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?…

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…

Telstra is a Sell

Coles-Myer (before and after the split) was and still is the worst retailer in the country saved only by the grace of scale.  Before selling off the Myer business to private equity, Coles-Myer traded off its glory days when it could boast attracting 20c cents of every retail dollar spent in Australia.  The problems that Coles currently has in selling itself are reflective of its ability as a retailer.

Telstra is arguably the worst telco in Australia saved too, only by the grace of scale and infrastructure, a legacy from when it was a government-owned entity.  It is the country’s incumbent telco.  A powerhouse whose share in the broadband market is growing despite having the worst offers on the market.  It defies belief that to report a faulty modem I had to wait cumulatively over 3 hours on hold over 3 days before being sent another modem that was equally faulty.  A visit to the Telstra stores with the faulty product seeking a replacement was met with a curt, “We can’t do that.  You’ll have to do it via the phone”.  ‘That’s half my problem!’ I thought.  The kicker was when I finally got through to Telstra to cancel my broadband account I had to call back because their systems were down.

Telstra is a sell.  The result has come and gone and management failed to provide the surprise the market as expected…From here on in you have nothing more than headwinds: In November the capital gains tax for the instalment receipts halves; In May 2008 the second instalment is payable, and; there is about another 18 months of uncertainty re a decision on Fibre To The Node (FTTN).  If I wouldn’t use them for my own purposes, why would I invest in them?

Goodbye nuclear…hello gas

It sounds like a plot from Godzilla – Japanese nuclear power plant built on fault line threatens community after earthquake causes radiation leak.  From what I recall from Mike Brady the architect, the words nuclear power plant and fault line never appeared in the same scene.  It would appear that that logic was lost in translation by the time the Brady Bunch made it Japan…Unfortunately this was the latest in a string of nuclear accidents which up until a recent moratorium had gone largely unreported.  The result, not surprisingly, is a population becoming increasingly disillusioned with the vision of nuclear power being environmently friendly, albeit they have found it is a great deal easier to spot people in the dark.  

Japan is largely powered from 2 key sources – nuclear and gas.  It currently has 55 nuclear power plants that supply 30% of its electricity with more planned (maybe).  This disaster will draw significant investigations into Japan’s nuclear power industry.  So what lessons can be drawn from this experience?

1. Don’t build anything important on a fault line;

2. Beware a Brady sporting a tiki cursed idol found in Hawaii, and;

3. Gas demand out of Japan will rise.  The Australian gas market will tighten.

Metcash: Part II

Metcash shares fell 7% after their result in early June.  The numbers were great.  The outlook, however, disappointed (see earlier blog Metcash 101 for background).  By all accounts, the moons could not align itself any better. for Metcash  Not only is one of its largest rivals distracted by the prospect of selling itself but it is gaining market share, its a store rollout story, its refurbishment program is delivering the returns…blah blah blah.  The good news just keeps going.  The only problem is that when management gave guidance, they basically assumed that all gains made would be forgone overnight.  In short, that it’s rival would be bought and regain its lost market share instantaneously.  Think doing a u-turn on the QE2.  It will take take time.

While Metcash management is quiet ready to concede their outlook actually looks rosy, Richard Goyder, the CEO of Wesfarmers, who has just successfully won out in the battle for Coles has at least reaffirmed that he does not expect any significant turnaround in the Coles business for 3 – 5 years!  Slightly later that what Metcash has assumed by some 3 – 5 years…

You can only defy gravity for so long…I can’t see how Metcash will not be able to upgrade their forecasts on 30 August…

Metcash 101

Metcash:  A case study in what happens when management compensation is linked to EPS rather than share price performance…

When thinking about how CEOs and CFOs ought to be compensated/incentivised, consider this.  What is best for the company and what is best for the share price are sometimes mutually exclusive.

Metcash should be having the run of the ever.  It’s store roll out story is well on track, its store refurbishment program is delivering strong results, it’s winning market share off the larger incumbents, its expanding its gross margin and is getting a free kick as one its biggest competitors, Coles, is going backwards as its owners are looking to sell.  So why then was the share price hammered after its last result?  The result itself was great.  What disappointed was a unnecessarily conservative guidance for the next year.

Management have basically suggested that their good fortune is effectively the result of the problems at Coles.  Their guidance suggests that Coles would be sold tomorrow and regain all the market share it has lost over the last 2 years immediately.  Anyone who watched the private equity players take some 2 years to simply stabilise Sainsbury’s market share in the UK will know the difficulty of the task.  You can see the frustrations of investors.

Those who have met Metcash’s CFO usually develop a uniform view…F@#*!  Unfortunately between him and Andrew Reitzer (CEO), they still run Metcash like a private retailer in downtown Jo’berg and not like the Top 100 company it has become locally. They have done an exceptional job with the business but have shown a degree of conceit towards investors and the share price.  

The outlook looks great for Metcash.  It’s moons are aligning and if you can ignore management’s attempts to communicate with the market and just focus on them as business operators then Metcash is great value.  It’s not hard to imagine that numbers will have to be upgraded at the 30 August AGM.

Tip of the Day: Easy Money…

Background:  Mexican building materials company Rinker is currently trying to buy the Australian building materials player Rinker.  Cemex has offered US$15.85 per Rinker share.  That equates to around A$18.85 which is where the shares are trading.  BUT it has also offered to pay punters A$19.50 for their first 2,000 shares.

Therein lies the arb.  If you buy up to 2,000 Rinker shares now at $18.75 and then simply accept Cemex’s offer, Cemex will pay A$19.50 for your first 2,000 shares.  That’s a quick 4% return to park your money for a couple of weeks…For more info, speak to your friendly, local broker.