Rudi's View | Mar 22 2017
In this week's Weekly Insights:
-Ramsay Health Care: Rumour, Hearsay, Speculation, Innuendo, and Rubbish
-Conviction Calls: GS, CS, DB, Morgans, UBS, MS
-Aus Retailers: Next Up, The Accountancy Disruption
-New Website: Mobile Devices
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
Ramsay Health Care: Rumour, Hearsay, Speculation, Innuendo, and Rubbish
By Rudi Filapek-Vandyck, Editor FNArena
We all know the share market as the public forum in which smart thinkers figure out the RBA is going to lower/hike interest rates well before the RBA comes to its decision. It's where smart money starts new trends before anyone realises the old is about to become new, and vice versa.
That's how the market is being sold to us; how the stories are being told, time and again.
But the share market is equally the place where share prices move on group-think, led by rumours, hearsay, baseless speculation, innuendo and unfounded fear.
In recent weeks, shares in Ramsay Health Care ((RHC)) have come under pressure ever since the company announced MD & CEO of nine years, Chris Rex, intends to retire later this year, and no successor has as yet been appointed. Then both departing CEO and the CFO started selling shares.
Plenty of room for unrestricted speculation about what all this can mean? And there the share price went from circa $78 (already down from $84) to $62 in three weeks. Any sideline observer who believes "the market is always right" would have drawn the conclusion the company is about to issue a profit warning, or something similar. Surely, when a share price of a Blue Chip that is Ramsay Health Care comes down by more than -20% something must be amiss, somewhere?!
On Friday, it appeared someone, somewhere had decided enough is enough, and a strong rally back into the mid-$60s ensued.
Maybe that someone works for stockbroker Morgans and issued a fierce rebuke of all the fear mongering that was going around the traps during that time?
Below is a brief summary, and my own interpretation, of stockbroker Morgans response to the share price weakness in Ramsay Health Care surrounded by the wild market rumours swirling around to justify the falling share price.
1. The CEO is leaving and nobody's ready to replace him. Yep. Board members could have done a better job, but note they are confident they will find a suitable, strong candidate, either outside or inside the company, which is far from a one-man operation. This is one of the largest private hospitals operators in the world, and one of the best too.
2. Insiders are selling shares. Are the rats leaving a sinking ship? Probably the most confusing rumours had it the Paul Ramsay Foundation, owner of 32% of RHC capital, was selling shares to set up a political think tank, the Ramsay Centre for Western Civilisation. As it turned out, this is complete rubbish. The foundation even felt compelled to issue a statement to the ASX about it. Morgans points out the CEO selling shares was well flagged and the CFO is selling to cover tax obligations because his shares are coming out of a trust in which they'd been held for seven years.
3. The Australian government is ready to clamp down on healthcare costs. Again rubbish. For good measure: Morgans doesn't actually use these words, but it is clear from reading in between sentences, they'd like to. The company has repeatedly indicated the pending protheses list review won't have any material impact and new health minister Greg Hunt seems to have a better grip on things than his predecessor, Susan Ley, while having spoken at length with Ramsay.
4. EU pricing headwinds are making life more difficult. More rubbish. Morgans points out the latest pricing cuts in countries such as the UK and France were less severe than in prior years and -equally important- in line with expectations. Management nor the analysts have seen a reason to amend group guidance for the present year.
5. Public hospitals are grabbing private insurance patients from private hospitals. More rubbish, apparently. Morgans received intel from Ramsay Health Care this "grabbing" has been going on for years now. Nothing new under the sun. It is the company's belief these privately insured patients predominantly enter public hospitals through the emergency ward.
The real clanger, however, is the price chart below. Its underlying thesis is that, in the long run, share prices of CSL ((CSL)) and Ramsay Health Care tend to move in unison and whenever one deviates from the other, a catch up move is surely to follow next. Even if we were to assume CSL shares might be ripe for a pullback after the strong rally in the first three months of the year, there's now a sizeable gap between the two, even larger than the one that occurred early last year.
It should be no surprise both Ramsay Health Care and CSL are considered cornerstone holdings by FNArena/Vested Equities' All-Weather Model Portfolio. Recent weakness in the share price has been used to buy more shares.
Conviction Calls: GS, CS, DB, Morgans, UBS, MS
Sell Bellamy's ((BAL)), Buy Ingenia Communities Group ((INA)), say small cap specialists at Goldman Sachs. Both are being presented this week as the stockbroker's "Best small cap ideas". The need for further discounting makes the specialists question company guidance for the second half, in the case of Bellamy's, while Ingenia should have a very strong FY18 and its valuation is not yet reflective of this.
Over at Credit Suisse, strategist Adnan Kucukalic has now added Computershare ((CPU)) to its Australia Top Picks "long" ideas. Computershare is highly cash generative, which makes it attractive for investors, says Kucukalic. The company should benefit in years ahead from the US Property Rationalisation cost program and strong growth in the US and UK mortgage servicing businesses, on top of cost cutting.
Deutsche Bank strategist Tim Baker also made a few changes to his model portfolio this month. He added QBE Insurance ((QBE)), Orora ((ORA)) and ALS ltd ((ALQ)) while dropping Insurance Australia Group ((IAG)), Telstra ((TLS)) and Sydney Airport ((SYD)).
The monthly update on Model Portfolios at stockbroker Morgans revealed the Balanced Model Portfolio has swapped JB Hi-Fi ((JBH)) for Beacon Lighting ((BLX)) and more resilience towards the pending threat from Amazon is but one of the considerations behind the move.
Meanwhile, smaller caps analysts at UBS have, post February reporting season, lined up their list of favourites, comprising of Autosports Group ((ASG)), AMA Group ((AMA)), Gateway Lifestyle Group ((GTY)), Infomedia ((IFM)), Mantra Group ((MTR)), NextDC ((NXT)), Premier Investments ((PMV)), TFS Corp ((TFC)) and Tassal Group ((TGR)).
Morgan Stanley also updated its Model Portfolios, but made no changes.
Subscribers should note: Weekly Insights from last week and the week prior also contained updates on Conviction Calls by stockbrokers in Australia. See your inbox or Rudi's Views on the website.
Aus Retailers: Next Up, The Accountancy Disruption
It's tough to be a retailer in Australia. Whenever I walk along Sydney streets, I note many an empty commercial space where once an enthusiastic small retailer was based.
In terms of listed peers, I note only few have managed to consistently perform and be a good investment throughout the usual seasonality and fear-and-euphoria cycles that characterise the listed sector on the share market. Super Retail ((SUL)) has fallen deeply since its late 2013 high and effectively gone sideways, through a lot of volatility, over the past two years. The Reject Shop ((TRS)) has fallen deeply too, twice, and is yet to make a sustainable come-back. Better not to mention Godfreys ((GFY)), Billabong ((BBG)), Temple & Webster ((TPW)) or Pumpkin Patch.
Harvey Norman ((HVN)) and JB Hi-Fi ((HVN)) have done a lot better, but they are now feeling downward pressure too. Woolworths ((WOW)) has made a remarkable come-back, but Wesfarmers ((WES)) is trending sideways and probably only because of it reaping the benefits from the Curragh coal operations, alongside of the prospect for a separate listing of OfficeWorks.
Retail spending in Australia in general has never recovered from the halcyon pre-2007 years. Australian jobs are predominantly part-time and wages pressure remains insignificant. Now Amazon is preparing to up the ante online through local management and real world presence, apparently. And the housing market is cum slowdown, finally.
And yet, there is one elephant in the retail room that nobody has as yet much talked about, but that won't last long. It's called "AASB 16", which is a highly technical sounding term for the upcoming requirement for all retailers to change their accountancy practices, in particular by pulling their lease contracts/obligations onto the balance sheet. This should happen from 2019 onwards. This sounds a long way off still, but my guess is professional investors and financial media will sharpen their focus on this matter well before the calendar shows December 2018.
Current practice is for retailers to treat their rents as an operational cost. Lease obligations are something that is irregularly being discussed with financial analysts, otherwise it's being kept off balance sheet. From 2019 onwards all lease obligations will be accounted for on the balance sheet while the Profit and Loss statement will recognise a depreciation expense and interest expense each year reflecting the utilisation of the leased premises.
In practice, this means a higher burden at the beginning of a lease which then gradually runs off.
Direct implications include:
-no accurate comparison with the past as just about every financial metric will be affected
-as leases differ markedly from company to company, inter-sectorial peer comparison becomes a lot more difficult too
-as leases are effectively a financial obligation, debt levels stand to rise markedly
-for some retailers, including Myer, Wesfarmers and Woolworths, debt levels could more than treble
-some retailers may be forced to renegotiate with their bankers because of sharply higher debt and impact on financial metrics
-many a retailer will face more volatile earnings trajectory
-retailers are likely to respond by negotiating shorter leases in future with more emphasis on exclusions such as turnover contingent rent
-the new standards will result in a rent expense that is very different to the cash rent paid to a landlord, making analysis and comparison by investors and analysts more difficult
Citi research suggests present lease liabilities are largest relative to market capitalisation for smaller cap retailers Myer, Specialty Fashion ((SFH)), OrotonGroup ((ORL)) and Billabong. These are also retailers near the bottom of the sector's operational earnings (EBIT) margins.
Note, for example, that on Citi analysts' calculations, Myer's total debt liabilities are likely to rise to 196% of total market capitalisation. For Specialty Fashion Group the rise could be as high as 156%, on present share price level. For Woolworths total debt could reach 50% of market cap, while for Wesfarmers the increase in liabilities in actual dollars might well be highest, but still this would take total liabilities only to 30% of market cap.
The impact will be smallest for Harvey Norman who owns 42% of the properties from which its retail stores operate. JB Hi-Fi and Premier Investments too will experience relatively benign impacts in comparison with their peers aforementioned.
In all cases, total debt and debt metrics will change. In many cases dramatically so. On the other hand, most retailer's EBIT margin will typically be higher -often a lot higher- because the interest charge on leases is taken below the EBIT line. OrotonGroup, for example, might all of a sudden report an EBIT margin of 27.8% compared with 9.6% today.
All of these changes are large enough to force investors into rethinking their past perceptions, assumptions and value-assessments once the new reporting methodology kicks in, which will be from 2019 onwards.
It can also be expected that management teams at retailers will be focusing on shorter term leases. Because the longer the lease term, the lower the annual depreciation expense as well as the EBIT margin differential.
Share prices for ASX-listed retailers have shown a lot of volatility in years past, and I am probably being gentle here. The above is a virtual guarantee we shall see a lot more of it in the years ahead.
New Website: Mobile Devices
Most visitors to the FNArena website are sitting behind a desktop PC. We envisage this will change in the years ahead.
Society is becoming ever more dependent on mobile and laptops. iPads and smart phones are steadily increasing their total market share of Internet and data usage in Australia.
Which is why the new FNArena website is customised for mobile usage. Incorporating smart technology, the website adjusts to smaller screen sizes. In case of mobile phones, where screen size can be tiny in comparison with today's 21 inch PC screens, a dedicated template kicks in automatically.
This means subscribers can have access at all times, and no matter where they are. At home. At the office. While commuting on bus or train. At the airport before leaving for a well-deserved holiday. At the hotel, or near the beach while otherwise enjoying your holiday.
As long as there is Internet access, and sufficient battery power inside the device, paying subscribers now can look up the latest broker opinions and changes for their stocks of interest, while glancing over news stories, share prices, the calendar, and Rudi's tweets on Twitter.
Those who are using the Portfolio option on the website can keep track via the smallest devices, if need be. Data-heavy applications such as R-Factor, Icarus Signal and the FNArena Sentiment Indicator have been specifically re-modeled and adjusted, so they too can be accessed and used while on the run.
To better accommodate reading on smaller devices, FNArena has developed an innovative, modern era style of publishing which in particular shows its merits when reading important information on the mobile phone. It is easy to share via Facebook, Twitter or LinkedIn. The Print in PDF button works even when there's no Acrobat Reader software in sight (i.e. on a mobile).
The company charts at the bottom of our news stories can look a bit tiny, but then our adaptive technology means you only need two fingers to zoom in and see the finer details.
Font size and amendments can be chosen via the top left icon in the address bar. All key functions are still on the grey-ish horizontal bar, which has the home icon on the left and three horizontal lines on the right.
2016 – L'Année Extraordinaire
It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.
If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).
For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
All-Weather Model Portfolio
In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.
This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: email@example.com
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday around 11.15am, Skype-link to discuss broker calls
-Thursday, 12.00-2.00pm, co-host in the studio
-Thursday, between 7-8pm, interview on Switzer TV
-Friday around 11.15am, Skype-link to discuss broker calls
Rudi On Tour
Your Editor has been invited to present at the Australian Shareholders Association's (ASA) 2017 Securing Your Investing Future Conference to be held at the Grand Hyatt Melbourne from 15-16 May.
The conference details – www.australianshareholders.com.au/conference-2017
Speaker information – www.australianshareholders.com.au/speakers
Program information – www.australianshareholders.com.au/program
Those who register before 31 March 2017 will receive $70 off the registration fee. Telephone: 1300 368 448
(This story was written on Monday 20th March 2016. It was published on the day in the form of an email to paying subscribers at FNArena).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: firstname.lastname@example.org or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup