Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience.
David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
Yesterday, the Reserve Bank of Australia cut their cash rate to 3.0%, down from 4.75% at October 2011, and the lowest level since mid-2009. Data points from manufacturing, the job market and the terms of trade are not cheery reading – all pointing to weaker GDP growth – and we expect the cash rate to fall further in 2013.
On 27 July 2012 I wrote “over the past fifty years, US housing starts have averaged 1.5m per annum. Currently starts are less than half the long-term average. Deutsche Bank is looking for US housing starts to jump to 1.0m by 2014 and to 1.4m by 2016 as follows”.
On Wednesday the Australian Bureau of Resources and Energy Economics said 51 mineral projects, 18 gas and petroleum projects and 18 infrastructure projects worth $268 billion had been approved. Of the 87 projects, 11 mega projects worth more than $5 billion each, account for an aggregate $200 billion or 75 per cent of the total committed project value. For some months now we have been warning investors of a growth cliff and note the slowing in the number of projects that have progressed from potential to committed. For example, in the six months to April 2012, 21 projects worth $45 billion were approved. However, in the six months to October 2012, 10 projects worth $13 billion were approved.
The daily lease rates for bulk carriers have risen by 20% to 25% in the past three months. The graph below details those daily rates for two categories of bulk carriers over the past two years; 28,000 dry weight tonnes which are around 170 metres long and 45,000 dry weight tonnes which are around 230 metres long.
The daily rates are currently US$6,550 and US$7,250, respectively, and reflect the perception China’s imports have recently recovered. For example, after three months of decline, China’s total coal imports hit 16.8 million tonnes in October 2012, up 13% from 14.9 million tonnes in September, and up 7% year on year.
The terms of the Budget Control Act of 2011 are scheduled to become effective at midnight on 31 December 2012. This will result in a 2% tax increase for workers, the end of certain tax breaks for businesses, the beginning of taxes related to health care law and deep automatic spending cuts. This would reduce the budget deficit by an estimated $560 billion or 3.7% of the $15 trillion US economy, however the Congressional Budget Office (CBO) estimates Budget Control Act would cut GDP by 4% and increase unemployment by at least 1% in 2013. The fiscal cliff is concerning investors and there is a strong possibility Congress won’t act until the eleventh hour.
The indecision is likely having an effect on the US economy as households and businesses “sit on their hands”. Walmart, for example, reported like for like US sales growth of only 1.5% for the three months to 31 October 2012. Their forecast for the three months to 31 January 2013 is for same store sales growth of between 1 percent and 3 percent.
Earlier this week The International Energy Agency released its World Energy Outlook. While total US oil and gas production is expected to increase 35 per cent from 17 million barrels of oil equivalent per day (mboe/d) in 2010 to 23 mboe/d in 2020, the transformation is explained by the expected 6 mboe/d surge in unconventional oil and gas production over this decade. Together with the widening of the Panama Canal by 2014, which will allow LNG Supertankers to travel to Asia from the Gulf of Mexico, the US could potentially turn into a cheap exporter of gas, in competition with Australia.
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The contractual nature of the resource service sector was highlighted with Emeco’s latest earnings downgrade. Their Australian fleet utilisation has declined from 91% in the 6 months to June 2012 to the current 66%. A combination of weaker demand, contract revisions, and contract non-remewals was to blame. Commentary particularly reflected lost contracts from the iron ore and coal industries. Expectations for the Company’s revenue line has been cut by 20% to around $550m for each of Fiscal 2013 and 2014, while net earnings have been reduced by around one-third to $51m and $58m, respectively. At the current share price of $0.51, some brokers are calling Emeco a buy as it is now selling on a prospective PE of 6X and a one-third discount to its net tangible asset backing of $0.76 per share.
Nevertheless, we remain cautious on the outlook for the resource service companies generally and believe investors should be wary of Emeco’s forecast $443m net indebtedness.
World Steel Production, according to Macquarie Equities, has been cut by 4 per cent to an average 1.7 billion tonnes per annum over the 2013-2015 period.
China’s steel production accounts for an average 760 million tonnes or 47%, approximately 50 million tonnes more than their forecast average demand.
Global mining capital expenditure is expected to peak in 2012 at $142b and decline by around 10% per annum to $115b by 2014.
Earnings downgrades are being experienced by major excavator companies like the Japanese listed Komatsu, where mining equipment makes up 30% of its US$22b revenue line.
National Australia Bank continued to suffer ongoing challenges from their Clydesdale and Yorkshire Banking subsidiaries, with reported net cash earnings for the year to 30 September 2012 declining by 0.5% to $5.443b. After contributing GBP183m in the previous year, NAB’s UK operations lost GBP139m. Charges for bad and doubtful debts soared by $793m to $2.6b. While average shareholders’ funds increased 7% to $43b, cash earnings on average shareholders’ funds declined by nearly 1.0% to 12.6%.
While the 7.0% dividend yield is attractive for retail investors, the National Australia Bank share price has been an enormous disappointment over the past decade and shareholders with long memories must be questioning the diversifications strategy which saw the purchase of Clydesdale Bank, Northern Bank (in Northern Ireland), National Irish Bank (in the Republic of Ireland), Yorkshire Bank and the US-based Home Side.
From Montgomery’s viewpoint, National Australia Bank received a B4 quality rating in 2004, and this was reaffirmed in 2007 and 2008. Its current quality rating is A4.
In releasing the Government’s white paper, Prime Minister Gillard told the Lowy Institute the 21st Century would see Asia’s return to leadership. Asia’s rise was “not only unstoppable, it is gathering pace.” Treasurer Swan said Australia “must continue building on our strengths to take advantage of the opportunities that are unfolding in the Asian region”. Large productivity gains is a major focus of the white paper.
Of the twelve separate categories that make up the rankings in the “Global Competitiveness Report” from the World Economic Forum, “Labour Market Efficiency” remains Australia’s nemesis. If our political leaders are serious about productivity gains and workplace reform, then our poor record in areas like burden of government regulation, wastefulness of government spending, flexibility of wage determination and infrastructure bottlenecks need to be urgently addressed.
