Downgrading!
According to one of our brokers, 127 companies have thus far announced downgrades for FY13. Throw Cochlear into the mix and that’s 128.
Now some of you might say, “There are almost 2000 stocks listed on the Australian Stock Exchange so 128 downgrades doesn’t amount to many.” Our reply is: of those 2000-odd companies, more than 1200 don’t make any money and companies that make no money don’t announce downgrades. In other words, the 128 downgrades is meaningful and it may be the tip of the proverbial iceberg.
The prospect of a slide towards recession – because government spending, consumption, residential construction and net exports might fail to fill the gap left by the dramatic decline in mining capital expenditure – suggests that investors should take a very careful look at their portfolios and ask whether significant premiums to intrinsic value are justified.
Of course sliding share prices present opportunities and if the pendulum swings too far…
So here are the 127 downgraders for FY13. And don’t forget to add Cochlear to make it 128.
Ariadne, Australian Agricultural Company, APN News and Media (second downgrade), ASG Group, Ausdrill (second downgrade), Ausenco, Australian Power, Bisalloy Steel, Blackmores, Boom logistics (second downgrade) , Bradken, Breville, Cabcharge, Cardno (second downgrade), Calibre, Clarius, Clean Seas Tuna, Chandler Mcleod, Chongherr Investments, Coffey, Coventry Group, CPT Global, CSR, DTQ, DWS, Elders, Ellex, Emeco (third downgrade), Engenco, Enero, Fantastic, Fleetwood (fourth), Greencap Ltd, Global Construction Services, GR Engineering, GUD Holdings (second downgrade), GWA Group, Hansen Technology, Hills Industries, Hudson Investment, Hunter Hall, Integrated Research, Jumbo Interactive, Konekt, Korvest, K&S Corporation, Lycopodium, Macmahon Holdings (third downgrade) , Mastermyne, Matrix Engineering (second downgrade), Melbourne IT, Miclyn (second downgrade), Moko.mobi, Mothercare, Noni-B (second downgrade), Norfolk Group, NRW Holdings, Nuplex, Oakton (third downgrade), Objective Corporation, Peet, Pharmaxis, Platinum, PTB Group, QXQ, Redflex, Reece, Regional Express, Resouce Equipment (second downgrade), Ridley, Rubicor, Ruralco, Saferoads, SAI Global, Sedgman (third downgrade), Servcorp, Service Stream, SMS Technology, Steamships Trading, Stokes, Structural Systems, Tel Pacific, Transpacific Group, Transfield (second downgrade), Virgin (second downgrade), VDM Group (second downgrade), Villa World, Vision Eye Institute, Warnambool Cheese & Butter, Watpac, Webjet, WHK Group (second downgrade), WDS Limited, World Reach, Zicom.
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.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
James Kennedy
:
N.b. I thoroughly, thoroughly enjoy reading your blog and watching your YouTube channel – both of which I check daily – and would like to apologise for free riding on so much intelligent discussion!
Quick question: is it still possible thesedays to get a signed copy of your book? I have been to its Amazon page, but I cannot find an option to put in a special request to the author…
James Kennedy
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Dear Roger, is it perhaps time to value some of these companies based on the likely proceeds from liquidation? With persistent capital management failures at many of these companies, some are worth more dead than alive…
A focus on firms trading at a very deep discount to NTA (and where the equipment or machines dominating the books have significant industrial uses beyond mining – i.e. should realize most of their carrying value), and also estimating redundancy payouts (workers have negotiated very favourable deals in recent years), *could* bear fruit could it not?
The other requisite factors to make this work that I can see are:
(1) Becoming a significant shareholder (a university student like myself cannot possibly obtain enough shares to force change at the board), and applying pressure if management & the board prove resistant to a wind-up;
(2) The likely delay between investing in the company and receiving the cash proceeds from liquidation;
(3) Alternatively, the need for a catalyst (PE takeovers of struggling firms with uneconomic asset deployment seems possible).
While recognising that it takes a fair bit of work to identify the rare deep-value gems that could realistically make a profit – and with a wide margin of safety thrown into the equation – would the Montgomery Fund ever be interested in it?
The Australian corporate landscape is littered with many lousy businesses, but few shareholder activists (the US has Bill Ackman, Carl Icahn). Roger, would you ever consider such a strategy?
Disclosure: I own no shares in any mining/mining services companies whatsoever, and do not plan to anytime soon. However I have spent weeks looking through the books, management and contingent liabilities of one firm which is trading at fair value based on extremely poor earnings but at under 20% of its NTA – this is, at most, 30-35% of what I estimate to be its minimum liquidation value.
Andrew Legget
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the “death” of the mining boom will create a bit of a problem, there are many other businesses which will be hit hard by this without explicitly being a mining or mining service company.
Just my opinion but i think that Investors could do well by taking the microscope to their businesses and see if their is a meaningful exposure.
Robert Devlin
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Roger, would it be time to consider reevaluating these mining stocks and take our losses and get what cash that remains into the safe haven of our SMSF bank account?
Is it also time to consider the option to take our profits in the shares that are still holding their own and have not posted a down grade so far for FY13.
Regards.
Rob
Roger Montgomery
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Hi Rob,
Can’t provide any advice of course but without knowing the mining stocks you own (we don’t own any), its hard to offer any insights…
Phil Crossan
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Further to that, of the around 800 companies that do make money, many of them are too small to be covered by brokers. Both HiTech Personnel (HIT) and MGM Wireless (MWR) issued statements during May 2013 that appeared to me to be downgrades of earlier FY 2013 forecasts.
Roger Montgomery
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great and valuable insight Phil. Thanks.
Sammy Giunta
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Hi Roger
I noticed overnight that Cash Converters has announced a downgrade of sorts as a result of new legislation impacting its Cash Advance product. Will somebody at Montgomery be writing an article over the coming days (or weeks) to explain what you believe will be the short and long term impact of these legislation changes on future earnings of CCV?
Much appreciated and great blog.
Roger Montgomery
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We have since spoken to CEO Peter Cummins at CCV and what we took away is that the issues affecting the payday lending business are largely transient and the business continues to grow – albeit at a slower rate than optimistic analysts were predicting. Take a look at the announcement and you will find a chart showing that May experienced a recovery.
Mike King
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There are actually only 95 companies in that list (not including Cochlear). Is the broker counting 2nd downgrades as another company?
Also, take out mining and mining services and there’s not a lot left, so it’s not really an indication of much of any trend. Add in those companies that perennially over-promise and under deliver and you are probably left with a handful.
Then take out those companies where brokers themselves were too optimistic when companies didn’t originally give guidance, but then were forced to.
It’s a pretty much one-sided argument with no perspective. How many companies have upgraded? How many of those downgrading, actually gave guidance in the first place?
Roger Montgomery
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Great questions to put to the broker. A flood starts with a drop and the sector that represents the drop is mining services. AAP reported yesterday “A new April record has been set for Australian companies becoming insolvent. Some 941 firms were put under administration, marking the highest tally for that month since records were first made public in 1999.
Some 941 firms were put under administration, according to an FTI Consulting analysis of Australian Securities and Investments Commission records.
Creditor wind-ups increased by 8 per cent, while voluntary administrations climbed by 16 per cent during April.
Insolvency levels rose in Victoria and Queensland but fell or remained steady elsewhere.
Almost 3450 companies have gone into administration so far this year, compared with 3524 during the same period in 2012.
But the number is higher than the opening four months of 2008 to 2011, which included the global financial crisis.”