News Archives 2015

Cash Burning a Hole in the Pocket

September 18th, 2015

Last week Woodside Petroleum (WPL) submitted an offer to acquire Oil Search (OSH). This hostile bid had a range of conditions (such as approval by the PNG Government) and is to acquire all of the shares in Oil Search for a consideration of 1 WPL share for every 4 OSH shares. This announcement proved to be positive for OSH shareholders who saw an immediate +17% jump in the company’s share price and enjoyed speculation in the press that higher bids would be coming down the pipeline. Woodside Petroleum’s shareholders were less happy as the stock was immediately sold off -5%, as the market questioned the company’s financial discipline and whether this represents a transfer of value from the acquirer to the acquiree.

In this note we are going to look at the questions that Woodside’s board face with the billions of shareholders’ funds burning a hole in their back pocket. Historically we have observed that far too many companies have frittered away their excess cash or diluted existing shareholders by issuing new shares on questionable acquisitions designed to buy growth or move into new markets.

Read more here.

Westfield Shenanigans

September 4th, 2015

One of the biggest decisions facing listed property fund managers is in determining the weight in the portfolio for both Scentre (SCG) and Westfield Corporation (WFD). These are the two largest trusts on the ASX and currently comprise around 38% of the ASX 200 A-REIT index, so a significant underweight or overweight will be a big driver of a manager’s performance.

Last year, Westfield Group (WDC) and Westfield Retail Trust (WRT) announced a proposal whereby their combined assets will be restructured along geographical lines.  Westfield’s Australian/NZ businesses were consolidated as Scentre Group (SCG) and their US and UK assets, including the Westfield World Trade Center in New York, Century City in Los Angeles and Westfield London were retained as Westfield Corporation (WFD). The investment thesis behind this quite costly move is that the market will rate the two separate companies more highly, and that offshore acquirers will now be more interested in Westfield’s global assets without the baggage of part ownership shares in Australian shopping malls. We note that Westfield Corp now trades at a PE ratio similar to US-based REITs such as the US$57 billion Simon Property.

In this piece we are going to look at the various permutations of Westfield over the years and follow the “pea” or the Westfield entities that have given investors the greatest returns over the last 35 years. Recently we have fielded a few questions about our positioning in the two former Westfield vehicles in the Aurora Property Buy Write Trust.

Read more here.


Meetings with Management

August 28th, 2015

A key part of our investment process is meeting with the management teams of companies at least once every six months where we hold a significant long or short position in the Aurora Dividend Income Trust and the Property Buy – Write Income Trust. Generally we seek to meet with management teams just after they have released their semi-annual profit results and at other times during the year when we have specific issues or concerns that we feel need to be addressed. The content and tone of these meetings varies widely depending on the nature of the company and how far the results that the management team has delivered deviates from our expectations.

As it is reporting season we have been very busy over the month meeting with management teams from both large (BHP and CSL) to small (Investa Office Fund) companies.  In this piece we are looking to shed some light on the role that these meetings play in the investment process.

Read more here.


What to do with the Australian Banks?

August 21st, 2015

Travelling around Queensland this week and meeting with clients one of the questions most frequently asked was, “What should I do with my bank shares?” Furthermore today has been one of the worst trading days for the banks since the GFC and with 30 minutes to go before the close the major banks have fallen roughly 3.5% today. Assessing future prospects for the major banks is currently one of the biggest issues facing investors; from the largest institutional equity fund manager at Colonial First State to the smallest retail investor who bought shares in CBA when it was floated in 1991 at $5.40. Over the last 3 months the banking sector’s share prices have declined -14%, significantly worse than the -6.5% total return posted by the ASX200. In this piece we are going to set aside today’s emotional selling and are going to look at the causes of this correction along with some thoughts for the future

Read more here.

The Curse of the $100 share price

August 14th, 2015

Last week the financial press was full of breathless articles about $100 stock prices, as biopharmaceutical company CSL hit $102 per share and these articles were full of speculation as to whether Commonwealth Bank, Macquarie Bank or Cochlear could also join CSL in having a three figure share price. As a former institutional shareholder of both Incitec Pivot and Rio Tinto during their period of having share prices greater than $100, what we saw was missing in these articles was the subsequent performance of stocks that have enjoyed these lofty per share prices. In this week’s piece we are going to look at the performance of past market darlings that have enjoyed a price greater than $100 per share and over-valuation in general.

Read more here.

What goes on during Reporting Season

July 27th, 2015

For equity analysts in Australia Christmas comes twice a year,  every February and August when the majority of Australian listed companies reveal their semi-annual profit results. At this time companies also provide guidance as to what growth in profit, revenue, profit margins or dividends that shareholders can expect over the following financial year. This can be a stressful time for a fund manager. When companies reveal unpleasant surprises, the company’s stock price tends to get sold down hard. Alternatively, it can be very pleasant when the company reports a good result, which validates the investment case for originally owning their shares.

In this piece we are going to go through how Aurora approaches each day during reporting season and what goes on during a typical day in an the earnings season.  It’s not all convivial lunches with management teams in the boardroom of an investment bank overlooking Sydney harbor.

Read more here.

Pruning the fear off hedge funds

July 23rd, 2015

The bitter taste of the GFC, and a strong equities market, have meant Australian investors remain cautious about hedge funds, Malavika Santhebennur reports.

The thought of investing in hedge funds evoked fear in advisers and retail clients after the global financial crisis (GFC) ……..….. Aurora Funds Management managing director, Simon Lindsay, suggested that most investors had an over-exposure to listed equities, especially the big four banks and Telstra.

This was particularly the case for self-directed, self-managed super fund portfolios.

“Ultimately, when everything is going rosy, people don’t tend to worry about the risk to the downside, and I think this is probably the exact time when people should be considering hedge funds in a portfolio,” Lindsay said.

Click on this link to read the whole article


Segmenting the Market

July 17th, 2015

As the 2015 financial year drew to close last fortnight, casual readers of the financial press may have had the impression that 2015 has seen a large degree of variation in the returns with the falls in oil in October and Greek Financial Crisis V2.0 in June. Contrary to the headlines which have reported the end of the mining boom, European financial crises and a weak domestic economy, the 2015 financial year has been average in terms of the dispersion of returns between the sectors. In this week’s piece we are going to be discussing the performance of the different industry sectors in the market both over the last 12 months and since 2000.

Read more here.

Volatility: Where are they now?

July 7th, 2015

With the close of the 2014-2015 financial year, markets have become focused on the global ramifications of the Greek debt crisis/potential exit of the Euro and more locally the ramifications of a Chinese slow down. While normally it is trite to be permanently pessimistic, the current situation is significant in that the possibility of asset price contagion is relatively high: UBS forecasts a 40% chance of ‘GREXIT’ and if this were to arise then a further 40% chance of ‘severe contagion’.*

Read more here.

Beware of the Bankers Bearing Gifts

June 19th, 2015

Over past two years investors have faced a barrage of glowing research from the investment banks trumpeting the blue sky potential of new companies seeking to be floated on the ASX. What is also clear is that the overall quality of these new initial public offerings (IPOs) are declining and that investors right now should be more critical of the bright forecasts contained in the prospectuses. Earlier this week we received the IPO offer documents for a company exposed to the buoyant domestic housing sector, valued based on the assumption that the current demand for new homes and apartments remains unchanged.  Indeed one of their competitors that listed just over six months ago and has already fallen 20%.

Read more here.

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