Investment Matters

What Matters this week

After a brief respite, Investment Matters returns this week, ready as always to cast a cynical eye on the week gone by.

Firstly, AGL’s (-6.5%) $3 billion bid for telecommunications provider Vocus (+12.8%) at a 26% premium had us asking “where are the synergies?”.  The move to acquire a seemingly unrelated business, had us wondering if we had stepped into Doc Brown’s DeLorean (a conglomerate? What year is it? 1982?).  AGL will hope to clean up some of Vocus’ consumer-facing issues and execute on the three-year turn around strategy that is currently in place.

It was a week where tech company founders collectively cashed in their chips.  And they couldn’t have done it at a better time, with the market (All Ordinaries) hitting an 11.5 year high of 6660 on Tuesday (hope they are not superstitious).  It is probably not a coincidence this comes at a time where technology companies have been catapulted to valuations that make some of the highfliers on the Nasdaq look cheap …

Fintech small business lender Prospa floated on Tuesday, after its botched attempt at listing in September of last year (it was tapped on the shoulder by “ASIC” regarding unfair clauses in its contracts).  The company was up 19% on its first day of listing by the way …  Oh and its founders sold down a portion of their stakes to walk away with close to $10m dollars after selling down 10%-20% of their holdings.

AfterPay (-6.7%) founders Nick Molnar and Anthony Eisen joined in, with AfterPay announcing the founders will be cashing in 2.05 m of their shares – to the tune of $44.6m (assuming a floor price of $21.75) as the company is looking to raise a further $300 m US from the market this week.  And it appears they raised money just at the right time, with AUSTRAC announcing on Thursday served notice that the company needs to appoint an external auditor in regards to its AML/CTF compliance.

And the last of the three tech duos to cash out were the Leibovich brothers, who decided to cash out their stakes in Catch Group (CatchOfTheDay.com.au) to Wesfarmers (-3.6%) for $230m.  Wesfarmers’ share price was dented, doubly so after it announced it is anticipating lower earnings (circa -9% vs expectations) for the Kmart Group reflecting a broadly weaker retail environment (slowing sales) and increased competition (lower margins).

The standout (under) performer for the week was Star Entertainment Group (-15.3%).  Revenue for 2H-19 thus far is up only 0.3% vs the pcp.  The company sighted challenging conditions (particularly in April and May) including a continuing slowdown in International VIP revenue, lower hold rates and the disruption by works at The Star Sydney and broad economic weakness.

Lastly, it wouldn’t be What Matters without our commentary on the banks.  And on the back of a rate cut last week (negative) and a proposed removal of APRA's interest rate floor (positive) as well as the election outcome (positive) some further headwinds have reared their heads.  These come in the form of an upwards revised household expenditure measure (HEM) (a measure by which borrowers expenses are calculated) and a change in the risk weighting (which translate to how much capital they need to hold) applied to residential mortgages (under the IRB approach), resulting in an effective lower weighting for principle and interest/high equity loans and higher risk weighting to low equity, investor and interest only loans.  While many viewed the banks as having gotten off lightly (post Royal Commission), the regulatory albatross they are carrying is growing by the day.

- Paul Grace