QAV 550 

Cameron  00:07

Welcome back to QAV. This is Episode — what is this episode? This will be 550. And I’m recording this on the 20th of December 2022. It’s that time of the year when Tony is back down at Cape Schanck, he’s playing a lot of golf. I like to give him a couple of weeks off, so he doesn’t need to think about QAV for a couple of weeks. There’s not many questions coming in from our QAV club members this time of the year, I guess people are busy finishing up work and school holidays and going away, whatever they’re doing. Getting ready for Christmas. So, what I tend to do is a bit of a compilation for a week or two. And, you know, I was not really sure what to focus on this year. I think last year I focused on iron ore and its travails over the course of the year. This has obviously been a bit of a tricky year for investing; the market started to correct in April as a result of, among other things, the war in Ukraine. And there’s been the whole COVID thing in China and everywhere else, and supply chain issues, all those sorts of things; Labour shortages, interest rate rises around the world, fears of global recessions. But what I decided to focus on was Tony’s history of doing pulled porks. So, we joke a bit on the show that when Tony does a pulled pork he puts the kibosh on a stock, because it seems that sometimes they crash after he does a pulled pork on them. So, I thought I would go back in time, jump in the TARDIS, and have a look at some of the stocks that he did pulled porks on at the beginning of 2022 to see how they fared over the course of the year. Am I imagining it, the Curse of the pulled pork kibosh, or is there some legitimacy to Tony’s dark, magical powers? So, that’s what I’m going to do this week and maybe next week. So, this first clip is from QAV 500. This is an episode that we put out at the beginning of 2022, January 5, 2022, first week of January, and Tony is doing a pull pork on CIA, Champion Iron. On the fifth of January, the price of Champion Iron was around $5.68.

Tony  02:43

Well, I actually prepared to do CIA, Champion Iron today as our pulled pork, which people can refer to as last week’s stock of the week if you want.

Cameron  02:52

Oh, you’re gonna do a pulled pork. Okay. 

Tony  02:55

Yeah, about four years ago, three or four years ago, they bought a mine called Bloom Lake and did a good deal on that, the prior owner had spent a lot of money upgrading it and then decided to divest it and sell it. The thing about this particular iron ore mine – and they do have a couple of other ones operating in Canada, but bloom Lake is the main game for them – it’s, it’s an iron ore producer that produces very high-quality iron ore, among the highest quality in the world, which is important from reducing emissions side of things. So, Champion Iron positions itself as, as the, I guess, the way of the future for iron ore mining. And as we know, steel production is a big carbon emitter. One way that the steel industry is reducing emissions is they’re moving across to electric arc furnaces instead of using the normal coal power blast furnace. It still does use coal, but it uses high quality coal. So, you can’t do electric arc furnaces with low quality coal, like Fortescue Metals Group produces. And so, as steel companies try and reduce their emissions, they move across to this different type of furnace, which needs a higher grade of iron ore. So, that’s the sort of value proposition for this company. They also trumpet the fact that because they’re in Canada, and a lot of the electricity in Canada is, is either hydro or nuclear, they’re also a low emission miner, as well in their own neck of the woods. So, that’s kind of their value proposition. Going through the numbers, it’s scoring well for us, average daily turnover is 8.3 million. So, it’s a large cap company. Share price that I used in this analysis is $5.44, and that’s the fourth of January, I’m recording this, that share price of 544 is less than the consensus price target for this, or valuation for this company. Its financial health is strong and steady in Stock Doctor. Again, we don’t use ROE in our checklist, but just for people who are interested its 77%, which is quite high. And what we do use is a price to operating cash flow or Pr/OpCaf, which is only 3.3 times, and the PE is only 4.3. So, it’s certainly a value stock for us, even though it’s an overseas miner, and there’s currency risk, operating in Canada wouldn’t have much sovereign risk, I wouldn’t think, but not sure why the, the Pr/OpCaf is so low on this one. The price is also less than IV1 and less than half of IV2, so it scores well on both those metrics. The forecast growth in earnings per share is down slightly – down 18%. So, we get a minus one for that, because if you put the growth over the PE it’s, it’s negative. There’s no yield, so we don’t score for that. Directors are holding 10% of the company, so we’re scoring it for that. It’s, in terms of the manually entered data, it’s the lowest PE for the last six halves, so it scores well for that. It’s increasing net equity, so it scores well for that. All in all it’s a quality score of 92% which is high and a QAV score of 0.28. 

Cameron  06:05

And it’s up 3% since it was our stock of the week last week, so good on you, CIA. Good call last week, Tony.,. 

Cameron  06:16

So, how did CIA do after Tony did the pulled pork? You know, I’m always joking that the pulled pork is sort of the kiss of death for stocks in our portfolio. We own them, and then when Tony does a pulled pork they often crash. Well, as I said, fifth of January it was about $5.68. It had a good run up until, you know, even though the market started to tank in April or the fourth of April, it was up around $8; $8.06 on the fourth of April, which is quite a good run over the first few months of the year. By the eighth of June it was still at $7.76 and then, I guess, iron crashed, and it fell down to $4.50 in August. Stayed down there through to September, but in the last month, like in December, it’s shot back up. It’s now around about $7 today as I record this on the 20th of December. So, you know, if you’d held it from $5.60 through to today and not even sold it, you’d still be doing okay. It did have a rough patch there for a few months, and we probably would have sold it when iron ore became a sell. Even if we hadn’t it would have probably breached one of its own selling conditions, but it has recovered. What is next in the historical pulled porks I wonder? Ah yes, so episode 501 we put out on January 18, 2022, and Tony’s pulled pork for this one was ANZ. Now if I go and have a look at the ANZ share price back in January it was tracking around $28 on the 18th. Yeah, $28.75. So, let’s see what Tony had to say about ANZ 

Tony  08:17

Alright, stock of the week. ANZ.

Cameron  08:21

Never heard of them. Who are they, Tony? What, what is this thing you call ANZ?

Tony  08:26

Australia New Zealand Banking Group, and everyone will know who ANZ is if you’re an Australian listener, or a New Zealand listener, one of the big four. Couple of things that people may have, may have missed if they weren’t reading the Fin Review over Christmas. There is some speculation around that the, I guess well respected CEO, Mr. Elliott, may retire in 2022. He will have been there I think for six or seven years by then. He was brought in, I think he may have been the CFO, Shane Elliott – uh, Shayne Elliott? I think it’s Shayne Elliott – before taking on the CEO role, then spent most of his early tenure unravelling the prior CEO’s expansion into Asia, which had some mixed success. So, he brought all of that capital back where it was earning a better return in the Australian franchises. And then during the Hayne Commission, I think probably out of the CEOs of the banks, probably did okay, or the best in terms of you know, he always was very, quite, humble, and was listening to what the, what Mr Hayne was saying, rather than – which was not always the case with some of the bank CEOs who, and some chair people who sometimes got a bit bolshy with the Hayne Royal Commission, much to their detriment. I guess that’s by the by, a CEO change can cause volatility in a company’s share price, and this could all be nine months down the track, but I do raise it as probably one of the impending issues for ANZ. it can cause the share price to be volatile for a couple of reasons; if they promote from within, then chances are the people who were on the list and thought they may have got the gig may get upset and leave, which could cause some reorganisations in the management, if not the business units, but if they employ someone from outside that could have a surprise effect, good or bad on the stock price. Most times good but can go either way. But either way, whether they employee from within or from without, oftentimes a new CEO will spend the first sort of three months working out how to best position the company for themselves – and I’m being a bit cynical here – but I’ve often seen a new CEO come in and take lots of write-downs, blame it on the last guy, and really clean up the balance sheet so that they can put a floor under their options going forward and make sure they make the most money out of all their incentives. That’s probably their only opportunity to clean decks, if you like, and shake out the skeletons, and take all the provisioning that the last guy may not have wanted to because it would have affected the share price. So, the share prices can often go down soon after a CEO is replaced, but not always. So, just an observation and something to be aware of if you’re thinking of investing in ANZ. The business itself, I mean, it’s one of the big four banks; every one of the big four banks really has a specialty, like a strength compared to the others, and in ANZ’s case there’s a couple. They are the biggest New Zealand Bank, which is a big money spinner for them. They are big in credit cards, and always have been, mainly because of the Qantas Frequent Flyer programme which they’ve been linked to for a long time. So, there are a couple of strengths, and their strength is still in the Asia-Pacific region, particularly the Pacific region. So, they still have probably a bigger market share in certain jurisdictions overseas than their competitors. So, they’re the strengths of ANZ. I think it’s coming onto our buy list now probably because it’s the cheapest of the, of the big four banks. Certainly, on a PE ratio basis, it’s the lowest of the big four and I’ll get into the numbers in a minute. But I raise this because there’s been like a, I guess, a shorthand way of investing in banks on the ASX for a long time, and that’s basically just to invest in the, in the bank with the lowest PE ratio. And that way, you’re always kind of buying the bank with the biggest value and as it sort of cycles up in share price and the PE raises, you sell it and you buy something else with the lowest PE, because big four banks are not a whole lot of differentiation between them. So, in some respects it doesn’t matter which one you buy, but relatively it does and buying the cheapest PE’s always been a good sort of way to invest in the banks and really the ASX in general going forward. There are these sort of shorthand ways that the experienced operators get to know over time doing things like what they call pairs trade. So, if you an industry like banking, if you want to buy the bank with the lowest PE, then you might want to short the bank with the highest PE and so you benefit from that cyclical sort of rerating of stocks. And the highest PE bank is CommBank at the moment, and there’s a question coming up later on about CommBank went down in the last quarter – and I think probably one of the reasons for that is because it’s the highest PE of the banks and so people do kind of trade out of the high PE bank into the low PE bank. Yeah, so that’s by the by, but again, like buying listed investment companies when there’s a gap to their NTA, like buying the top 20 stock which has the biggest gap between its current share price and it’s IV 2, they’re all kind of shorthand ways of investing, especially if you don’t have much time to look at it and buying the bank with the lowest PE’s another one of those. Anyway, that’s, I guess, background information for the numbers and I’m doing my analysis based on the download I did on Sunday, when the price was $28.40. The buy price at that time was $28.10, but as I said, last time I had a look, it was about a cent or two below that. So, if it doesn’t turn up again this might be a moot exercise, but still worth doing I think just to run through the numbers on ANZ. It’ll probably come back on the buy list I would think. The other thing to mention about the big four banks is their yield, and ANZ’s no exception. So, it’s currently yielding 5.06%, and it’s fully franked, and if you gross that up its 7.23%. So, if you’re a retiree with a million dollars and want to live off the income, putting it into ANZ means you’ll, you’ll pick up $72,000 a year after tax, especially if you’re in a, like a self-managed Superfund where you’re getting a full rebate for the franking credit. So, the big four banks traditionally have been well supported by retirees, and that’s probably still going on today I would think based on those numbers. To go through the numbers, ANZ is a large average daily transaction stock, as you’d expect; $134 million is traded on average every day in it, so very, very big. It’s QAV score is 0.36, so that’s also quite high, especially for large cap stock. And it will be getting pretty close to the top of our buy list with that kind of score. And a quality score of only 64%, though, and that’s probably the, the area to focus in on. To go through the numbers, it’s slightly under the consensus target, so that gets a one for us. It’s a borderline Star Growth stock in Stock Doctor and it’s a Star Income stock, so both of those score 0.5 in our checklist. So, it gets a score of 1 for those two combined. It does have strong financial health, as you’d expect, and it’s been steady for a while, so that’s, they’re both good things for our checklist. As I said before, it’s the lowest of the PEs for the big bank, it’s PE is 12 or 12.5. I think Westpac is just slightly higher than that at around 13, but then CommBank is up around 20. So, it’s, they’re good – both ANZ and Westpac are a long way behind CommBank. And I think NAB has the highest at the moment, but that’s probably a bit anomalous; its PE is well over 100, so it’s probably just been going through some write-downs which are affecting its earnings, but I haven’t looked at NAB for a while, so I can’t really say. The reason why it’s coming up well for us at the moment, though, is its prop cap is 1.81. So, it’s, it’s priced operating cash flow is 1.81, which is very cheap. So, even though it’s quality score’s only 64%, it scores well for us because of its value dimension. The current share price, however, is greater than our IV1 but it’s less than our IV2, so it does score a point for that. It’s trading around book value, which is very interesting for a big company like this. So, net equity per share is $22.81, and book plus 30 is $29.66, and with the share price in the sort of low 28s, we can buy this for less than 30% plus books. So, this would be something on the Warren Buffett radar screen if he was investing in Australia I would think. On the negative side of things, though, the analysts are predicting a decrease in earnings per share of 5% next year, so that scores a -1 for us. And again, that’s a prediction so who knows how that will play out. But that’s what they’re predicting. The yield as I said before is good, certainly above the bank rate. It’s the old adage of investing in Australia is “don’t put your money in the bank, buy their stock instead”, because the yield is much higher than the, the term deposit rate from the bank itself. So, yield scores well for us. And it did, as I said, it did cross over on the weekend and gets a point for a new upturn. That’ll have to lose, we’ll lose that point though, if it does continue to stay below its buy line, obviously. Equity in the bank is not consistently growing, though, so it doesn’t score for that, and it’s not the lowest PE in the last three years so it doesn’t score for that either. And obviously, it doesn’t have an owner-founder – the bank was founded over 100 years ago – so no score for that. So, quality score is only 9/14, which is not the highest but certainly gets onto our buy list because of the price to operating cash flow. So, that’s the numbers for ANZ. A couple of other thoughts about the business itself, and again, this is getting into the story and the issues rather than the numbers, but just for some thought starters for people who are thinking of investing, if you look at the share price graph for ANZ it’s pretty much completed its recovery from the COVID cough and that’s where all the big gains were made in the Australian banks, and it’s back to sort of that same trendline that was before the original COVID downturn in March a couple of years ago. And it’s on a sort of gently sloping decline, so it’ll be interesting to see what the share price does from here, whether it sticks to that trend or whether it does continue with its up, upturn. And Omicron obviously may still cause it problems. I suspect with large increases in property prices, especially home property prices in the last 12 months or so, they should be reducing stress on the loan book for ANZ. And you would think, you know, again, who knows with COVID what comes around the corner, but you think that reducing stress on the loan book is always a good thing for a bank and they’ll probably take lower provisions for bad and doubtful debts, and potentially even start to write some of those back from their current balance sheet. So, we may see some improvement from here just based on that alone. So that’s, that’s ANZ bank, Cam.

Cameron  19:14

Alrighty. Yeah, well, I just checked the blog post I did for it on Monday, I did say that it could drop back below its sell line, not the buy line. But yeah, it’s dropped, I don’t know how far it is from its sell line today, but it was just above that, too. So…

Tony  19:30

Oh, okay, yeah, they’re pretty close. They’re both very similar at the moment, in terms of price, yeah

Cameron  19:34

So, how did the pulled pork kibosh go on ANZ? Well, as I said, the 18th of January it was trading at $28.75. It immediately crashed down to about $26.53 over the next week or two. So, that’s no good. Went back up to $28, dropped back down in March to $25, went back up to $28, and then, of course by the time the big market correction happened in April, it started to slide and went all the way down to $21.60 on the 15th of June. It has been, sort of, recovering slowly ever since. As of today, 20th December, its at $23.81. So, you know, if you’d bought it at $28, you would have got rid of it. It didn’t have a good year, ANZ. Not sure that’s completely our fault, but, you know, we have an enormous amount of power, of course, over the way that these stocks do, but you know, there’s also global economic factors that play into that as well. So, ANZ looked good on paper, hasn’t had a very good year on the stock market. Well, Episode 502 which came out a week later — I think this one was about 18th/19th of January, last one would have been a week earlier — Tony did a pulled pork on Beach Energy/Beach Petroleum, whatever it was called back then, BPT. Can’t remember when it changed its name. Now BPT back at the end of January, so the 18th of January, was trading at around about $1.45. So, let’s see what happened after Tony did his magic… 

Cameron  21:21

Beach energy, BPT, another one that we’ve seen come and go on a regular basis.

Tony  21:29

So, I’m going to make that my pulled pork, if I can do that now. So, as you alluded to, it’s been on the buy list in the past, and it’s back on now. The couple of things, I guess, as background for it. The oil price has been increasing recently, and that’s not unusual this time of year because it’s the northern winter, so they’re kind of a flip side of what we are in summer. So, in summer, our power stations work around the clock because everyone’s turning on their aircon units, but in winter, we don’t need much heating. But in Europe, it’s the reverse. So, in winter, the power stations crank up because everyone’s trying to heat their homes and getting less and less these days but certainly over the last couple of decades, a lot of the homes were being heated by burning fuel oil, a type of oil, like a low-grade oil. And so, the oil prices in the northern winter generally go up. So, it could be short term, but it’s also being supported by another thing that’s going on, a macro trend, which is the fact that because oil is on the nose in terms of the ESG investors, and even to the point where they pressure the banks these days not to lend to oil companies to try and reduce the carbon footprint of the world – and I’m not saying it’s a good thing or a bad thing – but there’s been less much less exploration in new oil discoveries in the last couple of years than is normal. And so, it’s one of the reasons why the oil price is going up because the existing producers have less competition. A couple of other factors too, like in the northern hemisphere winter, because oil is, when it’s being drilled, it often goes through reserves of water and pulls out water as well, it freezes, and the water if it freezes on the drilling rigs it can shut them down for long periods of time. And so that’s happening. There was apparently some kind of cold spell in Texas, which is unusual, but the oil rigs froze there, so they’ve been out of the market for a while. So, lots of things are going on to sort of keep the oil price elevated, which all plays into a good story for stocks like Beach Energy. They’re also a natural gas explorer and producer. Natural gas is a funny one because it’s actually better to power a power plant using natural gas than it is to use coal, but the ESG people still say they’re both bad. But there has been a, there still is an ongoing conversion of coal power plants to natural gas, so that’s also supporting the price and, and oftentimes contracts for a gas are tied to the oil price, so they tend to go in lockstep. But both of those commodity graphs are going up. So, that’s the background to Beach. A couple of things about Beach Energy. One of the reasons why it came off the buy list last time was because they had a surprise downgrade, they eventually got around to telling the market that they didn’t have as much oil reserves under the ground and they’re oil fields as they’d stated in the past, so that caused the price to crash. I guess that’s now baked into the share price, so the fact that it’s turning up again is taking that into account. A couple of other things, though. The MD resigned unexpectedly at the end of last year, so we need to be cognisant of that. I don’t think they’ve appointed anyone yet as an acting CFO, as an acting MD. So, that’s another risk, I guess, to the stock. The last sort of background story to the stock is that the Stokes family through their Seven Group company own about 30% of the stock. That can be a good thing and a bad thing. If you look at what they did with Boral, I guess in the short term, it’s good. I don’t know how it’ll play out in the long term, but what they have a track record of doing with other companies as well is buying a stake that gets them a seat on the board, and then using what’s called the Creek Provision to be able to buy more stock without launching a takeover – a formal takeover. So, one of the problems with a company like Beach, if it has a large shareholder on the base is that it makes it less attractive for someone to launch a takeover bid. So, even though the price crashed, and the fundamentals were still strong, and the oil price is rising, and there has been merger and acquisition activity going on in the Australian oil and gas scene, it makes it hard for someone to launch a takeover bid for something like Beach Energy. So, that takes that kind of upswing in the share price potential out of the stock. So, that’s an issue. And then if, if the Seven Group keeps creeping up on the register without launching a takeover, then they’ll get to a stage where they’ll effectively control the company. That can be good and bad. There’s a case in the past where it’s been bad, where the Seven Group then use their control to buy other assets they owned at prices that were probably unrealistic compared to what you get in the market and so the, the company became stuffed with assets, and eventually, I think it eventually went broke. I won’t talk about which company that was because I don’t want to be litigated against, but that’s essentially what happened. And, but in the other case of Boral, it seems to have worked out for shareholders because they did exert enough pressure to turn around the company, and so that’s working out there. So, it can be good or bad. So, I know I’m sitting on the fence with the Stokes owning 30% of Beach Energy, but it is something to watch and just be, be aware that it can have positive and negative implications for the company. That all aside, I guess we just go straight to numbers, that’s pretty much it, I was going to talk about the oil price a bit further and say that as the oil price rises, there’s been some stories in the press saying that some analysts are saying or can reach $200 a barrel, it’s now sitting around 80 odd, in the 80s a barrel. So, along with a lot of upsides. And they’re basing that analysis around the fact that, like I said before, less exploration going on, ESG squeezing on producers being able to explore and therefore the existing people should be able to command a bigger margin for what’s left. And that’s, there’s some certain truth about that. However, in the last decade or so, both Russia and the US have acted as kind of valves against the oil price going too high, because there are shale oil producers in the US who lie dormant until the oil price gets up around $100 a barrel, and then they come back on because they can make money at $100 a barrel. And so, they almost become like a pressure valve for the oil price getting too high. And Russia is a bit the same. So, they’ve done a deal now with OPEC to throw in with the cartel in terms of trying to regulate the price and keep the margin up, but they also have a history of going rogue when they need to sell lots of oil, which brings money to them but drops the price in the market. So, they’re the two, I guess, issues around the oil price. To me, all that summed up says that I think $100 is about the natural limit in this market to the oil price, but it’s a prediction that could be wrong. Anyway, QAV by the numbers are quite good for this company. I’m using a share price of $1.40, which is less than the consensus target for Beach Energy, so that’s a score of 1 for us. It is a low yield company, and I guess I question why it even has a yield – I think it’s about 1.5%. I expect the answer is so that they can release some of the franking credits on the balance sheet. They’ve been paying tax on their earnings and like they can release some of that back as a credit to their shareholders. They don’t want to pay a whole heaping yield because they do want to put money back into exploring for oil and developing their own oil and gas fields. So, that’s probably why it’s about 1.5%. Financial health is strong and steady, Pr/OpCaf on this one currently is 4.2 times, so makes a good value stock for us. The price is slightly higher than IV1, less than IV2 and less than two times IV2, so it gets a couple of points on the checklist for those things. Net equity per share is around $1.35, and as I said before the share price is $1.40, so it’s trading around its book price and certainly less than book plus 30%, which is a good test for us in terms of value, so it gets a point for that. The interesting thing is that the analysts are forecasting earnings per share growth of 60% on this company, so they’re certainly seeing, I guess the analysts are bullish on the oil price and they’re certainly probably also bullish on Beach Energy getting it’s shit together. So, that’s probably why it’s forecast growth’s so high. But it means it’s got the growth over PE metric that we look at, is quite strong, it’s greater than five times, which is very strong. Stock Doctor is stating that directors’ holdings are only 1.79%, which is a bit misleading because the Stokes family have, as I said before, 30% via their Seven Group company. And the Seven Group company has at least one director on the board and maybe even two. So, that’s a bit misleading. But if I override the spreadsheet and give that 1 it doesn’t change the QAV score very much. So, I haven’t, I’ve left it, left it down. But people may want to do that. It gets a zero for the lowest PE of the last six halves. It’s, it’s almost that but it’s not. Gets a 1 for a new upturn, because as I said before, it was crashing last year, it’s just been turning around since its last results were out. Gets a 1 for consistently increasing equity. So total score is 12 out of 14 for quality, which is 86%, which is good. And if you add the Stokes shareholding back, it’s 13 out of 14, which is even better. QAV score of 0.2, and 0.22 if you add the Stokes’ score back in. So yeah, for a large cap stock it’s certainly scoring well for us.


Cameron  56:34

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