In this section we look to provide an update on newsworthy events that have occurred with investments that don’t necessarily meet our requirements today, but which we believe should be of interest to investors and readers.
Macquarie Group (MQG): Unexpectedly announced it would be moving into the mobile telecommunications game. The company has established a business called Nu Mobile, that focused on offering mobile plans that come with used handsets. The move appears to be focused on cost conscious consumers who may not necessarily be able to afford the huge price increase on the latest iPhones and increases competition in an already cut throat market. The service will be delivered on TLS’s network and interestingly Macquarie already owns some 1m handsets which is leases to other providers; so another string to the bow of this diversified investment bank. The move is not expected to be material to profits, and broker remained concerned about valuation, with 3 buys but 4 holds.
Wesfarmers Ltd (WES): After attempting a hostile acquisition of rare earths miner Lynas Corp and being rebuffed, WES continued it’s hunt for an entry in the battery and energy storage market, offering a $776m takeover offer for Kidman Resources. Kidman owns a number of lithium projects in Australia, with WA’s Earl Grey one of the biggest in the world, and has a joint venture agreement with SQM the largest lithium producer in the world. Management appear to be pivoting to what they know best in the world of commodities and attempting to get into the battery boom after a recent lull in takeover activity. Whilst the brokers are positive on the diversification strategy, they have concerns about Bunnings withstanding a housing slowdown and the consensus is a hold, with 5 brokers, and 2 suggesting a sell.
Technology One Ltd (TNE): The small cap manager darling Technology One, which offers custom enterprise software to businesses, suffered after an unexpected downgrade. That downgrade was to earnings growth of ‘just’ 45% for the year, however, greater concerns came from the lower than expected profit result, some 10% off expectations. The market is becoming difficult for companies priced like TNE, which still trades on a 42x P/E earnings ratio, but remains supported by small cap specialists like Pinnacle and Hyperion. The brokers have turned negative with 2 sells and 2 holds.
Fiat Chrysler and Renault: The two global automotive giants announced they were in discussions for a merger of their businesses, which triggered a rally in European markets. The combined entity would own Ford, Fiat, Renault, Citroen, Alfa Romeo and Jeep among other brands. Interestingly, once combined that behemoth would be worth only the same as Tesla despite making thousands more cars each year.
AP Eagers Ltd (APE): Appears to be finalising its takeover of AHG or Automotive Holdings Group after lifting their all share offer to around $2.3bn. The company will become a huge player in Australia and NZ with 229 new car dealerships and 12% market share. The board of AHG has recommended the offer.
Westpac Banking Group (WBC): Westpac reported a somewhat messy result with margins declining and earnings falling by 1.5%. Whilst mortgage re-pricing, or higher interest rates charged to customers, helped to support the bottom line it wasn’t enough to offset $1.1bn in remediation costs. The poor performance of WBC has been put down to its higher than market share of the interest only section of the market, which is seen as being higher risk. WBC of course benefitted more than its competitors from the property boom, and is no doubt more exposed today as a result. The dividend was maintained, however, the pay out ratio is looking stretched particularly in light of a full year fall in earnings. The brokers are mixed with 2 buys, 3 holds and 3 sells.
Adelaide Brighton Ltd (ABC): ABC announced an earnings downgrade that we had previously flagged on the back of their large exposure to the residential housing sector. That being said, the share price bounced back quickly following the Federal Election on the hope that the market will stage a recovery under Morrison’s status quo approach. Management announced a 10-15% fall in 2019 earnings due to the downturn in NSW and Victoria where it has its largest exposures. Earnings growth has likely been put on hold given the more competitive environment, however, the appointment of Raymond Barro, as Chairman may see speculation of corporate activity increasing. The brokers are wary with 4 holds, 2 sells and 1 buy.
Blue Sky Alternative Investments Ltd (BLA): BlueSky finally capitulated in May going into receivership, after the operating business breached covenants on the $50m convertible notes (or loan) provided by Oaktree Capital in 2018. Oaktree is the world greatest distressed debt investors, so the decision was likely based around taking control of the company to extract the best assets and performance fees from the underlying investments. Alternatively, Oaktree may see this as an opportunity to enter the Australian market at a very low price, given the reach that BlueSky has in the SMSF and institutional space. It’s a disappointing result given the majority of Blue Sky’s underlying funds including private equity, water and venture capital are actually performing ahead of expectations. Importantly for investors, each of the underlying funds is operated as a stand-alone entity and will not be impacted by this change. The Private Equity and Venture Capital divisions are independent subsidiaries with their own financial service licenses, earnings and employees.