Transcript QAV #607

QAV 607 CLUB

Cameron  00:06

Wel­come back to QAV. This is episode 607. We’re record­ing this on Valen­tine’s Day. Hap­py Valen­tine’s Day, TK. It’s 14th of Feb­ru­ary 2023, so we’ve got a lot of lag.

Tony  00:20

Hap­py Valen­tine’s Day to you, too, and our love­ly wives.

Cameron  00:23

Thank you. Yes. I know I ask you this every year, but are you cel­e­brat­ing Valen­tine’s Day this year?

Tony  00:28

No. Jen­ny walked into the apart­ment yes­ter­day with a bunch of red ros­es and I went “oh, they’re nice. What are they for?” I did­n’t even think about it.

Cameron  00:37

They were from you? You had your peo­ple send them?

Tony  00:40

No, no, no, no. They were from her.

Cameron  00:42

To you?

Tony  00:43

I don’t know. To her­self, I think. She’s pin­ing away, got her­self some flow­ers. And then about an hour lat­er I walked in and went, “I got it! That’s why you got ros­es. I’m sor­ry I did­n’t get you any­thing.” And she said, “that’s fine,” she said “I hate Valen­tine’s Day. I just saw these on the street and bought some because they look nice.”

Cameron  01:03

Right. Yeah, we don’t do Valen­tine’s Day.

Tony  01:06

So, she’s either being very diplo­mat­ic, which she does a lot. Or you’re right; we don’t cel­e­brate Valen­tine’s Day. How about you?

Cameron  01:12

No, we don’t do it. We think it’s a crock of shit. And it was Chris­sy’s birth­day a week ago, so, you know, we did a lot of stuff then and we’re not gonna do more stuff. Took her to Hamil­ton. We went out, it was good time. I’ll talk about it lat­er in after-hours. Won’t bore peo­ple with that. Let’s start off with maybe some port­fo­lio updates, I think, Tony. Let peo­ple know what’s going on. Let’s have a look at the… Well, the dum­my port­fo­lio, the QAV dum­my port­fo­lio for new lis­ten­ers, that’s been run­ning since begin­ning of Sep­tem­ber 2019. Accord­ing to Navexa, we are up 17.05% — that’s CAGR per annum — ver­sus the bench­mark, the STW, which is up about 7.93% per annum over the same peri­od. So, that looks good still. Of course, for the finan­cial year we’re still nowhere near the bench­mark. We’re up 6.41% for the finan­cial year ver­sus the STW, which is point­ing 21.2%. So, as we’ve been talk­ing about, it’s hav­ing a cork­er year; a lot of mon­ey flow­ing back into the mar­kets. It’s been kind of a crazy week, though: RBA. We men­tioned on our show last week that the RBA was going to come out with a rates announce­ment, inter­est rate announce­ment, and they did. They pushed it up yet again, and the mar­ket was shocked, sur­prised by this appar­ent­ly, Tony, because the mar­ket’s crashed.

Tony  02:42

Yeah. I think what they were shocked and sur­prised at is that they thought… I think 0.25% was prob­a­bly expect­ed, but it’s pret­ty dif­fi­cult to tell what the RBA is doing, but the mar­ket kind of formed the opin­ion that we’re nowhere near the end of rate ris­es. Which is one of the things that the mar­ket had been reach­ing as a con­sen­sus ear­li­er on this year, which is why the main index­es on the mar­kets around the world have been going up; because they think infla­tion is being tamed and we’re get­ting close to the end of rate ris­es, and maybe even some rate cuts. So, that was a rude awak­en­ing last week to the share mar­ket.

Cameron  03:21

Rate cuts, real­ly? They think we’re close to those.

Tony  03:25

In the US. I mean, remem­ber that the share mar­ket is cast­ing a long shad­ow, to use Roger Mont­gomery’s words, and is look­ing nine months in advance. There was a school of thought — and I don’t know if that’s still the case now after the last Fed rate rise — there was a school of thought which said that infla­tion was com­ing under con­trol, we’re get­ting close to the end of inter­est rate ris­es, and if it looks like the Amer­i­can econ­o­my in par­tic­u­lar is about to go into reces­sion, there may even be an eas­ing in rates. That’s not so strong as an opin­ion in the mar­ket at the moment, in the last week.

Cameron  04:00

Well, appar­ent­ly the US mar­ket was up last night because the All Ords had a huge recov­ery this morn­ing. It had been going down­hill for the last three or four days and then spiked up this morn­ing. Every­one got all excit­ed, but it seems to have been com­ing back since then. So, at the moment, All Ords is trad­ing at about 7633. A week ago, it was at 7734, closed yes­ter­day around 7608, so it’s up a lit­tle bit but it’s kind of chop­py. I had to trade a bunch of things last week after the RBA announce­ment came out. And you know, we’ve had com­modi­ties that are strug­gling as well on top of that, but I guess it’s just busi­ness as usu­al, real­ly, isn’t it?

Tony  04:47

It is, yeah. And you know, a cou­ple of points; I sent you an arti­cle today about the RBA Gov­er­nor, I think there’s a bit of tur­moil going on at the Reserve Bank. I sus­pect the PR spin­ners over there are try­ing to keep him away from micro­phones and cam­eras at the moment since he gave some guid­ance in the past which said inter­est rates would­n’t rise until 2024, which has caused a lot of prob­lems for him in par­tic­u­lar, but per­haps for the econ­o­my as well. So, for the first time that I can think of after an RBA board meet­ing, he did­n’t come out and speak to the pub­lic. Now, he said, “okay, I did­n’t do it, but that’s because I’m going to to the Sen­ate esti­mates com­mit­tee this week, and all will be revealed dur­ing the ques­tion­ing at the Sen­ate’s Esti­mates Com­mit­tee.” So, okay, that nor­mal­ly hap­pens as well as the RBA fronting the media after a Bank meet­ing. The real­ly strange thing, which I think will prob­a­bly seal his tenure at the RBA as fin­ish­ing this year, is that he did­n’t front the media, but he went along to a meet­ing of all the big banks trad­ing — what do they call it? Their trea­sury depart­ment, the trea­sury traders — and spoke to them behind closed doors. And, you know, that’s not a good look. The bond mar­ket moved after that meet­ing, even though he put out a press release say­ing he did­n’t say any­thing more than what was said in the press release fol­low­ing the RBA meet­ing. But some­thing was said or inti­mat­ed or expressed or inferred at a closed-door meet­ing to move the bond mar­ket. So, I just don’t know what he’s think­ing. I mean, again, all of these things and nor­mal for an RBA gov­er­nor; he wants to move the bond mar­ket. If he can do by what they call “jaw­bon­ing”, talk­ing to peo­ple like bond traders, then great; he does­n’t have to put up inter­est rates. So, I don’t know what’s going on and what the strat­e­gy is. It just strikes me, any­way, as an out­side observ­er, that there’s a bit of pan­ic going on over there.

Cameron  06:57

“I’ve come about the watch, moth­er, the watch,” is what he said.

Tony  07:02

Yeah, well the RBA is under review, so the fact is this is all play­ing into the hands of a change in poten­tial­ly, you know, a big shake up at the RBA. Cen­tral banks around the world since about the infla­tion­ary shock of the late 70s have all had this dri­ving man­date of inde­pen­dence. You can’t make them polit­i­cal because then gov­ern­ments can move inter­est rates to suit their own agen­das, and I get that. But that argu­ment is also true for every oth­er depart­ment in the gov­ern­ment. Every oth­er depart­ment in the gov­ern­ment has a pub­lic ser­vice bureau­cra­cy admin­is­tra­tion under it pro­vid­ing expert advice, and it’s up to the politi­cians to decide how or when or what to do with that advice. Except for the RBA and inter­est rates. So, you know, I kind of like an inde­pen­dent expert pan­el set­ting inter­est rates for the econ­o­my. I think that’s not a bad mod­el, but it only works as long as they’re com­pe­tent, or appear to be com­pe­tent. There’s been a few, a few twelve gauges to the foot in the last cou­ple of years for the RBA. So, it may be that they get hauled into line and become a branch of the Depart­ment of Trea­sury, and then they’ll have a lot more influ­ence from the trea­sur­er on what inter­est rates are going to be.

Cameron  08:21

You think if the gov­ern­ment was run­ning it, it would be more com­pe­tent?

Tony  08:24

No, not at all. I actu­al­ly sub­scribe to the argu­ment that an expert pan­el is a bet­ter way to run things than a bunch of politi­cians. But, you know, the risk in our par­tic­u­lar polit­i­cal sys­tem is that even­tu­al­ly, you know, one gov­ern­ment of the day is going to get sick of the expert pan­el either being incom­pe­tent or going against what the gov­ern­ment wants, and they’re just gonna put their arm out and hook them back into being a branch of gov­ern­ment. And I’m not say­ing it will hap­pen, but it’s a poten­tial out­come for the review.

Cameron  08:55

Well, speak­ing of reviews, there have been a lot of what do we say? Con­fes­sions com­ing out of con­fes­sion sea­son. Guid­ance down­grades I think is the ter­mi­nol­o­gy that gets used. Star Enter­tain­ment, Star Casi­no’s share price col­lapsed by 20.5% when they said that they’re prob­a­bly going to have to cop an impair­ment charge for all of the dodgy shit that they’ve been doing. There was JB Hi-Fi.

Tony  09:23

Before we leave Star… I mean, first of all, it’s not on our buy list because it’s had a qual­i­fied audit for a while. So, that saved us from invest­ing in it, because I think it prob­a­bly would have been on our buy list oth­er­wise even though sen­ti­men­t’s been bad since the Roy­al Com­mis­sion. But, yes, they’ve got an impair­ment charge, but I mean, how lucky are they not to wind up with stripe suits on in the big house? That’s not me talk­ing, there was a judge I read in the Fin Review today who just said, “what the hell are you guys doing? You’re the gov­ern­ment reg­u­la­tor look­ing after casi­nos. It’s tak­en a year now and you still haven’t start­ed pros­e­cu­tion against them. Pull your fin­ger out and get going.” So, I think there’s been a fair bit of reg­u­la­to­ry cap­ture when it comes to, you know, gov­ern­ments reg­u­lat­ing casi­nos. And again, I’ll be care­ful of what I say, I don’t want to say much more than peo­ple have already said in the press. But you know, there’s a whole oth­er rea­son for it, and a whole lot of rea­sons why it hap­pens, and one of them, I sus­pect, is that they’ve been hor­ri­bly under­fund­ed. If the gov­ern­ment of the day does­n’t want the gov­ern­ment to reg­u­late some­thing, they put one guy in a, you know…

Cameron  10:31

In a broom clos­et.

Tony  10:33

In a shared work­space out in the west­ern sub­urbs with a two hour com­mute every day, and that’s how they reg­u­late things.

Cameron  10:41

That’s the same guy that was appar­ent­ly run­ning Robo debt calls. We don’t know who he was, can’t find him, no record of him. Sor­ry, what? “Min­is­ter, did you know what was going on?” “No. What, me? No, I did­n’t pay any atten­tion to that, it’s not my job. Not my job.” Was­n’t Scott Mor­rison’s job to do any­thing about the fires and was­n’t that guy’s job to know any­thing about Robo debt either. Any­way, back to con­fes­sion sea­son; JB Hi-Fi warned about slow­ing sales growth. Their share price took a 5.6% hit. Super Retail were down, Bap­cor were down. Fletch­er Build­ing skid­ded 5.3% after issu­ing guid­ance down­grades. Ori­on Hold­ings was down 6.8% after guid­ance down­grades. So, it’s been a lit­tle bit chop­py out there this week.

Tony  11:33

Yeah. So, I think it’s Aur­i­zon Hold­ings which is the coal haul­ing com­pa­ny.

Cameron  11:38

Aur­i­zon. I copied this from Aus­biz, Aus­biz had a typo in there then.

Tony  11:43

Yeah. Any­way, just to clar­i­fy that it’s Aur­i­zon. I think the inter­est­ing one is JB Hi-Fi. It’s a real­ly well-run com­pa­ny, and it was only last month that, you know, we were all say­ing, “look how great the results are going to be for retail­ers,” because all the retail traf­fic is up; prob­a­bly on the back of peo­ple’s shop­ping more with COVID because they can’t go over­seas and they’ve got more cash to spend. Now inter­est rates are bit­ing and peo­ple are form­ing a dif­fer­ent opin­ion as guid­ance is giv­en. So, that all makes sense, but it does point to how ris­ing inter­est rates are gonna bite in the econ­o­my. So, that’s going to be the fea­ture of this report­ing sea­son, I think, and every­one’s going to very care­ful­ly watch sup­ply chain increas­es in costs. If it’s a retail fac­ing com­pa­ny, what’s the con­sumer doing? What’s foot traf­fic like? What’s like for like sales like? All that kind of stuff. Yeah, I mean, sur­prise, sur­prise, when inter­est rates go up, the econ­o­my slows. That’s why the RBA does it. Whether that’s going to solve infla­tion or not, I’m not sure, because as prices go up peo­ple also put in more demands for wage growth. So, that could just be a start of a cycle, too.

Cameron  12:52

Speak­ing of sup­ply chain issues, I not­ed that the CEO of JB Hi-Fi, I believe it’s Mr Smart, said that they don’t have any sup­ply chain issues any­more. Every­thing they want they can get. That’s all stream­lined and run­ning well now. I’m not sure if that’s true across all indus­tries, but that was inter­est­ing to read this morn­ing.

Tony  13:15

That’s a pos­i­tive note, because if that’s the case I think that infla­tion will come down whether the RBA is right to raise inter­est rates or not, because that’s one of the prob­lems. On the oth­er hand, I did notice as well that OPEC have put the oil price up and Rus­sia has fol­lowed suit, so at least that part of the econ­o­my is still going to get stung with high­er prices for a while.

Cameron  13:36

After Joe Biden appar­ent­ly fist bumped MBS and asked him not to put all prices up, he did it any­way.

Tony  13:46

Yeah, what’s the price of a fist bump these days amongst friends.

Cameron  13:50

Let’s talk about the ther­mal coal sell line. Dar­rell asked on Face­book what the sell price for ther­mal is. I plugged the num­bers into the 3PTL cal­cu­la­tor. I get $172.95 as the sell price, do you agree?

Tony  14:10

Yeah, I haven’t plugged it into the spread­sheet, but just using a line on the graph I got some­thing just south of 200. I had a look again today, it was around 175–180, so, yes, I do agree. I think it’s about right.

Cameron  14:23

So, it’s been a bit bit rough for our ther­mal coal com­pa­nies out there, NHC in par­tic­u­lar. WHC, they’ve been tak­ing a beat­ing. YAL anoth­er one.

Tony  14:36

Yep. It’s an inter­est­ing graph. I did fudge it a cou­ple of weeks ago, in which case it would just be a sell now. So, again, it’s one of those U‑shaped bot­toms to the graph. So, whether you take an 8% flat bot­tom or increase it a lit­tle bit more, it becomes mate­r­i­al to where the sell line is. So, you’re right to say it’s in the mid 172 or what­ev­er the num­ber is, 180 as the sell price. But, you know, if that’s wor­ry­ing peo­ple out there, they could fudge it. You’d get a sell price now if you change the flat bot­tom per­cent­age lit­tle bit. But either way, I’m going to stick with the cur­rent sell price. I think there’s room for the coal prices to bot­tom out and come back up. I’ve got no real sci­ence for that, but that’s the whole rea­son for stick­ing with a com­mod­i­ty when it drops. It’s hard because the share price is going down for the min­ing stocks that you own, but you must be get­ting clos­er to the bot­tom every day it gets clos­er to that resis­tance line. I did read a report from Ord Min­nett, so from Alex Hay’s firm of stock­bro­kers, on research into the coal price — and they do a lot of work on how much sup­ply is in the sys­tem, which com­pa­nies have what stock­piles, what’s dri­ving demand, all that kind of stuff. And they said that they think the bot­tom of the coal price is going to be between $180 and $200. But you know, that’s their mod­el and that’s their fore­cast, so who knows. But with a such a steep decline we should be get­ting to a bot­tom fair­ly soon I would have thought.

Cameron  16:07

Right, so you’re stick­ing with the cur­rent sell line. You’re not fudg­ing it at this stage?

Tony  16:12

Yes. And I came close to a rule one sell with White­haven Coal last week, which was one of the rea­sons I was focus­ing on the coal price. But it has gone up again since then. So, you know, that’s the oth­er thing to take into account, is that the share price of the min­er should reflect the share price of what peo­ple think’s going to hap­pen with coal. So, regard­less of what Ord Min­nett think or what we think is a three-point trend line sell, the share price of White­haven is still going up and some­one or the mar­ket out there thinks that the price is going to rebound.

Cameron  16:42

Well, speak­ing of rebound­ing, I just want to remind peo­ple that div­i­dend sea­son, we are in. So, before you sell any­thing, just check the div­i­dends. I got a sell on my alert today for VUK, Vir­gin Mon­ey, but luck­i­ly, I checked in it has gone ex-div on the 9th of Feb­ru­ary. Pay­ment date is the 15th of March. When I plugged the div­i­dend in it was no longer a sell, although I see it seems to have dropped again since then. Oh, it’s up 1% today, so it’s still pret­ty close to rule one for me, even with the div­i­dend fac­tored in. But just a reminder: check your div­i­dends before you pull the trig­ger on any sells out there. You don’t want to shoot your­self in the foot with that.

Tony  17:39

No. It’s hap­pened to me in the past over the years, and there’s noth­ing worse than sell­ing because the price has dropped quick­ly and then two months lat­er get­ting a div­i­dend check and going, “oh shit. That’s why it dropped. Now I under­stand.” Yeah. So, add the div­i­dend back to the cur­rent price and see if it still breach­es the sell line for you. And even I tend to add back the frank­ing cred­its, because they’re worth some­thing as well.

Cameron  17:39

Yeah, I have that all built into my sheet now, that auto­mat­i­cal­ly cal­cu­lates that for me because I tend to for­get that, too. Let’s talk about CDM. I noticed CDM on the buy list this week, and when I looked into it, it’s a CDL. What? It’s an LIC. What the hell is a CDL? I don’t even know what that is. CDM is an LIC. I’m suf­fer­ing from three let­ter acronym dis­ease. Cadence Cap­i­tal, CDM, got any idea why it might not be get­ting fil­tered out in our fil­ters?

Tony  18:38

Well, it’s def­i­nite­ly an LIC, a List­ed Invest­ment Com­pa­ny. I think the rea­son why it’s not being fil­tered out is that the major­i­ty of LICs don’t get what’s called a GIC code, which is how the ASX allo­cates stocks to dif­fer­ent indus­tries. And we fil­ter out all the ones that don’t have a GIC code. But I have noticed a cou­ple get called diver­si­fied finances, so they get lumped in with the likes of Cred­it Corp and actu­al trad­ing oper­a­tional finance com­pa­nies and sneak through on that basis. So, it should be removed. And just for a recap, we don’t like putting LICs on the buy list because one of our major met­rics to decide whether to buy or sell a com­pa­ny is based on oper­at­ing cash flow, and for ETFs and LICs that can be affect­ed by oth­er things besides the prof­itabil­i­ty of the under­ly­ing com­pa­ny. Like share redemp­tion, share buys, etc.

Cameron  19:36

Stock Doc­tor even says, “CDM is a List­ed Invest­ment Com­pa­ny, and as such does not have a finan­cial health rat­ing. LICs are effec­tive­ly man­aged funds and are not actu­al com­pa­nies. We can only assess finan­cial health and our growth and/or income Gold­en Rule cri­te­ria on an actu­al busi­ness, not a fund that sim­ply holds invest­ments.” So, sim­i­lar sort of posi­tion to us, right?

Tony  19:57

Sim­i­lar thing, yeah.

Cameron  19:59

So, just take note of that, folks. I’ll try and make a note on the buy list for next week to remem­ber to remove CDM if it keeps crop­ping up.

Tony  20:10

And look, no dis­re­spect to Cadence Cap­i­tal. It’s been around for a long time, it’s, you know, a well-estab­lished List­ed Invest­ment Com­pa­ny. It just does­n’t fit the pro­file that we use to val­ue com­pa­nies, so we exclude them.

Cameron  20:23

What else have you got on the news of the week, TK?

Tony  20:26

Yeah, so, only gonna say that there was some­thing else to talk about with White­haven Coal. I did notice last week that a large share­hold­er sold a stake, so that is per­haps why it did start to flirt with my rule one sell line apart from the fact that coal price is declin­ing. And the fact that trade went through, and every­thing’s hunky dory might mean that’s why the share price has gone up this week even though the coal prices still declin­ing. So, even though min­ing com­pa­nies gen­er­al­ly track the under­ly­ing com­mod­i­ty, there is oth­er cor­po­rate activ­i­ty which can change that. But gen­er­al­ly, gen­er­al­ly they do. So, that’s White­haven Coal. A cou­ple of com­ments on the pulled pork. I did a pulled pork on Chan­nel 7 recent­ly, Sev­en Media I think it’s now called, and noticed in the last week that they, at least invest­ment bankers, are float­ing the idea of a merg­er between HT&E and Sev­en, and the share price has gone up a lit­tle bit this week. So, the curse of the pulled pork might be in abeyance for that one. I’m gonna do a pulled pork on Fletch­er Build­ing, and luck­i­ly, it’s Feb­ru­ary 14 and not Feb­ru­ary 13, because they came out with a prof­it down­grade yes­ter­day. So, maybe when some­one request­ed a pull pork on FBU the mar­ket heard and sold the shares in between.

Cameron  21:42

Well, the share price for Sev­en West Media is not doing great either. A week ago, it was trad­ing at 47.5 cents, it’s now trad­ing at 43. It crashed down yes­ter­day and today, so it was a delayed reac­tion to the pulled pork on that one.

Tony  21:57

The curse is alive and well, then.

Cameron  22:00

Yes, it is. And yeah, poor Fletch­er Build­ing.

Tony  22:04

In terms of Sev­en, I’m not sur­prised that there’s going to be some M&A activ­i­ty. It’s an indus­try fac­ing a lot of head­winds. Com­pa­nies are just… I mean, every com­pa­ny looks for growth, and if you’re not get­ting it from your basic busi­ness anoth­er way to do it is to go and merge with some­one or acquire them or be acquired. So, expect to see a lot more activ­i­ty in the space. And speak­ing of that, I watched the Super Bowl yes­ter­day and noticed that Elon Musk was in a box sit­ting next to Rupert Mur­doch. And there’s a pho­to, actu­al­ly, of it, in today’s Fin Review. So, they had the same idea I did. So, the first thing I thought of was MySpace. Well, the sec­ond thing I thought of was, you know, two peas in a pod. Two Bond vil­lains get­ting togeth­er to rule the world. But yeah, you won­der why the own­er of Twit­ter is talk­ing with the own­er of News Corp.

Cameron  22:56

I know you don’t watch Suc­ces­sion, but that’s like some­thing straight out of suc­ces­sion. The old media guy meet­ing with the young whip­per­snap­per bil­lion­aire, and they’re try­ing to fig­ure out — this is the last sea­son — try­ing to fig­ure out who’s going to buy who and how it all fits togeth­er. They’re try­ing to fig­ure out a merg­er and, you know, who’s going to end up on top, and who’s try­ing to crash the oth­er ones share price so they can end up com­ing out on top of the merg­er and the acqui­si­tions? So, yeah.

Tony  23:26

Exact­ly. And so, it’ll be inter­est­ing to see if any­thing hap­pens. And also, who’s the smarter of the two. I mean, the last time we went around with the dot­com boom, News Corp bought Myspace and paid a lot and did­n’t get any­thing for it. So, hope­ful­ly they’re once bit­ten and twice shy if you’re a News Corp share­hold­er, but watch this space.

Cameron  23:44

Yeah. But the flip side of that argu­ment is Myspace was a poten­tial threat to News Corp, and it’s not any more. So, a lot of these I remem­ber from the original.com days, I remem­ber when the big retail­ers start­ed buy­ing com­pa­nies like Wish­list and D Store, and then just, “oh, yeah, no, we’re not going to change” was Rupert’s old line when­ev­er he would buy a news­pa­per. Like, “we’re not going to chat. We love what you’re doing. We’re not going to change the man­age­ment, we’re not going to change the edi­tors, the edi­to­ri­als. It’s all great, we just want to own it because it’s great.” And that would last six months to a year and then the Night of the Long Knives would come out. At least they would keep them on board, you know, but when the big cor­po­rates by the dot­coms they tend to just shut them down because they know the old world. They don’t know the new world, right?

Tony  24:40

Well, yeah, this is all spec­u­la­tion. I did also think that it’s inter­est­ing that one of the first things Elon did when he took over Twit­ter was to invite Don­ald Trump back on and to take all of the checks and bar­ri­ers away from free speech and hate speech and things like that, or most of them any­way, on Twit­ter. Which would be right up Mur­dock­’s alley, If he can recre­ate Fox News to the young kids on Twit­ter, that’s got to be attrac­tive to him.

Cameron  25:08

Yeah. Elon allowed hate speech unless it was a hate against him. He was kick­ing peo­ple off.

Tony  25:18

Yeah. And he put out a quiz or sur­vey say­ing, “should I run Twit­ter or not?” And every­one came back and said, “no, you’re an idiot.” And he’s still run­ning.

Cameron  25:29

Yeah, opin­ions are only worth so much, real­ly. Alright, so who are you going to do a pulled pork on today?

Tony  25:37

Quick. Grab your stock­bro­kers and get ready to sell: its Fletch­er Build­ing, FBU. And the only rea­son I’m doing this is because it was a request a week or so ago. So, thanks for the request. We were asked for two: Reg­is Resources or Fletch­er Build­ing, and I think Fletch­er Build­ing is more top­i­cal at the moment giv­en their results are out tomor­row and there was a down­grade announce­ment out yes­ter­day. So, we’ll talk about that. But also, too, it was still on the buy list. I’m not sure if Reg­is is on the buy list. So, I’m going to do Fletch­er Build­ing this week, and then I will do Reg­is next week.

Cameron  26:14

Good strat­e­gy to wait until the share price crash­es, then do the pulled pork so we can’t get blamed for the share price crash­ing.

Tony  26:25

Well, it’s a good strat­e­gy if you have a com­pa­ny, you’re a bit wor­ried about. Email us and say you want it to be done as a pulled poor, because then you’ve got at least a week to get out before we analyse it.

Cameron  26:35

Before we do it, yeah.

Tony  26:36

Let me just find my notes on FBY. But yeah, so Fletch­er Build­ing for any­one who does­n’t know is a large con­struc­tion com­pa­ny. It’s New Zealand based, but it also oper­ates in Aus­tralia. It’s one of New Zealand’s biggest com­pa­nies, so it’s con­sid­ered blue chip from that per­spec­tive. It also does retail build­ing prod­ucts, includ­ing con­crete, but also things like Laminex and oth­er, you know, build­ing prod­ucts that are used in build­ing new apart­ments. And it also is a devel­op­er, so it does also sell into the hous­ing mar­kets, retail hous­ing mar­ket. So, you do find if you have a look at their assets that they do land bank, and then they will build and then sell off devel­op­ments into the res­i­den­tial space. And that’s been good and bad for them, but they’re pret­ty good at man­ag­ing the cycle. One of the things that they spoke about dur­ing their con­fes­sion sea­son announce­ment yes­ter­day was oper­at­ing cash flow had been high in the last cou­ple of years, because with a strong res­i­den­tial mar­ket due to all the mon­ey stay­ing onshore dur­ing COVID and peo­ple work­ing from home and want­i­ng to buy big­ger and bet­ter homes, they were quite savvy in releas­ing land into that mar­ket and devel­op­ing res­i­den­tial lots and sell­ing them on. They’re now announc­ing they’re going to reverse that and they’re going to start refresh­ing that land bank now that prop­er­ty prices are com­ing off in the res­i­den­tial space. So, that will be a drain on oper­at­ing cash flow for the com­pa­ny going for­ward. And so that’s an inter­est­ing thing for us, because oper­at­ing cash flow is a big dri­ver of our val­u­a­tions for com­pa­nies. So, we’ll see what hap­pens. The num­bers I’m going to give you are based on num­bers which are now six months old, and the new num­bers are going to be announced tomor­row, even though there was some guid­ance giv­en yes­ter­day and the announce­ment. The guid­ance yes­ter­day was main­ly about six months hence, when the end of finan­cial year num­bers are released. So, the num­bers released tomor­row are for the half, and they should be pret­ty good. As they say, it’s been a strong half for them. It’s only going for­ward that they think they’re going to have a slow­down, and part of that rea­son­ing is because there’s been a lot of wet weath­er in New Zealand in par­tic­u­lar, in Auck­land, so, you know, my thoughts go out to our Kiwi mates that are doing it pret­ty tough over there with anoth­er rain — I would­n’t call it a cyclone, but anoth­er rain depres­sion hit­ting Auck­land pret­ty hard in the last twen­ty four hours. So, that envi­ron­ments not great for con­struc­tion com­pa­nies, they obvi­ous­ly send every­one home on wet weath­er days, and so they can’t do much work and that affects their bot­tom line. Again, that’s prob­a­bly tem­po­rary. So, you need to look through some of these things some­times. It’s always hard to know what to do, so that’s why we focus on the num­bers. I guess my rec­om­men­da­tion out of all this is if you hold FBU, wait and see what the results are like when they come into Stock Doc­tor in a cou­ple of days and then drop into our buy list. Have a look, see what the share price does. I’m doing this analy­sis today on Feb­ru­ary 14 2023. Share price is $4.43, and that’s only 20 cents above the three-point trend line sell. So, if the results come out tomor­row and they’re not received well, the share price could go below our sell line. So, that’s one thing to bear in mind. And it’s also cur­rent­ly a Josephine fol­low­ing the fact that it dropped I think about 7% yes­ter­day after the announce­ment was released. So, you would­n’t be buy­ing it today any­way. But yet, might be one to watch as we come out of the new results when they drop. The rea­son why I say that is it’s a well-man­aged com­pa­ny, and the QAV score for qual­i­ty is quite high with this. So, I’ll run through the num­bers now. It’s a large cap stock; ADT is $2.6 mil­lion, so that should suit almost all retail investors who should­n’t have any prob­lems get­ting in, and more impor­tant­ly get­ting out, with an ADT like that. The finan­cial health of this com­pa­ny is sat­is­fac­to­ry and steady, so that’s good for us. I do know that it’s sat­is­fac­to­ry and not strong, but sat­is­fac­to­ry still scores for us. But inter­est­ing to note when the results come out again, you know, if there is a dete­ri­o­ra­tion that could become less than sat­is­fac­to­ry which would reduce the score for us. This might be a prob­lem in Stock Doc­tor, but I did know that there’s noth­ing record­ed for direc­tors own­ing any shares, which I find quite strange. Not even the MD or the chair­per­son has shares, which they usu­al­ly get as part of their remu­ner­a­tion. So, could be the fact that infor­ma­tion sim­ply does­n’t make it through to the ASX, because this would be a dual list­ed com­pa­ny. So, you may have to dig around and find that out. But I would be sur­prised if there’s any own­er-founder of this com­pa­ny, it’s been around for a long time. Typ­i­cal­ly, a big blue cap com­pa­ny like this will have, you know, cor­po­rate types run­ning it now rather than founders. So, I’m not that wor­ried that we’re not see­ing in Stock Doc­tor. Pr/OpCaf for this com­pa­ny is cur­rent­ly 6.81, so it’s just with­in bounds for us. So, that’s again some­thing else to look out for when results come out. If the share price does drop, how­ev­er, that will help the Pr/OpCaf for this com­pa­ny. So, it may be one that we just watch for a while and wait for it to come back up again if it con­tin­ues to drop. ROE is only 11.6, and that makes sense because this is a cap­i­tal heavy busi­ness. And so, it does have a lot of assets and as I said a lot of land and equip­ment. So, you’re not going to get a great ROA off all that, and pos­si­bly not a great ROE. And plus, the con­struc­tion busi­ness as well as being cycli­cal is also fair­ly low mar­gins. Which is one of the rea­sons why large com­pa­nies tend to dom­i­nate, because they can weath­er the storm and sur­vive on thin­ner mar­gins. The price is cur­rent­ly greater than IV 1 but less than IV 2, so it scores one for that. Inter­est­ing­ly enough, the com­pa­ny has a net equi­ty per share of $4.34, so it’s trad­ing close to its book price, and cer­tain­ly less than book plus 30% which is $5.64. So, this looks like the kind of cof­fee shop, to use our anal­o­gy, that peo­ple want to buy based on the actu­al prop­er­ty rather than the under­ly­ing busi­ness. So, that’s inter­est­ing. But, you know, there are com­pa­nies which are val­ued on their assets and com­pa­nies which are val­ued on their dis­count­ed cash flow, and this is one of which appears to be trad­ing around its book val­ue. So, that’s a score for us on that basis. The oth­er inter­est­ing thing about the cur­rent sit­u­a­tion any­way, and it may change in a cou­ple of days, is that the earn­ings per share growth is still in Stock Doc­tor to be fore­cast to grow 23% when the finan­cial year con­cludes in June ’23. I sus­pect that will prob­a­bly change, and the rea­son I say that the fore­cast growth is based on earn­ings per share, and we don’t have a guid­ance for earn­ings per share from the com­pa­ny in yes­ter­day’s announce­ment. What we do have a guid­ance for is for EBIT, and the EBIT guid­ance was between 600 and 660 mil­lion. Six months ago, at the last finan­cial year results it was 550 mil­lion, so that’s not a 23% increase in EBIT. And there’ll be some slight dif­fer­ences, but EBIT growth gen­er­al­ly tracks earn­ings per share growth. So, we may see that fore­cast revised down. But at the moment, this com­pa­ny is yield­ing a high yield which is above the bank rate of 7.81%. So, inter­est­ing­ly enough, we have a high growth stock and a high yield­ing stock, which is kind of a nir­vana for a com­pa­ny. I sus­pect one of those will change, and I sus­pect it’ll be the the fore­cast growth which will drop based on yes­ter­day’s announce­ment and prob­a­bly based on the num­bers when they drop into the spread­sheet tomor­row. So, watch out for that. Some­thing else that will change is that it’s still record­ing a one in our spread­sheet in our man­u­al­ly entered data because it was a new three-point trend­line upturn after its last results, and it will lose that sta­tus most like­ly tomor­row unless the results are well received, and the share price ticks up again. I expect it to get back to a zero score for us going for­ward. All in all, though, the qual­i­ty score for this com­pa­ny is 15 out of 16 items which is 94%, and the QAV score is 0.14, which puts it towards the bot­tom of our buy list, which means that it could well drop off the QAV buy list tomor­row when the results come out. But cer­tain­ly, some­thing to cir­cle back and watch in the com­ing days. It’s not with­out its risks, and that will also be fac­tored in by the ana­lysts and the big funds who will be pay­ing atten­tion to Fletch­er Con­struc­tion as it’s now called. The risks are obvi­ous­ly ris­ing inter­est rates, and they’ve been ris­ing ear­li­er and hard­er in New Zealand than they have in Aus­tralia from what I can see. So, the New Zealand hous­ing mar­ket’s prob­a­bly more sub­dued than in Aus­tralia, although I haven’t paid close atten­tion to it. But any­way, ris­ing inter­est rates means res­i­den­tial prop­er­ty is declin­ing in val­ue, and that’s one of the spokes to the wheel of this com­pa­ny. So, that part of the busi­ness will suf­fer. They do oth­er work, of course, like I said; they sup­ply con­crete to com­mer­cial prop­er­ties. Peo­ple have prob­a­bly seen Fletch­er Con­struc­tion or Fletch­er Build­ing on cranes around town, so they still will have that busi­ness. But inter­est rates will hurt a lot for this com­pa­ny. So, that’s a risk even though it’s, like I said, in a sweet spot of high growth and high yield. Let’s await the results, and let’s watch the sell lines and see what hap­pens.

Cameron  1:37:30

The QAV Pod­cast is a pro­duc­tion of Space­craft Pub­lish­ing Pro­pri­etary Lim­it­ed, autho­rised rep­re­sen­ta­tive of AFSL 520442 AFS, rep­re­sen­ta­tive num­ber 001292718. Please don’t make any invest­ment deci­sions based sole­ly on lis­ten­ing to this pod­cast. This is pre­sent­ed as gen­er­al advice only and not per­son­al finan­cial advice. We don’t know your per­son­al finan­cial cir­cum­stances. Please see a finan­cial plan­ner before mak­ing any invest­ing deci­sions.