Investment Matters

What Matters this week

The market continues to slowly get back to its feet after having its legs kicked out in October.  Another reminder though: there are plenty of potentially market-moving events still in the pipe-line – particularly US-China trade negotiations.  Over in the land of the free, as expected, the Democrats took majority in the House of Representatives while the Republicans took the Senate (just in case you didn’t hear) which caused a jump in US markets but a much more muted response domestically.

Webjet announced on Monday that it is acquiring Destinations of the World (DOTW), a B2B travel industry wholesaler (aggregating and selling hotel rooms to travel agents, tour operators etc) headquartered in Dubai for consideration of $AU240m.  The acquisition will help round out WebBed’s (the company’s B2B arm) geographical footprint - helping it scale and consolidate its #2 position in B2B travel.

As we have come to expect, the RBA decided on Cup day to keep rates on hold.  Interestingly the board has become more optimistic about the economy, revising its forecast for real GDP growth (in 2018 and 2019) up to 3.5% (from 3.25%).  In the face of falling house prices and weak household consumption, several institutions commented that this figure is optimistic.

A US District court ordered Cochlear to pay $US268m in damages after losing its long-running patent infringement case.  The company was “surprised by the decision” – clearly - they had only provisioned AUD $21.3m in relation to the dispute.  With Cochlear planning an appeal it is expected the case will take several more years to resolve (its only taken six so far).

VGI continued its assault against Corporate Travel, circulating a second (thankfully briefer) presentation and increasing its short position by 23% to 2.5 million shares.  Corporate Travel was subsequently put into a trading halt (again) on Tuesday and issued an independently assessed report.  The report, which effectively read like a lesson in accounting, comprehensively rebutted the most serious of VGI’s claims.  It seemed to restore investor confidence with CTD up 15% on the day.

Shares in APA sunk on Friday as Treasurer Josh Frydenberg rejected CK Group’s acquisition proposal.  The Treasurer came to the conclusion that increasing foreign ownership of critical energy infrastructure (56% of our gas transmission pipelines) is not to our country’s benefit.  Even though we understand the argument that a change in ownership is irrelevant in the face of adequate regulation, we imagine we're not the only one taking comfort in the news.

REA Group produced results that were better than expected, with revenue rising 17% for FY-19 – lifted by its recent acquisitions and better than expected growth in its Developer and Commercial business.  This was in spite of a continued decline in listing volumes (8% in Sydney and 1% in Melbourne) which the company expects to continue.

More figures released by the banks this week with Westpac issuing its annual report and CBA releasing its Q1FY-19 update.  Results for both were broadly in line with expectations, with CBA’s net interest margin shrinking slightly and Westpac’s widening thanks to a rate rise early this year.  Worryingly, (as per ANZ and NAB next week) provisions for losses were reduced – odd given the housing market has peaked and both banks are implementing rate rises …. Furthermore APRA surprised the banks on Thursday proposing they hold more regulatory capital by 2023.  This could signal some serious concern about the banks … more on what we think about this in next week’s edition.

The ACCC this week green-lighted the merger between Nine and Fairfax, reasoning that online Australian news providers like Buzzfeed provide “competitive constraint”.  Furthermore, they do not see any challenge to future “investment in journalism” due to a culture change and little overlap between Nine and Fairfax’s media assets.  Let’s hope editorial independence does not suffer.

Lastly, on the back of last week’s disappointing results, Kogan announced it is partnering with Mercer to offer Kogan Super, continuing its strategy of tackling big markets.  It will begin offering “no frills” superannuation with “ultra-low fees” in early 2019.  Call us skeptical, but (even leveraging Mercers investment capabilities and reputation) entering an industry where trust is paramount may require a leap of faith from consumers. Plus, cost is only ever one side of the equation …

- Paul Grace