The Donut King – Alan Moss

A year after the Australian press expressed its disgust with the $30m paycheck for Macquarie chief Alan Moss, they are at it again.  With Alan Moss’ income hitting $80m this year (including his retirement kicker), the media and politicians are at it again.  This time they demanding for something they call ‘pay restraint’.  As the idea suggests, it involves individuals suggesting to employers that to perhaps not pay them so much given the amount may be well in excess of they what they actually require.  Sounds great…. if you are an incense sniffing, butterfly loving, rice burning, ant saving monk in the middle of a rice patty.

Should it be of a concern then that the man who has replaced Alan Moss is Nick Moore, whose name sounds more like the Macquarie mission statement rather than a name?…

Futuris – Groundhog Day

Futuris is one of Australia’s listed agricultural stocks.  It’s a diverse business that is trying to be everything to Australia’s farmers – retailer of farm products, insurer, plantation operator offering tax effective respite, an auto parts business and grain aggregator.  Unfortunately that doesn’t include being an investment grade stock pick.  Consider that since of 2005 the stock has delivered a 6% annualised return compared to 17% for the market.

Furthermore, if you have seen one of their management presentations you’ve seen them all.  The story remains the same but nothing ever progresses.  The only thing that changes is the menu and my increasing frustration at not being a coffee drinker.

That said, given that Australia is coming out of one its longest droughts and that China’s appetite for soft commodities can only increase, it becomes clear that it is the agricultural sector’s time to shine…and frustratingly Futuris will likely be taken along for the ride almost by default.  My money, however, is on the likes of Incitec Pivot that actually have quality management, greater leverage to the ag cycle and have a commendable track record.

What happens at four strikes?

The Australian listed Healthcare Sector is somewhat bipolar.  At one end you have global dominating powerhouses like Cochlear (hearing devices), Sonic Healthcare (pathology) and CSL (plasma products & vaccines).  At the other extreme lies Sigma Healthcare (ticker SIP)…victim of mismangement and misguided ego. 

In under a year SIP has transformed itself from being an industry leader to being  a basket case.  SIP’s nightmare began when it acquired Arrow Pharmaceuticals, Australia’s leading generic drug manufacturer, from the Duchen family.  SIP offered big discounts to its customers (ie, pharmacies) through its wholesaling business in order to shore up market share.  The idea was it would more than make up for it via its foray into generics.

Enter Ranbaxy, India’s deep pocketed generic drug manufacturer, which came into the Australian market and destroyed the pricing environment through deep discounting.

Then there was the bungled bid for rival Symbion. 

This was followed by a mismanaged buyback of the Duchen’s SIP stake.

And then there have been 2 successive profit downgrades in the space of 8 weeks as the discounting in the generic space showed no sign of easing.

Management credibility is a fragile thing.  With the departure of the CFO and the Financial Controller and a CEO whose guidance is as useless as a tablet labelled Placebo, something has to give.

As a final insult to injury, the CEO has not turned up to investor presentations at exactly the time when he needs to be doing the most to try and muster some reassurance.  As my grandmother used to say, “Shit or get off the pot!”.  It’s time to go.

Babcock & Brown Wind (or lack of it)

I went for a bike ride this morning.  Conditions were perfect…sunny and plenty of interannual variability.  That apparently is the new euphemism for no wind according to the management team at Babcock & Brown Wind, the listed windfarm satellite of Babcock & Brown (ticker BBW).  It basically means buggered if I know what happened to the wind but I’d be amazed if this happens again next year.

This is an excellent stock that suffers just one problem…no wind.  Not ideal for a wind farm operator.  Management is still very happy to stick with P50 (ie. an estimated wind yield that is expected to be exceeded at least 50% of the time…in the last 7 quarters BBW hasn’t).  Regional diversification should go some way in rectifying the issue.  You see, 75% of the latest result’s shortfall was caused by wind and 75% of that came from the Spanish portfolio.  So far this year, BBW’s regional exposure has risen from 6 to 11 regions.  To put that into context, Spain’s representation of the group portfolio has fallen from 30% to 13%.

While BBW will see over $200m from the Alinta deal and came to the market back in April, they will have again tap the equity market when they exercise the right to pick up the balance of Enersis.  In the meantime, there are still plenty of acquisition opportunities given the fragmented nature of the industry.  The top 4 players hold about 20% with the rest made up of small operators like German dentists who may have just 2 turbines to milk tax benefits.

BBW is trading at a significant discount to the only other listed pure wind play, France’s Energie Nouvelle.  There is also another player nearing its IPO, Spanish player Iberenova.  That too is being priced at a significant premium to BBW despite the fact that BBW actually has a significant development pipeline (so strong in fact that they can’t even consider massive markets like India or China given the opportunities still available in the OECD).  

European investors understand windfarms.  They have been using them for 20 years and they now represent about 6% of Germany’s power use.  In Australia, wind power is still in its infancy and accounts for only 1% of all power generation.

So regardless of whether the wind blows or not, there is enough conservatism in the guidance to ensure that the distribution is protected.  That’s an 8.5% yield…and that’s not blowing in the wind…

Empire building…

It took Kerry Packer 31 years, royal commission into his tax dealings, a once-in-a-lifetime Alan Bond, One-Tel, a bout of polio myelitis, a reinvention of cricket, eight heart attacks, a new kidney and death (or as close as you’d ever want to get) to build up his media empire.   It took his son just 18 months to unravel it…