November 2011 Review Comments
Written by Tony Gray   
Thursday, 02 February 2012 00:00
Markets continue to trade on sentiment and the next instalment in the European debt saga. Metal prices have recovered somewhat but concerns about a continuing slowdown in the rate of growth in China exist. An easing in inflationary pressures allowed the Reserve Bank to cut
interest rates by a quarter of one percent – but this had already been more than factored in by money markets and bank term deposits.This month I have focused on a number of specific investments – that may or may not suit your
portfolio position. 

Cash & Fixed Interest

The higher level of savings in Australia means the banks are able to pay less on term deposits and reduce their reliance on wholesale money markets. We expect this trend to continue and hence are comfortable re-investing maturing term deposits in longer dated deposits to maintain the rolling maturity strategy. We expect term deposit rates to fall further in the medium term.

Woolworths have offered a floating rate note, but unfortunately did not consider shareholders adequately – setting aside only $25 million out of a $700 million float for shareholders. The balance will be placed via institutions. With no interest paid on applications refunded and a sizeable scale-back likely, we recommend waiting for the notes to be listed and then consider investing. The notes have a 25 year term, but the strong expectation is that they will be paid out in 5 years – since (1) this is expected in order to issue future notes, and (2) the interest paid rises by 1% p.a. after 5 years.  The notes appear quite attractive – with a yield of between 3.25% and 3.50% above bank bill rates. While the notes are unsecured, we are very comfortable with the underlying business and some allocation may be considered.

International Shares/Investment

The Australian dollar recovered somewhat in the past month and an allocation to Platinum Asset Management’s International Brands Fund may be considered. The weakness in many global markets has seen well known companies trade at lower levels, despite strong growth in demand from Asia for their products. BMW was held out as an example. With weaker currencies in the developed world and rising middle class purchasing power in Asia, the demand for branded products appears bright. Whilst the manager applies a higher
than average management fee (the internal cost ratio is 1.54% p.a.) the long-term track record justifies the added expense – particularly when traversing negative markets. The product disclosure statement is available at


We cannot go past examples such as BWP Trust (formerly Bunnings Property Fund) as worthwhile investments. Following some recent acquisitions the following metrics apply:
• Unit Price: $1.69
• Net Tangible Asset Backing: $1.90 (i.e. trading at a ~11% discount to asset backing)
• 2012 Expected Yield: 7.8%
• Weighted Average Lease Expiry: 8.4 Years
• Gearing (debt to tangible assets): <25%
• Portfolio Composition/Comment
o 91% rental income sourced from Bunnings/9% other industrial. Intention is to
limit non-Bunnings exposure to maximum 20%.
o Properties held across Victoria, Queensland, NSW and Western Australia, South
Australia and ACT.
o Bunnings is a very profitable business but a very high proportion of rents are
linked to inflation and not turnover. Importantly, BWP is the landlord, not the
business operator.
o Renamed BWP in April 2011 to reflect independence from Bunnings and at a
recent presentation it was noted the group could potentially own properties
from the competing Masters hardware store concept - being developed by
o I see long-term value in the land value of the sites owned – being quite large and
adjacent to major population centres.
o capital growth BWP’s core purpose is to ‘provide a premium commercial real estate investment product, providing unit holders with a secure and growing income stream and long-term capital growth’. My feeling is that a 7.8% p.a. income yield and expecting growth in line with inflation of (say) 2.5% p.a. lifts the total sustainable BWP return to 10.3% p.a.

Australian Shares

The ability of the Reserve Bank to cut interest rates and a likely fall in the Australian dollar in response to a weaker economy or due to overseas ‘shocks’ does serve as a shock absorber of sorts for Australian shares. The level of gearing across listed companies is also at historically low levels and from a balance sheet and cash-flow perspective companies are much better placed than in 2008.

On a 5 year view accumulating stock at current levels is expected to generate a healthy total return compared to cash. Dividend returns are expected to provide the bulk of returns, but with some capacity for growth.
We recommend cautious accumulation of stock on weakness (especially if panic selling sets in again) across a range of large and small companies.

Examples include the following:
Woolworths (WOW) $24.40 - a trailing yield of 7.1% (includes franking) and inflation+ growth is expected to generate a 10%+ p.a. total return. Whilst it is not apparent from the chart, earnings per share and the dividend increased by 65% from 2007 to 2011 and the equivalent 2007 share price peak would now be $58.50 per share compared to the current $24.40 (i.e. Woolworths is trading at a 58% discount to the 2007 bull market earnings premium).
Talent2 International (TWO) $1.19 - earnings and the quality of earnings have been rising for some time, with 2/3rds of earnings now derived from the managed services business (the remaining 1/3rd from recruitment). Despite this the share price has declined to the low end of the 2 year trading range and the stock has the ability to generate growth well above the 3.6% p.a. required to record a 10%+ p.a. total return (allowing for the gross dividend yield of 6.4%).

From 2007 to 2011 earnings per share have risen 170% and yet the share price is trading 62% lower than the peak. This reflects a dramatic reduction in the growth premium applied to the share price. The recent market weakness has cut 20% off the 2009 to 2011 average share price of $1.50, when in a ‘normal’ market the result would have justified a rise above $2.00.
Talent 2

Engenco (EGN) $0.91 – there will be a 1:10 share consolidation tomorrow that will result in an equivalent share price of 91 cents (from 9.1 cents). Despite the low share price, there is potentially strong growth from this micro-cap stock. With a market capitalisation of $111 million the company generated a $6.8 million net profit for 2011. This marked a dramatic turnaround from 2010 losses and can be attributed to action taken by new management.  Dale Elphinstone holding 35% of shares on issue and since joining the board in July 2010 and installing the managing director, Engenco has been recapitalised, loss making businesses sold and two well regarded boutique managers (Thorney Holdings and S.G. Hiscock) are now on the share register.
The company provides rail work and propulsion systems (diesel engines) and earnings are linked to mining sector activity. There is no specific guidance from the company beyond noting substantial profit growth for 2012 is expected. Despite the achievements of the past year, the share price has slipped by almost 50%.

Gold / USD

We recommend moving out of gold exchanged traded fund units and replacing with USD – the Betashares exchange traded fund that holds $US – for those who are looking to have a hedge against falling growth asset values.
Last Updated on Thursday, 26 April 2012 10:21

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