22 October 2019
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Search for the stars and standouts

Simon Bond
23 June 2010

Is the market cheap or expensive?

Does anyone know anything anymore? Sometimes it helps to go back to the basics and ask ourselves why we invest, what is the level of risk we are prepared to take, are we looking for income or growth?

What do we know about the businesses we are investing in and who are we relying on? Remember, buying shares is buying a piece of the business. Once you own the shares, you are a partner in the business to all intents and purposes. Of course, if you only own a small number of shares, you won’t have any say in management decisions or future direction. This is why you need to look at management before you buy or sell an equity stake in the company.

How has management positioned the company to weather the downturns when they come and has the company been positioned to take advantage of the upswings when they arrive?

Over the past week we have again been dogged by bad news and events outside our control but the market over the past few weeks has very quietly gained around 10 per cent.

It certainly does not feel like it, but the numbers tell the tale.

The end of the financial year is fast approaching and now is a good time to focus on which companies will deliver and which companies will disappoint.

Some have already flagged write-downs and warned the market that life is tough right now at the operational end.

An excellent illustration of under-promising and over-delivering came in the form of an announcement last Friday from listed company, Advanced Share Registries (ASX Code ASW).

They announced an expected increase in profits of close to 75 per cent over the previous period (at this stage I declare an interest in the company as I am a shareholder).

Whilst the company is at the smaller end of the market, I have held shares in Advanced for some time and I was attracted by a number of issues.

  1. Management of the company are significant stakeholders and, therefore, have an interest in the company performing at its optimum.
  2. The company has no debt and has solid cash reserves in the Bank.
  3. The company pays a great fully franked dividend that is paid out of operating cash flow, the yield on ASW is around eight to nine per cent fully franked which grosses up to around 14 per cent when considered on a pre-tax basis.
  4. The company is in a growth industry (provision of share registry services) and is headquartered in the growth state of Western Australia.
  5. The company is very well leveraged to take advantage of improvements in technology. Faster Internet speeds make the company even more attractive, as a big part of their business can be conducted online.  

Compare the above with the announcement on Tuesday from Elders Ltd, formerly known as Futuris, who predicted an underlying loss of $8 million to $14 million for the year to 30 June, compared to a previously forecast underlying profit of $55.7m. This was attributed to sales in the June quarter being lower than expected.

"I apologise to all the shareholders who are listening in,'' Elders’ chief executive Malcolm Jackman told a conference call, less than 12 months after raising $550 million from investors.

Shareholders “will need to continue to be patient” with Elders, he said.

Mr Jackman said the company was taking decisive action but acknowledged that Elders was gaining a reputation for constantly releasing bad news to the market.

"(This) is clearly a very, very unsatisfactory performance for the business and for our shareholders," he said.

The market reacted savagely, sending Elders shares down as much as 46.3 per cent to 44 cents, the lowest point since it listed in June 1981.

What can one say to the poor suffering shareholders when they are given such a bitter pill to swallow?

Last, but not least, it was pleasing to see at least some announcement from the Federal Government over the weekend clarifying the situation for Telstra.

As we noted in last Wednesday’s column, the future for Telstra is all about being able to compete in the auction process for the upcoming spectrum. For those who missed it we wrote:

“The new iPhone that is being released in late July in Australia will again alter the habits of everyone who is connected or uses a mobile phone. We have long made the case that bandwidth requirements will also grow exponentially.

That is why Telstra quite simply cannot afford to be locked out of the next wave of spectrum that will be released by the Federal Government. The market may also be telling you the same thing, as the share price of Telstra has been moving convincingly against the index.

Whilst some of the rise may be attributed to investors becoming more defensive and reducing their exposure to Australian Resource companies, I remain convinced that Telstra is still the best-positioned company to deliver to all Australians what they need, to remain relevant in the Internet age.

They have scale, capacity, bandwidth, infrastructure, people and presence”.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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