Investment Matters

What Matters this week

AMP (-17.2%) was the biggest story this week, after it took another plunge. The sale of its Life Division was blocked by the Reserve Bank of New Zealand (RBNZ) after it stipulated that the acquirer (Resolution Life) hold separate, ring-fenced assets (as insurance, so to speak) for New Zealand policyholders.  This has also taken $700m off the sale price of $3.3 billion, as conditions and assumptions around valuation have changed (since the deal was brokered in 2018).  Furthermore, the company may now have its hands tied, as without an injection of capital from the sale it may not be able to embark on a turnaround of its Wealth business.  This signals that a capital raise might be coming, which means dilution for existing shareholders and will no doubt be at a discounted share price. Ouch.

Rio Tinto (-1.2%) delivered a cost blowout, with issues at its Mongolian copper/gold mine Oyu Tolgoi continuing.  Since 2016, the company has been constructing an underground mine to tap the circa 80% of the value that remains.  While the first production was initially anticipated in 2020, this timeline has now been pushed back another 16-30 months, the issue being a change in its mine plan due to stability risks.  Furthermore, the project will cost an additional $1.2 – $1.9 billion, just slightly more (22-36%) than originally budgeted.

A scathing independent review of the Australian Prudential Regulation Authority (APRA) was issued this week.  The review, chaired by Graeme Samuel, barely stopped short of recommending a complete overhaul of the regulator, with recommendations that ran the gamut.  This included changes to remuneration policies, organisational structure, internal performance standards, internal communication, culture, supervision of the superannuation system, enforcement and penalties.  Noteworthy was the final recommendation, which was emphasised in bold: a need for a “more strategic, active and forceful approach in its public communications” – i.e. naming and shaming rather than acting behind closed doors.

Medical device company AirXpanders, maker of a post-mastectomy tissue expansion implant, announced it will be ceasing all sales of its products immediately and filing for bankruptcy.  The company, whose market cap peaked at almost $340m in 2016 will now be wound up after sales were suspended in Australia (its main market) and despite recently receiving FDA approval for the sale of one of its products in the US.

Shares in Austal (+12.8%) jumped after the ship-builder provided guidance for FY-20 of operating earnings (EBIT) of no less than $105m due to an improvement from its Australasia shipyards.  This surprised the market, with analyst consensus numbers estimating operating earnings of $92m (Source: IRESS).

A letter from the Chairman did little to settle SpeedCast (-5.4%) shareholders’ nerves this week.  Shares in the company were down a further 5.3% this week after the company detailed difficulties turning around its recent Globecom acquisition, earnings volatility due to its exposure to large contracts and the albatross of debt that is hanging around its neck. Details of operational improvement programs and the assurance that its leverage ratio will be “below” the 4.1x limit (after indicating it is 3.5x-3.6x as at 30 June 2019) did little to settle the company’s share price.

Lastly, Lendlease’s (+2.6%) announcement was a large deal.  A$20 billion “large” in fact.  It will be developing several of Google’s landholdings in the San Francisco bay area – approximately 15 million square feet of residential, retail and hospitality space over the next 10-15 years.  The deal will see Google help alleviate the housing crisis in the San Francisco Bay Area (somewhat) adding 15,000 homes over 10 years (versus the 19,000 employees it added to its workforce last year ...). Regardless, rents are still at astronomical rates in the Bay Area.  While A$5,260 per month will get you into a 4-bedroom home in Toorak, in San Francisco it will afford you little more than the comfort of a one-bedroom apartment (Source: Zumper).