Good afternoon,

Another week of pretty near-zero aggregate returns, with the ASX 200 adding 0.58% and currently trading at 6267. Energy and Resources had a good week while Health and Staples battled, however, let’s be real, these sectors are +36% and +21% for the past 12 months, happy for them to chill out a bit.


Seneca Podcast is LIVE
Jordan and I have managed to record 4 episodes of the Seneca Financial Solutions Podcast, and they are now live and available wherever you listen to Podcasts. I’ve linked up a few popular players below (we aren’t on Spotify yet, but will be in the coming weeks.)

Please SUBSCRIBE and share with your friends and family.
iTunes

Stitcher

Pocket Casts


Gage Roads Brewing (GRB)

The fine folk over at GRB put out there quarterly(you can read it here) on Wednesday, informing the market of their progress. They made $2.9m cash from operations during the quarter, with sales through independent retailers up 173% and draught sales up 145%!!! Importantly, management was able to grow branded sales from 32% of sales to 39% of sales by the end of FY18. This is consistent with the stated strategy and goes a long way towards Gage running higher margins and making bigger profits!

Management continues to deliver on their promises and objectives. The balance sheet is in excellent shape, GRB remains nimble and flexible both financially and operationally. I have high confidence in this teams ability to deliver on their 5-year strategy, at which point (or some time prior) they’ll be acquired for a deserved premium price or shareholders will be left to enjoy the spoils of a highly cash-generative business. Shares reached 13.5c, and closed at 11c on Friday, up 26% since 1 January 2018.


Facebook (FB-US)

Facebook got whacked last week, falling c.20% on the back of disappointing Q2 revenue, user and profit growth. Executives also warned that Facebook’s rapid rate of revenue growth (51% CAGR over past 5-years) would become decline for the rest of this year “high-single-digit percentages from prior quarters sequentially in both Q3 and Q4,” while still expecting expenses to grow from 50% last year to 60%. The company also guided to a squeeze on profit margins, from over 40% historically, to c. 35%.

Why does this matter? Well, some commentators say that the data scandals, the distrust, the movement to abandon the platform have come back to bite Facebook and this may be the start of their demise.

Others, think this is history repeating itself and the company is being overly conservative. 2 years back, FB caused a mini-panic when it cautioned that its revenue growth rate would “meaningfully” slow around mid-2017 because Facebook couldn’t keep shoving more advertisements into its social network. Investors worried for more than a year about those words and the share price went nowhere for 6-months. In the end, the growth rate barely ticked down by late 2017.

A few, think this is tactical and political. FB is trying to avoid scrutiny from politicians and policymakers by temporarily weakening their share price. The actual written words on the update weren’t too bad; it was the conference call guidance that spooked investors.

Look, FB is a ludicrously good business. Instagram is a BEAST. Check the home screen of your mobile device. FB own the most valuable real estate in your life. So what they missed on user growth by a bit in North America… of course it’s going to slow at some point… EVERYONE IS ON THE PLATFORM ALREADY!

There’s an opportunity somewhere in all of this.


Spotify (SPOT-US)

This is just a not-so-humble brag. Our position is up 30% (in AUD) since we first invested/wrote about it in this weekly note just after listing in April. Tasty!

But seriously. Its quarterly was deluxe. Paid subs up 8m in the Q2, now 83m; more than double that of Apple Music. Second-quarter revenue rose 26% to €1.27bn (£966m), impacted a bit by GDPR in Europe (as to be expected).

During the call, management was asked if Spotify’s recent hiring of chief content officer Dawn Ostroff, formerly head of Condé Nast Entertainment, represented a big push into original video programming, company execs said no — that it would remain heavily focused on audio and music.

I reckon the behaviour doesn’t entirely map to the story they are trying to tell us… don’t you?



I caught the above video last week in my newsfeed and thought it was pretty interesting. Aside from Jamie Dimon being a pretty savvy cat, his thesis on why the US economy is strong and why this market might keep rallying is pretty sound. Mr Dimon supports his view, stating:

  • Household wealth is going up
  • Income is going back up
  • Construction activity is going up / housing is in short supply
  • Unemployment is all-time lows
  • Sentiment is good

But it got me wondering, could I say the same thing for Australia?
1. Household Net Worth
While Mr Dimon talks a recovery in household net worth in the US driven by a recovery in the property market. Here in Australia, our property price growth is starting to level off/decline. Property is the primary driver of wealth in Australia. Chart sourced from the ABS.

Here’s property price growth, year on year, with some international peers for comparison.

2. Income
Wages growth is about as low as it’s ever been, down at GFC-type levels but this time, more protracted. The below chart shows quarter on quarter change in wages. So while wages are still nominally going up slightly, by no means are they growing in real terms (after inflation).

And here’s a chart of disposable income against the US. While Australian data is annual and US data points are more regular, the trend of our income flat-lining vs the US accelerating is clear.

3. Construction activity is going up / housing is in short supply
This was the case, but as a result of the 2009-2016 spike in construction approvals, completions have now begun to slow as projects struggle to find financing and pre-sales slow to a snail’s pace.

4. Unemployment
The US is at all time lows, Australia on the other hand… not so much.

5. Sentiment
Business sentiment is pretty solid in both markets.

Look, this is no means a disaster, but don’t get it twisted, global growth might be going up, but that doesn’t necessarily include Australia at the moment. Consensus GDP Growth forecasts by year, by county below.


Movers & Shakers

Nine (NEC) fell while Fairfax (FXJ) rallied on the well-reported merger. What can I say about this that hasn’t already been said? Umm, I think the cultural fit will be awkward, plus I think old media is dead so, this probably delays the inevitable through sacking a bunch of people and ripping out.

Mayne (MYX) on the bounce after some decent broker upgrades and the acquisition of Efudex. It’s been a long time coming.

Kogan (KGN) FINALLY heading back to the PE it deserves, down c. 50% off its highs.


 

Have a good week,
LL