Transcript QAV 306

Episode: QAV 306 Club

Length: 1:05:04

 

Cameron Reilly [0:18]: Welcome back to QAV, Tony Kynaston has done and before we get into it, TK Happy birthday.

Tony Kynaston [0:24]: Thanks, Cam. Yes, that was last Friday. Fourth of April.

Cameron Reilly [0:28]: The fourth of April.

Tony Kynaston [0:30]: Actually, it was Saturday.

Cameron Reilly [0:31]: Saturday. You have had a big weekend?

Tony Kynaston [0:35]: Kind of passes without knowing, when you can’t celebrate with anyone except being alone.

Cameron Reilly [0:39]: I know, earlier in the year you told me you did have big sort of birthday bash plans. So, I guess either that didn’t happen. Or you went ahead and just didn’t invite me.

Tony Kynaston [0:49]: It’s a former now you’re invited. But no, we bought the use of a band for the charity auction earlier on or late last year. First of all, our touring in Aid of the Bushfire Relief. So, that kind of push the dates back and we thought it might even work with my birthday. But first of all, you couldn’t have gatherings of more than 10 people and now it’s two people. We just couldn’t book on; we’ll get to them later in the year hopefully.

Cameron Reilly [1:20]: So, what did you do? Just a quiet night in the sky palace?

Tony Kynaston [1:23]: Yes. quiet night, a couple of cupcakes, and a bottle of wine. And then Jenny bought me a nice bottle of scotch. So, I sat on the deck for about 11 o’clock. 

Cameron Reilly [1:37]: What was the bottle?

Tony Kynaston [1:38]: I just haven’t had it with me. Sorry. It’s a strange one. It’s such inside scotch. It’s whiskey. It’s French whiskey. So, [cross-talking 1:44] sharing it. So, it’s a really strong, rich sort of flavor to it.

Cameron Reilly [1:50]: By the way, remember, Niko, who was at our screening after-party in Sydney, who brought his sort of own whiskey concoction along? I’m chatting with him after we talked today. He’s just set up his factory. At least his factory in Sydney is going to start producing his whiskey.

Tony Kynaston [2:09]: Wow. And he can do that during the shutdown.

Cameron Reilly [2:13]: I guess. Maybe it’s just him in the factory hearing up, but I said, Tony and I get in on this man. You want to get it on the ground floor of the whiskey business so, I’m having a chat with him later on, at least I do. I have never met you.

Tony Kynaston [2:29]: We’ll drink all the profits. I think probably.

Cameron Reilly [2:31]: That’s okay. Yes, he and I are talking about doing a whiskey podcast where he sends me a bottle of whiskey each week. And then we drink it and talk about it, I thought you’d like to get in on that.

Tony Kynaston [2:41]: Yes. That’d be great. So, I’m in my study. So, when we finished, I’ll take a photo of the whiskey and send it off to you.

Cameron Reilly [2:50]: Great. And you didn’t do a zoom party. There was a mate of mine in Seattle, an old friend of mine, Buzz Bruggeman, one of the godfathers of the podcast network. He had his 65th birthday, I think on zoom a week or two ago, we did a zoom party, and a bunch of people from around the world jumped on zoom to toast him and wish him a happy birthday. We should have done that for you. And I did pitch the idea of a zoom meeting for our club subscribers last week, and he said you’d be into it.

Tony Kynaston [3:23]: Yes. And that would be good.

Cameron Reilly [3:25]: First of all, you complained about how hard I’m working in you were like, Jesus Cam. You’re making me do two podcasts and review the Edit of the Getting Started Guide. Now you want me to do a video call?

Tony Kynaston [3:40]: Yes, I think you should double my pay.

Cameron Reilly [3:41]: I think I will. I’ll triple it, how about that? So, we will let Club subscribers know when we’re going to do that maybe later on this week, depending on when this comes out later on this week, or we’ve already done it and wasn’t great and we had a good time. Alright, well, its big week for us. Last week, we bought a stock we added the stock to the portfolio and everyone lost their collective minds over that. So, we should start with that the Santos buy. I don’t know how you want to start with this, we got a couple of questions from listeners. And we should probably do the checklist as well. I did it last night. Where do you want to start?

Tony Kynaston [4:37]: Well, let me go through my reasoning for buying it. And we may have answered most of the questions in so I’ve said before on the podcast that I use the top movers’ tables in the AFR which they publish at least a couple of times a week they publish a small one every day, usually has a top-five stock in it and they publish a bigger one probably three times a week, which are companies which have their highest stock price in the last rolling 12 months. And Santos popped up. So, I went and had a look at it. And probably the thing that struck me the most was it’s got updated forecast earnings per share.

So, people have been crunching the numbers on Santos. And they’ve lowered their estimates, which gives us some numbers to work with. So, that was a good copy with the fact that Santos was already on our watch list after its half-year results. So, the numbers kind of just got better after that. And I think we’ll go through and analyze it either now or later in the podcast, but the future IV I came up with was about $9. And given the current share price is around four. I thought that was a pretty good margin for safety as well. So, that got me interested, I had looked at the three-point graph for Santos. This is one of the interesting ones that happened at this stage in the market. If we take a ruler out and look at Santos, it’s almost a vertical drop from about $9 so the price during the end of January was $8.70.

Before the Coronavirus crisis, they’re calling it now. Anyway, so you’re a straight line down then we’ve got a bit of an upturn, the classic J curve that people talk about in economics. So, we have seen technically, an upswing from a three-point downtrend. The difficulty with these kinds of ones is kind of after one month of training, you don’t know whether it’s going to continue and might go either way it might swing up or it might swing down. So, these arise a bit iffy in terms of using the three-point graph to predict how things are going to go. But what did give me a bit of courage is that the share prices went from a low of $3.42 up to 399. So, it’s it has arisen a fair bit. So, I started doing some research.

Cameron Reilly [7:21]: Sorry, well, it was a lot lower than that. I’ve got the chart in front of me I see we’re down to $3 and one.

Tony Kynaston [7:30]: Okay, what are you looking at the five-year monthly?

Cameron Reilly [7:37]: Sorry, no, my bad two-year weeklies, I can’t figure out how to get the graph on the front page. How to get that five years monthly? [Cross-talking 7:47].

Tony Kynaston [7:48]: So, go across to the box, which might say my select the price alert.

Cameron Reilly [7:53]: Yes.

Tony Kynaston [7:53]: Yes, and select None. It’s a bit clunky, but that turns off the SD max indicator. And then you can go across to the period selector and you get five-year monthly in.

Cameron Reilly [8:07]: Thanks. Yes. Okay. Now I’m with you. Right.

Tony Kynaston [8:11]: Yes, but you’re right. According to the monthly graph, the low was 342. But it did get lower than the interest. So yes, it’s gone up something like 25 – 30% in the last little while, maybe in the last week. So, there’s certainly an uptick happening. So, I kind of did some research to work out why. And what I found was a couple of things. So, first of all, the breakeven price of a barrel of oil for Santos is around $30. So, I saw 30 in one of the researches reports I was reading, Alan Kohler reported 32, in the research reports he was reading on the weekend. So, it’s around 30 bucks, the oil price jumped to $30 on Friday and sell back to 29.

And that was large because of some tweets from the orange market in Washington saying that he’d been speaking to MB major banks or in Saudi Arabia, and they were trying to do a deal to get the oil production numbers down because what’s happened is the oil demand has dropped because of the Coronavirus, and it’s dropped to by about 25 million barrels per day. And at this stage, the Saudis and the Russians have been floating the idea of dropping oil production by 10 million barrels a day. So, they’re going to have to drop it further, but at least they’re starting to talk about the interesting thing though, is that we’re getting to a stage where we’re getting too close to what’s called peak storage in the oil industry.

So, all the wells are still pumping all the refineries are still refining and they’re still shipping crude. But nobody’s buying. So, all the storage for oil is filling up in the world, large co tanks that you’ll see. Oftentimes in sports, the pipelines are filling up. All tankers are traveling the world with cargoes and can’t sell them. That’s probably days If not, maybe a week away from being full. And that’s always a tipping point in the oil market because it doesn’t matter how much you reduce supply; you can’t pump any more on storage anyway.

Cameron Reilly [10:32]: Isn’t that when you just do a couple of X on Valdez?

Tony Kynaston [10:34]: I start to do it for the insurance yes, it possibly. But basically, all production has to drop to zero until the stuff that’s in the pipeline can be sold. So, no one’s going to let that happen. That tends to be the burning platform that gets a deal done at the last minute. So, even though it was Trump’s tweets, which saw the oil price rise, I think there will be something done in the next week or so to lower production dramatically, try and soak up the oil that’s in storage. And because that means supply starts to equal demand, we should see a price rise in the price of oil, it might not be dramatic, but it only has to rise maybe one or two bucks a barrel for Santos to go at least to break even and stop losing money. On top of that, they’ve got low debt, they’ve got nothing, I think that needs to be matured or swapped out for another couple of years in terms of debt repayments. And they stopping all their capital works in preserving cash. So, I didn’t go all-in on Friday, I bought probably about 12% of my usual amount. So, I’m going to dollar cost average into this. And if the share price turns down, I’ll wait and watch and see and maybe buy some more. If it even starts to run quickly. I might buy some more as well. So, it’s a bit of a watch and waits and the dollar cost average exercise. But I thought even though I don’t think we’ve seen the volume at the market that we may have for oil.

Cameron Reilly [12:01]: Interesting. And I’ve been reading stuff over the last couple of weeks about the impact that the oil price is having on the shale producers in the US. So, could send a lot of them to the wall.

Tony Kynaston [12:14]: Yes. And we had the first bankruptcy in the shell market during the week as well. So, that’s already starting to happen. And that’s obviously the game plan of Saudi Aramco, which is probably the biggest company in the world now, potentially, but certainly the biggest oil company, they’re trying to gain market share and give economies of scale. And it’s always been a thorn in the side of AIPAC that America has become all-sufficient since the Obama days. So, they’re trying to drive the shale operator to, while I’m reading, have sort of 50 $60 breakeven prices for a barrel of oil. And they’re highly indebted. So, I’ll start to go to the wall. And that will have flow-on effects for the financial industry in the US as well because that’s why I get repaid, they’ll be a markup in bad debts. And oftentimes, those debts are syndicated across a whole heap of the bank so it’ll flow through the US won’t be great. That might be another leg down in the market. But reduce demand in the market will mean the oil price should rise.

Cameron Reilly [13:15]: Right. So just to clarify this hit your radar because it was on the top mover’s chart in the ASX and how often do you look at that?

Tony Kynaston [13:26]: I apply for the Australian Financial Review.

Cameron Reilly [13:27]: Sorry, AFR, yes. How often do you look at that?

Tony Kynaston [13:30]: Every day.

Cameron Reilly [13:32]: Right. So, that’s part of your daily review over breakfast is the top mover’s chart?

Tony Kynaston [13:37]: Correct. Yes. Months [inaudible 13:39] breakfast, but some snacks during the day.

Cameron Reilly [13:43]: And what are you going to do when Fairfax goes belly up? How will that change your [cross-talking 13:48]?

Tony Kynaston [13:49]: I have to try and find another source of that kind of child or we’ll do a filter on stock doctor myself or something like that.

Cameron Reilly [13:56]: Just buy it.

Tony Kynaston [13:57]: Yes, possibly.

Cameron Reilly [13:58]: Yes, we’ll just buy Fairfax.

Tony Kynaston [14:00]: Buy Fairfax. Yes, for sure. [Inaudible 14:03] Fairfax so, you can run channel nine.

Cameron Reilly [14:10]: Well, we know someone who could help us run Channel Nine. He has dinner with us in Sydney. He probably knows a few things about what’s going on. Okay, so your radar through that apart from that, at a time like this, people have asked me via email in the last week or so. What’s Tony doing right now in terms of how many stocks is analyzing and I said, look to the best of my knowledge, nothing he’s not bothering with analysis. Are you doing much deep-dive stuff at the moment or just when things tickle you in the nether regions like this one?

Tony Kynaston [14:56]: Yes, no, I’m not doing much analysis until I get a sort of a lead like this. But I am watching the three-point train grasp because there are a couple of stocks, I’m watching which are getting close-ish to three-point uptrends. So, stocks like Rio, Bell Financial group, which we’ve had before, and their metals are all on upswings that haven’t broken through yet, but they’re getting close. So, I’ll probably update our watchlist once every couple of weeks. I’ll probably do it again this week now because things look like they might be moving and see how it looks. And then I’ll watch the stocks which are moving up because some stocks are and see if they’re getting close to 3.3 lined breakthroughs.

Cameron Reilly [15:42]: I want to talk about the center’s chart in a second, but just go over for me again. How are they reporting on the financials? So, you saying that they’ve done some updated projections?

Tony Kynaston [15:57]: Yes, so that was the thing which tipped over for me. So, I think when I first did the numbers on Santos after the full-year results, I think their forecast earnings per share was I don’t have the number in front of me, but it was maybe even an increase on the current number. But now when I look at it, the current APS for Santos is 43.91 cents. The future APS has now dropped to 28 cents. So, the analysts have been updating their numbers on that.

Cameron Reilly [16:29]: Okay, right, because that’s what I was doing the checklist on it last night. That was the one thing I wasn’t sure about, these numbers that I’m using. How do I tell if they’re even relevant, but I did notice that the future APS was very low? So, didn’t sort of tweak for me, though, that was an indicator.

Tony Kynaston [16:48]: So, that’s one of the things even with these other stocks I mentioned before like Rio Tinto, if they do a three-point uptrend breakout, I want to still have some kind of confirmation that the APS forecasts have been lowered. And we’re not still doing calculations based on old numbers.

Cameron Reilly [17:06]: Right. Okay. And is there any way of telling how up to date the numbers are on the stock doctor, because when I look at the past financial performance, it just says December 19, for their annual report? Is there anything else I should be looking at there?

Tony Kynaston [17:22]: It’s pretty laborious, but you can do it. There’s a varies in the alert manager. We look for alerts, recent updates on price-sensitive maybe, or a company financials updated, there’s a couple of tabs, you can see there you can check, and then you run it. And you can see there’ll be updated APS will be one of the alerts that come up through there.

Cameron Reilly [17:48]: But there’s nothing on the map the main screens, Santos and SDS that tells you that right?

Tony Kynaston [17:54]: No, I picked it up because I still had the numbers in my spreadsheet from February when we did the analysis before. And I can see that the earnings per share and almost halved from old numbers.

Cameron Reilly [18:07]: Okay. Well, let’s talk about the chart thing. Do you want to whip through the checklist? This chart is a tricky one. And I’ve had a couple of people asked me to help them understand how to do a chart in times like this.

Tony Kynaston [18:26]: So, this is an interesting one, because Santos fell from basically a tie point straight down. So, some of the other companies we look at, for example, Quantos, sorts of had a leg down first. And so, if you draw the line from its high point towards the next high point, the upswing we’re seeing hasn’t crossed that line yet. But in the case of something like Santos, where it goes from the high point straight down, we go through a couple of points. So, the highest point was in January, the price of 869. And then we have another month the end of February at 683. And then end of March, we have a low of 342. So, there’s our line for three points. And then the current price is 399. So, it’s gone above that line. There, as I said before, because of the shape of this graph, we’re not going to know whether it’s going to be sustained or not for another month or two. So, I’m not going to go all-in just yet. I’ll just keep dollar-cost averaging as the month unfolds.

Cameron Reilly [19:32]: Yes. Because the ASX, the [unclear 19:36] did have sort of rally last week in general.

Tony Kynaston [19:41]: Yes correct. I think it was down last week or the week before but anyway yes.

Cameron Reilly [19:47]: Really?

Tony Kynaston [19:48]: I could be wrong. Sorry.

Cameron Reilly [19:51]: Well, I’m sure you’re never wrong Tony. That’s what I like about you.

Tony Kynaston [19:55]: Well, I think that’s a good point to make. I could be wrong in this case. Santos could drop through the floor next week. Who knows? And the other thing about this chart is if we go across to beach energy, which is one, I haven’t had time to do as much research on the Santos, but it’s another oil company. And its graph is also doing the same thing. So, beach energy may become a buyer as well, I just haven’t had time to research it yet.

Cameron Reilly [20:25]: And, the next day, after we recorded this Tuesday, the seventh of April, the day I’m editing this, Tony did email me and say that he had just added beach petroleum to his portfolio. But he didn’t want me to add it to the QAV portfolio, because he felt we were sort of exposed to that sector with Santos. But he did want me to let you know for transparency’s sake that he did add some BPT to his portfolio this morning. Well, when I was analyzing this last night, where my head was that forgot what’s going on with the oil price, forget what’s going on with the all odds in general and the global this and that, and forget all of the macroeconomic analysis, I’m looking at my checklist, I’m looking at what the numbers tell me. And what my rules tell me according to the official, soon-to-be-released QAV getting started manual, as soon as Tony signs off on it. My rules are my rules. And this passes the rules on the checklist.

So, I put out of my head, that I might be doing the wrong thing here. But for me, I put out of my head, all of the oil stuff and all of the general market stuff and go, I’m just looking with one shot. Robert De Niro, a deer hunter focuses on this dog. This is the thing, I’m going to put this on a coffee mug, this is going to be the next coffee mug. Listen to the numbers that are all, I think. Listen to the numbers. What are the numbers telling me to forget everything else, listen to the numbers? Again, this could be completely off base here. But this is where I’ve come to after a year or so of doing this with you. Forget the stories forget the narratives forget trying to predict where the oil prices going and what the Saudis are going to do and what the Russians are doing and what Trump’s tweeting about. Look at the numbers make my decisions based on the numbers; you’re not going to be right all the time. And you’ve always told me that, you try and get it right 60% of the time. But the numbers are telling me what the numbers are telling me, which is this is a buy. So, I’m like, okay, I listen to the numbers.

Tony Kynaston [22:40]: No, I agree. And that’s what I think it was important for me to see that the earnings per share forecast number had been revised down. That gave me some more confidence that the numbers were more accurate than they were a month ago. 

Cameron Reilly [22:54]: So, we’ve talked about the sentiment chart, pull-up checklists, boys and girls. Column H gets a tool for sentiment because it’s breached that line. And I’ll do a video of this. So, later on, today or tomorrow or something you can have a look at the video. Cameron in the editing booth here. I decided it wasn’t worth a video, but I did a screenshot and marked the three points. So, go up to our website, have a look at the blog post for this episode 306. And you will see the picture screenshot thereof that in case of a little bit confused about how the chart works on our videos page QAV podcast community slash videos, you’ll find all of our videos. Column I, is there a recent positive upturn? Yes. So, you agree with me?

Tony Kynaston [23:46]: Absolutely, yes.

Cameron Reilly [23:47]: Okay. Net operating cash flow 2.920 billion, say shares on issue 2.083 billion gives me a cash per share of $1.40 share price when I did it last night was at 399 as a change today?

Tony Kynaston [24:07]: Yes, it’s 409 now according to the stock doctor.

Cameron Reilly [24:10]: Okay, well anyway, I’ll leave it at 399. Price to cash ratio, I got 285 which is less than seven. So, got a two on that dividend yield 2.01% lower than the mortgage rate. So, we didn’t score on that PE 18.63. Which is not less than the yield not the lowest nor the highest in the last three years.

Tony Kynaston [24:39]: Just hang on for a minute no you’re right there. Because if you look at the stock doctor, it’s 18.63 as of December 19, but it’s currently nine.

Cameron Reilly [24:51]: Okay, right. So, you take that one?

Tony Kynaston [24:53]: Well, I take [cross-talking 24:54] them because sometimes either the PE can go up if the price has jumped after the result. So, we’ll take the results number just because I’m using those figures, but if the share price has come down, then you know, we’ll take the lower number, but it’s still not the lowest because it was 3.96 back on June 17.

Cameron Reilly [25:12]: Okay. I’ll change that anyway, in my sheet 9.09. Good to pick up thanks. Net equity. I got 10.956 billion.

Tony Kynaston [25:24]: Yes.

Cameron Reilly [25:25]: And it does have consistently increasing equity. So, I gave it a one for that. Share price again, I use 399 net equity per share our calculators $5.26 share prices below that. So, I’ve got a one for column Y, is the share price less than NIPS. Price to book I ended up with minus 24%. So, its share price is way below value. So, it gets a one for column double A is the share price less than 30%. Above the NIPS. That’s our Peter Lynch peg ratio. No, that’s [cross-talking 26:08]. This is your cap cities. This is the cap cities guy.

Tony Kynaston [26:16]: I haven’t been able to find that reference for you either. Sorry.

Cameron Reilly [26:19]: I think you made that up, dude. Because I told you I bought the book. Well, I’ve only read that first chapter. I haven’t had a chance to read further yet, but I scoured that. Well, when I say a scout, I hit Ctrl F and search for it. That’s my version of scouting. No, I couldn’t find that. So, I don’t know where you got that sorry from.

Tony Kynaston [26:41]: I’ve got my book on Audible. So, I’ve started to re-listen to it. So, I haven’t come across it yet. But it will be there somewhere. I think and I could be wrong could be somewhere else. But it was almost like a throwaway line. It could be in the epilogue or something. Will they say Paul Murphy built up an empire by paying one company at a time by paying no more than six times cash flow.

Cameron Reilly [27:03]: Yes, right. Column E B EPS 43.91 cents.

Tony Kynaston [27:12]: Yes.

Cameron Reilly [27:14]: And future earnings per share to get a stock doctor 28 cents.

Tony Kynaston [27:18]: Yes, that’s right.

Cameron Reilly [27:19]: Okay. Which is negative growth of minus 3.98. So, it gets a minus one for growth over PE. I got an IV number one been of $2.25.

Tony Kynaston [27:38]: Yes, 92.

Cameron Reilly [27:41]: So, obviously the price is above that so it doesn’t get a score for that. I got IV number two for $4.15. [cross-talking 27:50].

Tony Kynaston [27:53]: I think I made a mistake there I think $9 may have been the old EPS number. So, I apologize for that.

Cameron Reilly [28:00]: That’s alright it’s still above where it is last night today but barely. But anyway, got a one for the share price is below IV number two, but it’s not twice IV number two, so sorry, IV two is not twice the share price I get zero for column AK on my sheet. Is it a star stock on a stock doctor? No. Is it an A one A two B one B two on share analysis? No, I think was a C three as of last night. But stock doctor’s current intrinsic value is $6.10. There was a consensus valuation, I think.

Tony Kynaston [28:40]: Yes, of 13 people.

Cameron Reilly [28:44]: So, we should take that as being [unclear 28:48] up to date?

Tony Kynaston [28:49]: I think so. Yes. It’s lower than it has been in the past and given those new EPS forecasts, these guys should be using that to come up with $6.10.

Cameron Reilly [28:59]: Yes, right. Okay, so gets one for the share price being below the stock doctor intrinsic value the share analysis current intrinsic value, I only got $2.17.

Tony Kynaston [29:16]: Yes, so it’s about that.

Cameron Reilly [29:21]: Big difference between a stock doctor and share analysis.

Tony Kynaston [29:24]: Yes.

Cameron Reilly [29:27]: But share analysis is intrinsic value is going up in the future. I think it was gone up to three bucks something from memory.

Tony Kynaston [29:39]: $5.13 in two years.

Cameron Reilly [29:43]: In two years, okay. What is in one year?

Tony Kynaston [29:46]: One year it’s 387.

Cameron Reilly [29:48]: There you go. So, we give it one for that intrinsic values going up financial health and the stock doctor is stable, gave it one CEO only got I think 0.09% equity or something, so gave it a zero for executive share ownership. So, I got 11 out of 19 58%, and a total QAV score of 0.20, which is bloody strong. Even though the growth is not great. Like the forecast, EPS is down, as we said, etcetera. But still came up looking good. So, listen to the numbers I said to myself.

Tony Kynaston [30:36]: Yes, and it just the big asterisk and caveat here are that these numbers may not mean much going forwards. Because if Santos has to draw down on its equity, then it won’t be increasing equity going forward. We got an EPS forecast, which gives me a bit of comfort, that’s good. But all these other figures will change in the next six months, we don’t have visibility of those yet. So, even though we’re using the numbers, I’m acknowledging that they are out of date. But it does give me a bit of comfort that the EPS has been lowered, and we’re still within that sort of IV price range for Santos. And look, we could try to predict what equity will be like in the future and what these other numbers will be like in the future. But it’s just too hard.

Cameron Reilly [31:26]: Yes. You starting to sound like the orange, what did you call him before the orange, something that Muppet? Look on hand. On one hand, things can be fantastic it will all go to zero tomorrow. On the other hand, it could be the worst calamity that’s ever happened. You can people tell me, I don’t know.

Tony Kynaston [31:47]: It could be a large number could be a small number.

Cameron Reilly [31:53]: Whatever it is, it’s a beautiful number. And if it’s a great number, if it’s a low number, then I did it. If it’s a bad number, then it was the state governors who didn’t listen to me. I watched his yesterday while I was roasting coffee beans. I was watching his daily press conference art. Being a historian or a student of history, spending so many years going deep into the fall of Rome and the fall of Athens and we tend to look back and go How did this happen? How did they let this go on? It’s ridiculous from the glory of Athens in its heyday in the glory of Rome to just becoming a shamble. And I’m watching Trump’s press conferences and I’m going I’m living through it I’m watching it happen. It’s downing to me it is just mind-blowing watching his press conferences right now just, what a just Bizarro world it is.

Tony Kynaston [33:02]: It’s two hours of rambling, isn’t it? It’s like the uncle you’re feeding dock to a Christmas time so he starts rambling, you know how they are.

Cameron Reilly [33:11]: And just the vagaries and the nonsense and when he gets into arguments and shutting down journalists who try to ask questions and even the guy from Fox News, he shut down the other day and accused him of secretly working for CNN. It’s just astounding to watch anyway. Alright, so we had some questions from people that we may have already answered them lets run over it. Richard. Richard says hi Tony. I recently received QAV of email with your decision to buy Santos shares the oil industry short term futures not looking too bright at the moment the combination of the Coronavirus with the drop in oil price has resulted in a severe drop-in planned activity for the rest of 2020.

However, undoubtedly, there are many oil and gas companies currently undervalued on the market. I look forward to hearing your stance on seeing those. Well, I think you already explained that. Richard also has some questions about Stanmore Coal. But let’s circle back to that because Chris had some Santos questions as well. Oil demand is collapsing and supply is increasing the most recent uptick in oil prices last week as a result of a tweet by Donald Trump that he expected Russia and Saudi Arabia to agree to production cuts which may or may not happen global storage is near capacity and without substantial production cuts. All prices are at risk of further Falls is the decision to buy purely based on the three-point trend line?

Tony Kynaston [34:34]: Not purely, I’ve given my reasons, but yes, it’s also because the forecast earnings per share numbers were updated to and it scores well on the QAV checklist.

Cameron Reilly [34:45]: Yes. The decision to buy doesn’t seem consistent with any of the QAV commentary over the last couple of weeks about sitting on our hands for several months question mark?

Tony Kynaston [34:59]: Good point. Well, I don’t think I’ve ever said I’ll be consistent. So, what can I say, the process is the process and the process was have a look at Santos and the numbers stacked up and the graph was good? So, I started to buy something.

Cameron Reilly [35:18]: Well, I think the sit on your hand’s comment is, particularly in response to people that are eager to jump back in because things are cheap. As I’ve said, I think the manual that we will come out with soon, the checklist, and all of Tony’s statements and tools to help your thinking, not a religion. Although, by the time I’m finished, it will be religion.

Tony Kynaston [35:51]: The only way we can get tax deductions.

Cameron Reilly [35:53]: Yes. And I am building a shrine to you, but they sit on your hands, the way I’ve understood it is don’t be eager to jump back in when we get back in when we listen to the numbers. And in this case, the numbers tell us that we should get back in, it’s tentative, but the numbers say yes.

Tony Kynaston [36:20]: No, that’s exactly right. Cam. Yes.

Cameron Reilly [36:22]: It’s not a religion Chris yet. That’s my next coffee mug QAV it’s not a religion dot, dot yet. It’s not a cult dot, dot, although that’s exactly what we would say if it was a cult. This is from Chris; the general view is that we have yet to hit capitulation/despondency. In the cycle of market emotions. Does Tony agree with this? I think he doesn’t.

Tony Kynaston [36:49]: Yes. So, we went through Kubler Ross last week. I think we haven’t hit the bottom yet. We’ve been through anger and we’ve been through a bit of denial. I think we’re at the bargaining stage now. So, depression comes next. I think after people have been locked up in their apartments and houses for a couple of months, they’ll start getting depressed. And that’s not to say, the cafe is not opening, the restaurants not opening people with losing their jobs are still not back at work. That’s a good point. The other reason I looked at Santos was they went they had their AGM last week, last Friday. So, that’s another time when companies can talk to us about their future guidance. And they answered all the questions about how much debt they had when it had to be repaid, and things like that. So that’s useful too. But we may start to see some updated forecasts when companies hold their AGM, which they should all be doing fairly soon. If they haven’t already. So that might start to give us some figures to put into a spreadsheet.

Cameron Reilly [37:53]: Alright, listen to the numbers. It remains to be seen for me how all of these buyer layouts or whatever you want to call them support packages, the governments are coming up with a gun to paying out. I was talking to one of my other podcast subscribers, my history shows in Sydney, who owns several jewelry stores late last week, and I said, how hanging in and I said, is government’s packages, helping you out and he said, no, completely useless for my business. It’s a lot of good talk but, at the end of the day, it’s not going to be any good for people like me. So, I’m going to get him on one of my other podcasts this week to sort of drill-down and understand how he sees it. So, I think as people start to see businesses big and small, go to the wall. That could create another shockwave, another round of shock.

Tony Kynaston [38:55]: Absolutely. And it’d be great to have him on our show. And just a thought, if listeners out there, want to send us some anecdotes about, how the virus is affecting their business and how the government support is helping or not helping, that might be a great way to get a feel for things as well collectively. And we can share the results anonymously, or someone gives us a case study. We can drill down into that maybe get them on the show, but now we have a listener base the field to work out what’s happening in their world.

Cameron Reilly [39:27]: I’ve got quite a few emails from pilots, that subscribers talking about how they’re flying a couch for the next couple of months. And all of them have said the same thing. So, I’m using this as an opportunity to drill down into my QAV study so that’s great. Taking the time to invest in QAV. University.

Tony Kynaston [39:50]: Well, it’ll be interesting to see if they have any information about when they think they might be flying again.

Cameron Reilly [39:55]: Yes, yeah. Okay. Do you want to circle back to Richards, Stanmore Coal questions?

Tony Kynaston [40:04]: Yes, that’s right. So, Stanmore Coal was one of the shares that we’ve owned. And perhaps some of the listeners are still owning it. But there was a takeover offer made for them, I think in the last week, but I don’t think it’s been opened yet. But it’s happening as we speak anyway. And the offer price was $1, the company that’s locked the offer already had about a third of the shares before the bid was launched. And I did a bit of a Google search on the weekend. And I’ve now got, I think, over 50%. So, it’s an unconditional offer, which is good. So, that means that it can’t be pulled or can’t be amended down, it could be increased. The share price rose to almost meet the offer. So, the offer is $1 per share, and the share price is 99.5 cents.

So, if people do want to sell into this bid, then they can get their money in two days if they sell on the market. I personally probably wouldn’t do that just yet. Because it’s unlikely there’ll be another bid coming because the bidder already has over 50%. But it’s possible in these kinds of circumstances that someone that’s called a green male and might launch a counteroffer. And just try and extract some a higher price out of the bidder by buying a blocking stake and stopping them from getting to for acquisition of the company. And that’s forcing a high bid. So, don’t need to add just yet. If you accept the bid, you’ll get your money probably slower than if you sell on the market. So, if you need the cash, then do that. But don’t wait until the bidding company gets up close to 90% because then they can compulsorily acquire your shares.

Cameron Reilly [41:57]: Sorry. How do you tell where they’re at? How do you keep track of that?

Tony Kynaston [42:01]: He’s just got to look at the six announcements for the company and the bidder. Yes, so the stock doctor will have announcements on the front page, I think. And the most recent ones anyway, and you have to be kept up to date through that process. So, I think further on in that question from that listener, that he was worried about the company. One of his questions is golden investments as a private company. So, that’s the bidding company. So, am I correct and assuming if and after the takeover goes ahead, any remaining shareholders will not be able to sell, and it will effectively be a loss for them? So that’s not the case. So, we spoke once before about a takeover. And that was another coal company, I forget what the name of the coal company was. Sorry, just escape kept my mind. Will King be the chairman anyway?

And that was a bit different to this one, because that company and attacking the company that was wanting a takeover, weren’t subject to Australian corporate law, they were using British corporate law. And there are some different wrinkles in that corporate law compared to Australian corporate law. But this takeover of Stanmore is subject to our laws, and one of the laws is that you have to make the same offer to all shareholders. So, if you wait, then this bidding company, which is called Golden Investments, will still have to offer you $1 a share when they compulsorily take you over. If you wait till the bitter end. So, they’ll do that. And again, in the prior example, the company was threatening to go private, and then was going to make a potentially a lower offer to shareholders to buy them out, which must be potentially the case of how British law works. But that’s not how Australian law works. So, if you wait, you will still get $1 per share. The question is, how long do you want to wait for your money and whether you sell our market now or wait until it gets closer to the compulsory acquisition number, which is 90%.

Cameron Reilly [44:13]: Just reminding people, this is not financial advice.

Tony Kynaston [44:15]: It’s not, no. So, what would I do? I would hang on a bit longer and see if there’s going to be anyone launches another bid. But as the acquisition creeps out, to maybe 70% plus, then I’d sell our market and get my money. And okay, it’s 99.5 cents in $1. But I get it within two days rather than waiting for the bureaucracy of the bidding company to send me a check.

Cameron Reilly [44:41]: Okay, any more questions from Richard on Stanmore? I think that’s kind of it.

Tony Kynaston [44:46]: Yes, I think so.

Cameron Reilly [44:47]: Possible scenarios. We’ve got a question from Paul. Paul had dinner with us. Hi, Paul. How are you doing, Paul? Paul came to dinner in Sydney. Do you want to say hi, Paul? Say hi, Paul.

Tony Kynaston [44:47]: Hi, Paul. Tony is everything and I just last it. Hi, Paul, it was great to meet you. We question you and I thought we had a very high IQ dinner that night with our listeners. It was great.

Cameron Reilly [45:01]: I brought it down. I apologize for that. He asks, does any type of listed investment vehicles lend themselves to QAV analysis? For example, ETFs, LIC, or LITs, do they ever score well enough on the price to cash per share ratio to score over point one? I think we’ve talked about running them through the checklist before, right?

Tony Kynaston [45:43]: Yes, every listed company goes through the checklist. And occasionally we do get some ETFs and LICs. that meet our scores. That has happened before it’s not all that often, but it has happened. So yes, is the answer.

Cameron Reilly [45:58]: Yes, is the answer, Paul, and if you want, let me know. And I can shoot you some links to episodes that we’ve done before. Where we talked about that, by the way, everyone, feel free to do that. If you guys talked about this before, shoot me an email, because I keep pretty good notes on what all of our episodes are. And I can flick you a link, got to listen to this one and this one and half of that one and whatever. Or we can answer them again the following week like we just did, but sometimes we do deeper dives. And that kind of jazz, I should come up with like an index for people.

Question two from Paul, Tony has previously spoken about investing in listed Investment Trusts such as Wham and specifically when the trading price was less than the net tangible assets, as we speak almost all of the Wham products, capital research, etcetera, are trading at significant discounts to their NTA. How is an NTA calculated when the assets are holdings and listed companies themselves? Wouldn’t the NTA be calculated based on pre-COVID-19 earnings and itself be inflated taking that into account? Is this one of the times or opportunities where Tony will consider buying into a listed investment vehicle even if the NTA itself has a question mark over it? Thanks again, James Paul. Well, this is kind of similar to the Santos discussion, I think, right about the validity of the numbers?

Tony Kynaston [47:26]: Well, yes, there’s partly that. Paul’s right that LICs can be trading at a discount now. And part of that’s because the markets getting ahead of the NTA reporting, so, companies that are listed in this style, either liquor or an ETF, sorry, I think maybe just LICs they have to report their NTA at least monthly. So usually, by about the second week of the month, they’ll release their net tangible assets on the ASX website. And you can go and have a look. And then you can say, Well, given that these Western investment companies have stocks and cash as their assets, you can look at as a proxy, where the share market has gone since the NTA was reported.

So, if the NTA is say, March 31, and the share market has gone up since March 31, then maybe it’s gone up by 5%. So, you can add 5% to the NTA number and see if it’s positive or negative compared to the share price. So, that’s pretty much how I would do it as the markets moving around like this. But a couple of other points. I’m not sure that Paul is right about all the Wham stable of listed investment companies being at a discount to their NTA, I have a look at the notes provided by Jeff Olson, they did an investor call on the first of April, and the only Western investment company and they’re stable I could see trading at a discount was when global and that’s trading at about a 25% discount. So, just to run through that the net tangible assets for Wham global state of being to those 20 per share. In other words, if you add up all the cash and all the stocks that Wham global adds divide by the shareholders and Wham global you get $2.20 per share. But the price for Wham global was $1.65 per share. So, 25% discount what I then did was have a look at the share price graph for Wham global in stock doctor and it does have a bit of an uptick to it.

But it hasn’t yet quite breached the three-point trend line. So, I would think that if you wanted to sort of taking advantage of this discount then you could start dollar-cost averaging. But I would feel more comfortable when the share price goes above that three-point trendline. Additionally, I went to the MSCI global index, because this is a global LIC and that’s been trending down. So, it’s also possible that the NTA will go down as well. So, I’m not in any hurry at this kind of stage of the market to look for discounts and NTA. But they are appearing, where I tend to find its, better buying is that oftentimes those discounts don’t disappear on the way up. So, the assets, or the shares that this company owns, will start to go up quite possibly before the share price and the LIC does.

And then often is the case because we’ve reached capitulation in the market, and people just start buying into these lists of investment companies. They’re sold out and they’re sitting on cash still, but the share prices are moving for the underlying shares in that investment company. So certainly, you can take advantage of a 25% discount, but our dollar cost average at this stage. I feel more confident when the market starts to turn up. And certainly, more confidence on the three-point trend lines start to go above their downswings.

Cameron Reilly [51:15]: Sorry, I’m still stuck on when you said global LIC, my mind started to wander. Phased out for the last half of it.

Tony Kynaston [51:28]: Yes, the Wham global LIC.

Cameron Reilly [51:34]: Great. Well, thank you for those questions, Paul. Hope you’re taking care of staying safe in Sydney town. Steven Maab sent us an email and with some questions, which we will answer privately, I guess. But one of the things that he pointed out and I know we’ve had some questions about this recently, so might be useful for people. Stephen was on the show a few months ago BCV. And he mentioned I think at the time that he likes to use a low cost or has in the past likes to use a low-cost broker. So, people have been asking who to use one of the ones that Stephen says he likes to use is somebody called Selfwealth online brokers at $9.50 trades so Stevens smart chap knows what he’s doing.

So, you might want to have a look at those Selfwealth. Not a recommendation. I don’t use them, Tony, doesn’t use them but Steven does and he’s a smart cookie. So least check them out. And they don’t sponsor the show yet. Probably because we haven’t asked him to maybe we should do that. Maybe Steven Maab should do that Steven should suggest that they sponsor the show. Now, listener Elmer sent me a link on the weekend to an article that friend Roger Montgomery wrote on the ASX his website for some reason. Well, at least that’s where it was posted. Talking about framework to assess COVID-19 investment risks and opportunities. I had a quick read of it seemed to make sense to me, Tony, what did you think of it?

Tony Kynaston [53:16]: Yes, same I did. So, as we set, off-air before Roger, a classic value investor. Now he’s been doing cash over the last couple of years because he thought the market was overvalued. And that’s turned out to be correct. But I don’t do that because you don’t get the benefit of those last couple of years in a bull market to boost your shares. And then I’d like to sell into the downswing and go to cash then so just different flavors of the same pie, I guess. But otherwise, I’m pretty much on the same page with Roger he’s got a cash portfolio and he’s starting to look for companies that are going to survive they’ve got low debt and they’ve got solid businesses and he makes the point buy them at the right value. So, understand what intrinsic value is.

Cameron Reilly [54:05]: There’s a quote from his article. “To avoid overpaying and the investor must understand the intrinsic value that concept requires its chapter which I included in my book Value. Able”. You can find out more about how to value a company there and I know that we’ve talked about his book before, it’s a book that you recommend people read?

Tony Kynaston [54:26]: Yes. It’s a good book.

Cameron Reilly [54:28]: There you go. So, Roger is doing the do sticking to it writing good stuff. One of Australia’s value investors who is I’m sure going to do quite well this year.

Tony Kynaston [54:48]: Yes. That’s the classic playbook for value investing as you underperform in the booming market, but he’s come into his own in the next 12 to 18 months.

Cameron Reilly [54:58]: Well, I think that’s all my notes for today Tony, is there anything else you wanted to throw in before we go to black?

Tony Kynaston [55:10]: Yes, a couple of things. So, we did have an email. I think from David, one of our listeners about the Kathmandu rights issue. So, I think he sent us an email last week asking whether Kathmandu was a buy. And then we went back and said, listen to the podcast, and then the rights issue happened. And we asked him if he would go into that and we swapped some emails about that, but basically, to give some background Kathmandu is a retail company, they purchased a surf way chain and boots manufacturer from the States last year. And they borrowed to do that on the understanding that they could trade their way through ongoing and use the revenue to pay off the debt. So, given that all stores had to shut in the last month, that’s turned out to be not a great plan. So, they’ve had to raise money.

And they’ve quickly raised a lot of money from institutional investors on a 1.2 for one share price raising at 50 cents New Zealand of 49, Aussie, and the retail part of that process is about to open. So, in other words, if you’re a shareholder, as a closer business last Friday, you can buy an extra 1.2 shares at 49 cents a share. And the share price, I think like a lot this morning was 76 cents. So, even though you’re being diluted, it’s not a bad deal. So, you might want to consider going into it. But apart from the financial advice side of things and think about it for yourself, I just wanted to raise a couple of points about this rights issue because we might see them in other ones and they’re a bit instructional. This rights issue has some positives and some negatives. So, the positives are the company’s color on the front foot. And they’re issuing their rights early. And that’s always important because there’s only so much cash sitting around in the market. And once that goes, then if someone’s low to market and they need cash, they’re going to have to discount it very heavily to try and lose some cash. So, it’s always good to go early. And we’ve seen several rights issues in the last week with Webjet and the media kind of being forced to do it and Kathmandu kind of being forced to do it.

But we’ve also seen sort of productive companies like Korea, raising money just because they know if you go early, you’ll get access to cash even though they may not need it straight away. They made it down the track. But if you go well, it’s good thing management’s being proactive. The other interesting thing about this one and I think it’s positive is that the banks had been intimately involved with Kathmandu and I mentioned, they’re talking to the banks a lot because they owe money and they can’t trade at least in the retail sense, they can still do online. So, the banks will be getting updates as to how they plan to repay their debt. And in doing this share placement, the banks have agreed to waive some of the covenants on a debt and that might be a term that some listeners are familiar with, and some aren’t. But basically, lots of corporate loans will come with strings attached which are called covenants.

And so that’s when the bank might say, for example, will lend you this money but if your market capitalization falls below this level, you want to get it back or if your revenue drops by a certain number. Probably all sorts of different covenants that can be placed in loan documents. I’m not sure what the ones are for Kathmandu, but it is a positive sign to see the banks are willing to try and try their way through with Kathmandu rather than to foreclose and try and sell the assets and get their money back. So, that’s good. On the negative side of things. One of the largest shareholders in Kathmandu was a company called Briscoe Group. Again, another New Zealand retail chain and I think it’s Alan Briscoe. But anyway, Mr. Briscoe is a famous New Zealand retailer. He isn’t taking up his rights in Kathmandu, which is usually a negative side.

However, I think a mitigating circumstance will be that because Briscoe Group is another New Zealand retail, they’re probably facing their cash limitations at the moment so probably understandable. And the other negative for Kathmandu was this is their third share raising in three years. And this one couldn’t be foreseen. And the other ones had good reasons because they were undertaking acquisitions. But it’s always seen as being negative to continually raise cash because there comes a point where potentially you’re throwing good money after bad if a company has to keep coming back to the market all the time. So, I think it’s probably okay in this instance if I go on the front foot and there’s a good reason for doing it, but if it becomes a habit, I’d be steering clear of Kathmandu.

So, an article caught my eye recently in the fin review about Wesfarmers. So, Wesfarmers had floated off course spun off coals, the coals group of sub-markets out of the Wesfarmers company and kept a stake in coals as part of that float process that they’ve been selling down and they sold another 5% last week. And I think they still have 5% to go in our shareholding in coals. And so, some of the investment bankers are starting to speculate that Wesfarmers is building its cash holding to go and make a bid on a distressed company. And I wouldn’t mind betting that Wesfarmers is probably lining up companies that may be on the QAV checklist because that’s the kind of forum is to go in and get some deep value. Some of the names that were being thrown around JB Hi-Fi which isn’t part of our checklist, but our retail might fit the Wesfarmers stable of retail businesses like Kmart and Officeworks, and Bunnings as well. Another one is super cheap auto which I don’t think was on our checklist this year but was for me last year. And quarter has even been bandied around as a potential acquisition. Now tomorrow’s cap has fallen. So, I think to watch this space. And we may find that this corporate activity happening in the next sort of three or four months. And that can also be sometimes a sign that with the markets reaching their bottom, and the big players can feel comfortable and investing, I think that’s it.

Cameron Reilly [1:01:48]: Well, good news for after pay shareholders their share price rebounded a little bit in the last week. It’s now only 50%. down from where it was before the crash. Looking good been back.

Tony Kynaston [1:02:04]: [Inaudible 1:02:04] in the same boat as all of us really, aren’t they?

Cameron Reilly [1:02:07]: Yeah. Okay, Tony. Well, that’s it. Thank you, everybody, for your questions. And we will be back next week with more religion. Sorry, not a religion just a secret plan. I shouldn’t talk to them about the secret.

Tony Kynaston [1:02:29]: Hopefully, we’re more scientific than the religion. But anyway. I’m looking out the window on the right. And I can see a cruise ship sitting off the coast of Sydney.

Cameron Reilly [1:02:39]: Another one?

Tony Kynaston [1:02:39]: Yes, there were nine cruise ships out there last week. And two came into the harbor on the weekend I think to refuel, hopefully, they didn’t dock so that was good. But they’re all going up and down.

Cameron Reilly [1:02:51]: You know, this is the one time I would consider going on a cruise.

Tony Kynaston [1:02:55]: Really?

Cameron Reilly [1:02:56]: Because I’d be the only person on it. That to me sounds like a good cruise. Just me, maybe Chrissy. And no Fox.

Tony Kynaston [1:03:06]: But could let Fox loose on a boat by himself, couldn’t you?

Cameron Reilly [1:03:10]: Well, yes, that’s true.

Tony Kynaston [1:03:12]: I wonder whether the cruise industry is going to survive after this.

Cameron Reilly [1:03:15]: Really?

Tony Kynaston [1:03:16]: Yes. Would you take a cruise next year?

Cameron Reilly [1:03:18]: I wouldn’t have taken a cruise at any time at any point in the past or the future Tony sounds like hell. The only thing worse than being stuck in this house with Fox for the next six months is going on a cruise.

Tony Kynaston [1:03:33]: Fox overboard.

Cameron Reilly [1:03:36]: He’s overboard. He’s driving us nuts.

Outro: Please be advised Ladies and gentlemen, boys and girls, cats and kittens, that nothing you heard on this podcast should be taken as financial advice. Because neither Tony nor I are licensed, financial advisors. We don’t know your situation. This is just Tony talking about what he thinks, how he runs his stuff. Don’t take it as advice for you. If you need financial advice, go see your financial advisor. By the way, we’re also not doctors or gynecologists or nuclear physicists. We have opinions on all those things. But you should go get some professional advice before you make any life-changing decisions. But do get a copy of my book the psychopath epidemic, if you haven’t already looked for it online and keep an eye out for my film Marketing the Messiah going to be coming to download and streaming services and the live streaming event coming up in the next couple of weeks. Until then, stay safe, take care, and remember not a religion or a cult. But that’s exactly what we would say if it wasn’t.

 

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