they achieve it! Shares dropped 19% on the news.

ANZ and NAB announced their September results, which (after accounting for a massive wallop from customer remediation) were broadly in line with market expectations. We continue to see net interest margin compression (1.87% and 1.84% for ANZ and NAB respectively) as well as shrinking consumer and home loan growth.

CEO Shayne Elliot this week acknowledged that retail banking is under pressure with “housing growth slowing and borrowing capacity reducing”. Perhaps more importantly, he signalled this shift is likely to be “permanent”- not temporary. We are seeing the effect of credit growth slowing as a result of reduced demand (due to house prices tapering on the back of macro prudential measures) as well as stricter adherence to responsible lending criteria that provides a more prudent assessment of borrowing capacity.  

Furthermore ANZCBA and AMP came out pushing a narrative of “simplifying” their businesses in future.

This came as CBA announced the sale of Colonial First State Global Asset Management (CFSAM) to Japan’s Mitsubishi UFJ Trust and Banking Corporation (which already has a 15% stake in AMP Capital). Furthermore, AMP last week announced the sale of its life insurance, income protection and disability insurance business – which several fundies protested may have been a little on the cheap side (meanwhile Macquarie, smelling blood in the water, is said to be sniffing around AMP).

I suspect, given the Royal Commission’s views on vertical integration, these businesses are worth more once broken up. Additionally, ahead of the anticipated shakeup of regulatory changes that will increase the need for compliance and oversight, banks would rather sell (even at a discount) and let someone else bear the uncertainty and risk around future regulation and profitability.

With the divestment of their integrated businesses, I’m left wondering where future growth is going to come from ... hopefully (aside from cost cutting measures and interest rates rises) they will start lending to SMEs again which could be a boon for growth (lending for productive uses versus piling debt on households and increasing paper wealth).

   - Paul Grace