Good evening,

A very late note this week as I’m over in WA working with our new weatlh advisor Zac Angove developing our business in the mighty West. I’m also, as usual, catching up with family, friends and clients – very lucky to have a job that allows me to work anytime, anywhere.

That being said, getting a weekly note out whilst on the road, with back to back meetings, it’s certainly… challenging. In any case, I’ll get stuck into it.

ASX 200 added 47bps for the week (including today), closing at 6089. Reporting season is in full swing and it’s a super busy time of year, with lots of results, guidance statements and conference calls to digest.

Reporting season so far

Without a doubt the standout result of reporting season so far was Breville (BRG) which rallied 24% after announcing significant growth as a function of their geographic roll-out in Europe and continued strong performance of their Australian and US businesses. Regular readers will know of my love of Breville, it’s just a great business with a really clear, simple strategy. Valuation, coupled with ‘consumer spending’ fears and a bit of Trump tariff uncertainty probably caused the stock to sell off. An opportunity arose to pick a stock growing 5-10% on the top line, with an increasing diverse geographic source of revenue, a really sound research and development-based go-to-market strategy and a proven track record at c.20x earnings. I see this as a business deserving of a FY21 PE of 25x, so assuming analysts are correct (for the record, I think consensus is a bit conservative) they earn 66c, share price can grow to $16.50 over next few years whilst paying >3% in dividends. Last close $14.37. 10 years of price and earnings below.

In other reporting season happenings, Domain (DHG) surprised the market by not going backwards. Though I’m not convinced yet (and admittedly have done a lot of work on it) that it’s going to make meaningful inroads on REA which, just seems to have the market cornered and, seems better placed to handle what undoubtedly, will be a tough operating environment for Aussie property-exposed businesses. Magellan (MFG) is a juggernaut. Another business, kinda like Macquarie (MQG) over the last 5 years that sells off on market weakness but always finds a way to scratch together a great result, pay a 5%+ dividend and MFG in particluar just spills free cash. Just like MQG though, you need to be careful how you value its more ‘cyclical’ performance fees (or in MQG’s case, its trading income)… just gotta be careful you don’t pay for BWM prices for a BWM shell with a KIA engine. Not a negative, just got to know what you are doing. Elsewhere Ausdrill (ASL) is rallying hard into its result which has got me excited! GWA Group (GWA) is perennially underestimated (and really well run) whilst Tassal (TGR) reported some pretty impressive Salmon pricing which has got me worried that I’m not long Huon (HUO) which is cheap + illiquid + yet to report. Woodside (WPL) still killing and dividend is just going up and up because they’ve made great investments in infrastructure-style gas assets that just spit of free cash flow that gives them optionality. Woodside is more like Transurban these days than an oil exploration company…except you can pick it up for a 10th of the valuation.

I don’t realy follow it but A LOT of institutions are long to the eyeballs Bingo Industries (BIN) which got slaughtered today! Pact Group (PGH) is making headway (apprently) but not fast enough to keep the market satisifed. BOQ is going backwards and I think a tie-up of some description in that regional bank sector is getting more and more likely (SUN, BEN, BOQ et al). Treasury Wines (TWE) underwhelmed and every time I read their results, my spidy-sense tingles… something is not right there. That inventory issue in China I reckon could be real, they bundle up a bunch of brands that no one wants with the Grange… I dunno, only time will tell. I’ve got no facts, only a hunch. AMP still a dog. I work in weatlh management and I wouldnt buy any listed weatlh manager/fund manager other than MFG and MQG (for different reasons). It’s a tough business and the boutiques are ruling.

Property

Because I’m home in Perth and my Mum is a real estate agent and all my mates are in their early 30’s, breeding and buying houses, I thought I’d share an article I saw from Morgan Stanley (MS) which got me thinking.

MS survey 1800 mortgage-holders and highlight the fact that almost half of the ‘interest only’ borrowers are ‘trapped’ with 45% of “IO borrowers would have preferred to be on a principal and interest (P&I) loan, but were either refused by the bank or couldn’t manage the higher cash flow. These ‘trapped IO’ borrowers make up ~11% of all mortgage holders and appear higher risk: relative to the broader mortgagor universe, trapped IO borrowers have greater leverage, higher debt-servicing, lower saving and a more optimistic price outlook.”

With 60% of interest-only borrowers being forced onto principal + interest loans in the next 2 years, there’s going to be a lot more homes coming on the market as borrowers simply can’t afford or may be unwilling, to refinance.

So whilst property prices have fallen 10-20% depending on where you look already, I think there’s further downside that is not currently a part of the consensus view. Whilst tighter credit standards have already impacted the borrower of today, they are about to start impacting the borrower from the past (2013 through 2015) when the mortgage market was booming and credit-easiness was peaking. Given wages and employment conditions haven’t markedly improved over that 5 year period, I don’t imagine those households are materially more ‘credit worthy’.

From an investment perspective, you have to be careful with companies exposed to the residential property market, the consumer and the banks (where you need to put an extra margin of safety on your bdd numbers/provisioning.) Luckily for the banks, I think they can already see this ahead of them so fingers crossed, a bit of common sense prudence will allow them to see off the worst of it. Market is already pricing flat earnings and dividends for the next 2-3 years.

Have a good week,
LL