Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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With the recent bid announcement regarding Billabong, Roger Montgomery discusses with Ross Greenwood how clever he believes TPG is, particularly as it relates to the long-term performance of entities they sell. Listen here.
This discussion was broadcast 25 July 2012 on Radio 2gb.
Roger Montgomery discusses his insights into the perfromacne of Fund Managers on behalf of investors, and the implications of poor fund performance on pensioners in this discussion with Ross Greenwood on Radio 2GB broadcast on 15 August 2012. Listen here.
Roger provides his Value.able insights into Leighton Holdings (LEI) and National Australia Bank (NAB) to Ticky Fullerton in this edition of ABC1’s “The Business” braodcast 14 August 2012. Watch here.
Roger discusses how the JB Hi-Fi positive 2012 result conceals future structural difficulties in this Australian article published 18 August 2012. Read here.
JB Hi Fi today reported its full year results. Revenue of $3.13b was 6% higher than FY11, but NPAT was down 4.6% to $104.6m. While this was the first decline in JB Hi-Fi NPAT since it listed in 2003, it was slightly better than the market had anticipated and, as I write, the share price is up over 6%.
As value investors, we are more concerned about the long-term than the intra-day outlook, and the question exercising our minds is: to what extent are the current headwinds cyclical vs. structural?
JB Hi-Fi believes that most of what is happening is cyclical, and there is some evidence that can be marshaled to support that view. However, it can also be said that retailers who previously competed locally must now compete with the best in the world. In this context, retailers that must pay Australian prices for rent, staff and utilities have some relatively big hurdles to clear.
Investors should also be aware of two interesting financial developments. Looking at the Profit & Loss statement you will see EPS has risen from 101.76 cents to 105.93 cents.
But the charts of EPS in the remuneration section reveal a very different picture. You see, the P&L includes an abnormal loss of $33 million associated with the Clive Anthony’s ‘restructure’. Take the abnormal loss out and the continuing operations made EPS of $1.247 in 2011 against this year’s $1.059. If it was ok to use $1.247 for the execs in working out their incentives, it should be ok for shareholders to use to compare this year’s P&L!
And for those investors enamoured with cash flows, don’t get too excited by the cash flow from operations jumping to more than $215 million from $105 million last year. You see, there’s been a $100 million blow out in payables. In other words JBH appears to have held off paying its suppliers a little longer.
Leighton’s half yearly results grabbed headlines when they reported a 66 per cent drop in interim net profit to $114.6 million, at the low end of guidance.
For 24 months, we have been warning investors about the company’s difficulties in collecting receivables in the Middle East and the likely writedowns of the Desal Plant in Victoria and the Brisbane Airport Link. And now a string of results are revealing that these issues are savaging the company’s profits which for the most recent half, were down from $340 million in Leighton’s previous first half, the six months to December 31, 2011.
But the problems may not be over. The early traffic numbers out of Airport Link are much worse than expected – even though the opening of the link has allowed drivers on the road for free – the project may go bust like other toll roads before it. We believe Leighton’s have a deferred equity contribution requirement of $200 million that may still be required to be paid.
In the Middle East, Leighton’s has not been paid for a number of projects and they aren’t small. Imagine building an equestrian centre (see image) and failing to be paid. It would send most companies bust.
BREVILLE (BRG)
Both Breville Group (BRG) and Flexigroup (FXL) saw solid gains yesterday.
Breville’s share price hit new highs in terms of price (not that we’re looking of course) in anticipation of a solid result. EBITDA was previously forecast to be in the range of $65 to $67 million but not long ago the company upgraded guidance to $71 to $72 million. Investors who are focusing on depressed local retailing and consumption need to have a look at the US retailing index which is up more than 275% since the March 2009 lows. More than half the company’s revenues now come from outside Australia, with roughly a third coming from North America, and growing despite the weak US economy.
FLEXIGROUP (FXL)
Two days ago, Flexigroup announced that it had successfully priced AUD255m of asset-backed securities, supported by a pool of Australian unsecured, retail, “no interest ever” payment plans, originated by Certegy Ezi-Pay Pty Ltd (“Certegy”), a wholly owned subsidiary of FlexiGroup Limited.
This securitisation of Certegy receivables is part of FlexiGroup’s strategy to diversifying its funding sources by regularly accessing wholesale capital markets. The term securitisation is FlexiGroup’s third and its also the second rated by Moody’s.
According to Spencer Wilson, Associate Director in Fitch’s Structured Finance team, “A valuable tool in Certegy’s underwriting strategy is its access to large volumes of historical data, which is then used to identify key risks across product types, demographics and borrower types,” adding “This transaction follows on from the Flexi 2011-1 deal, with notable features being the short weighted average life of the receivables, small contract size and significant levels of excess that are available to offset potential losses”.
Many believe that understanding economics is the key to being able to predict the stock market. Curiously the Chinese economy is growing the fastest of all economies and is variously described as the global growth engine. And the Chinese ripples positively impact many peripheral economies too, as my recent visits to Singapore have shown me.
Meanwhile the US economy is in the doldrums, threatening to fall into another recession with anemic growth, stubbornly high unemployment and continued weakness in housing.
And yet the Chinese market as measured by the Shanghai Stock Exchange A Share index remains 65% below its high of 6391.98 in October 2007. Perhaps ironically the S&P500 made its high of $1565.42 on October 10, 2007 and today it sits just 11% below that. If the Total Return index is taken into account, its sits level or just above its 2007 highs.
So all that chatter about recessions, depressions, unemployment and the like counts for very little. How many children are suffering needlessly because the money spent on economists isn’t directed to the kids?
What we do know is that investors should be looking at individual companies. Or talking to people on the ground. In China, balance sheets are deteriorating as receivables blow out while in the US, of the 411 companies listed on the S&P 500 that have reported earnings so far this quarter, 297 have exceeded analysts’ estimates, while less than 110 have missed their forecasts. And as many of our travelling clients have informed us, things seem to be swimming along in the US.
Keep an eye on individual companies and you’ll go far. So don’t worry about whether you should say Go Australia or not. We say Go ARB, Go WOW, Go CCP, Go COH and Go CSL!
Alternatively, if you would like to pre-register to be contacted when the fund re-opens to investment visit www.montinvest.com and select Apply to Invest.
Fig 1. Selected Australian Long Only Equity Funds as reported by Mercers and compared to The Montgomery [Private] Fund.
