Investment Matters

What Matters this week

Telstra has made a big strategy announcement.  Bigger picture, the company is going to undergo a major simplification (for example, 1800 [really!] consumer and small business product plans down to 20 core plans), split its infrastructure and retailing operations (exactly what the government should have done when it privatised Telstra), sell assets (that it probably spent way too much acquiring not so long ago), and cut 8000 jobs or a 1/4 of its workforce – focusing on management.

But short-term-ism drove the 4.8% share price fall on the day.  As dividend guidance was not provided post FY-19, investors are assuming it will be cut, so income driven retail shareholders are not happy.  The big-4 banks were the beneficiaries as yield chasers pushed their share prices up by an average 2.6%.  (I wonder what they will roll into when the banks downgrade …)

But really this share price fall just reversed the rally in the period prior to the strategy day – as some investors had envisaged a magic wand would appear to instantly make vanish the internal and external structural issues facing the company.

Telstra’s share price now since sits comfortably below even the 1997 T1 IPO price of $3.30 per share (as well as T2 $7.40 in 1999, and T3 $3.60 2006).


Source: IRESS, First Samuel

Does Telstra remain a falling knife?  Hard to know, but it certainly feels like earnings are heading south in the short to medium term.

And to other matters: The iron ore kids are not playing nice - each trying to better their own position.  Or at least not allow anyone else to better theirs.  Atlas Iron received an unconditional bid from Gena Reinhart’s Redstone Corp (a subsidiary of Hancock Prospecting).  Mineral Resources, who made a lesser offer last week, capitulated (she has much deeper pockets).  Now Mrs Rinehart will need to tussle it out with Fortescue Metals (an almost 20% shareholder in Atlas), as well as WA’s Minister for Transport, Planning and Lands (who, it is contended, is contradicting previous commitments in statements last week that Atlas has the rights to Stanley Point Berths 3 and 4 at Port Hedland).

Atlas wasn’t the only story from last week to continue into this week – with a second suitor for Gateway Communities appearing on the scene.  Canadian property behemoth Brookfield’s $2.30 conditional offer trumped US-based Hometown’s $2.10 offer made last week.  Unlike last week, the share price reaction (just under $2.30) implies the market thinks this offer is closer to the mark.

The downgrade of the week goes to private hospital operator Ramsay Healthcare.  Challenging conditions in Australia (expected to continue in the current private health environment), and a downturn in UK conditions, contributed to the downgrade and downbeat outlook post FY-19.  Share price down 7.5%.

The troubled McGrath Real Estate had a strategic equity investor jump on board.  Share price +26.4%.  Gutsy call, although off a fairly low base (share price low).

The shrinking trend is proving highly contagious – Wesfarmers, the banks, and now IAG Insurance.  The latter is selling its Thai, Indonesian and Vietnamese operations, increasing focus on Australia.  The market liked it: +2.4%.  Give it 5 years or so, and the trend will reverse …