Investment Matters

What Matters this week

On Monday, AGL’s (+4.5%) offer for telecommunications provider Vocus (-23.6%) was promptly snatched off the table (as quickly as it was put on).  Which made us think, what is lurking under the hood at Vocus?  AGL walked away after under a week of due diligence.  Swedish private equity firm EQT walked away last month over a similar timeframe.  After another rise and fall, a chart of the company’s share price is beginning to resemble an ECG reading.

Wanting to avoid the -6.7% share price slump that Afterpay experienced last week, high flying payment and compliance company iSignthis (+2.4%) was on the front foot on Monday, highlighting its proprietary KYC/AML process and its strict compliance of both AUSTRAC and EU rules.  Management’s nervousness is understandable, given the +300% increase in the company’s share price (taking it from a ~$160m company to a $700m company in 6 months), providing another example of the tech wave that has formed this year.

The big news this week was from Coles (+6.3%), this time it’s not prices that are down (“Down Down”), it's expenses.  The company presented a very frank assessment of the headwinds its business is facing (increasing competition - with Kaufland and Lidl knocking on the door; rising wages and electricity costs; growth in the share of its lower margin online business).  Its proposed strategy (which, many remarked, made sense – seemingly a rarity these days) includes reduction of $1 billion in costs (to be achieved over the next 4 years), a new “tailored” format strategy, slowdown in store rollouts and increase in store refurbishments.  Time (and results) will reveal its ability to execute this and whether the 6.3% run up in its share price this week was justified.

After the yield hungry run-up we have seen in the property sector since January (XPJ +19%), GPT Group (+1.0%) was the latest REIT to put its hat out, raising $800m from institutional investors.  This was the third in a string of large institutional placements this month, including those from the likes of Mirvac ($750m) and Dexus ($950m).  All were conducted at a comfortable (rather, uncomfortably high) premium to NTA of course, but at the moment it seems like where there’s a yield, there’s a way.  Expect more raisings to come.

It appears that Chinese steel mills won’t be getting much of a reprieve from soaring iron ore prices, with Rio Tinto (-3.7%) downgrading its iron ore guidance by 13 million tonnes on Thursday due to “operational issues”.  This will offset a substantial part of the 20 million tonnes that will be brought back online with the restart of Vale’s Bructu mine (which was closed after the Brumadinho tailings dam disaster in January).

The shining light this week was aviation services provider Alliance Aviation (+11.8%), which delivered what has been a rarity this calendar year – an earnings upgrade.  The company (who derives a significant amount of its revenue from the mining industry) upgraded its earnings to “in excess of $32.5 million” for FY-19, which is 25% above analyst consensus estimates.

In contrast, Caltex (-11.6%) worryingly slashed its net profit guidance for the half (to 30 June) to 56% below the previous comparative period.  This was due to lower refining margins (volatile crude price, weak dollar), heightened competition, a “slowing Australian economy” (citing the transport, construction and agricultural sectors in particular) and lower volumes.  These lower volumes are anticipated despite the fact it has won market share.  The announcement took fellow fuel product supplier Viva Energy Group down with it (-8.9%).

And lastly, how would you feel about trusting a company that been plagued by privacy and security issues with your hard-earned money? Welcome to the world according to Facebook.  This week it announced a plan to launch a new digital wallet – “Calibra” in conjunction with a new digital currency called Libra (which, unlike many other cryptocurrencies will be backed by fiat currency).  While it was foreseeable that the tech giants would enter such a lucrative space, it is odd that the one with arguably the least social capital moved first.  What it does however signal is more competition, as traditional banks are increasingly coming under threat of being side-stepped.

 Note: Price changes represent performance for the week to market close on Thursday afternoon.


Paul Grace