Share Investor: January 2010

Sunday, January 31, 2010

VIDEO - Simon Moutter on Australian Airport Purchase

Source: ONE News, Thursday January 28, 2010.

Auckland International Airport [AIA.NZ] CEO Simon Moutter discusses the airport's strategy following its $166 million purchase of a stake in two Australian airports and its $126 million share offer announced on Wednesday.

Please keep in mind that Simon was the chief operating officer at Telecom New Zealand [TEL.NZ] for 12 years before becoming AIA CEO, so he and his cohorts at Telecom have a track record of a massive failure in Australia already with Telecom's ill fated purchase of AAPT, which continues to have negative financial ramifications for the Telco and its shareholders to this day.

He keeps talking about the Australian Airport as a "step out" from the ports main asset, their Auckland Airport asset.

As an AIA shareholder I don't feel as positive as Simon about our purchase and feel a little nervous considering all the business jargon he is using to explain his reasons for the buy.

Just a footnote, the new share issue at NZ $ 1.65 could provide the opportunity for new AIA investors to get in cheaper than the closing price last Tuesday of $1.92 as the share price finds a new level post capital raising.

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Wednesday, January 27, 2010

Auckland Airport Capital Raising a fair call

The announcement today that Auckland International Airport [AIA.NZ] is going to raise NZ$126.4 million from shareholders to pay for two hick town airports in the middle of nowhere in Australia should be no surprise to AIA shareholders.

AIA defends its Australian airport purchase

The airport borrowed heavily to fund the purchase and now shareholders must take the brunt of what I see as a poor decision and bail out AIA directors who apparently have money to burn or risk having their share holding diluted - boy I am going to have to eat dirt if this buy is a success.

Anyway, bad business decisions aside, the structure of the capital raising doesn't look half bad.

Allocations of new shares will be attributed on the basis of one new share for every 16 shares held and no extra shares will be given to institutions or any medium sized shareholder will be scaled down their allocation. Every shareholder big or small will be treated in the same manner and for that management should be handed a bunch of fresh pansies. This approach contrasts the many capital raisings of 2009 which favoured smaller and very large shareholders but largely ignored medium sized players like myself who had no choice but to have their shareholdings diluted because of an inability to get a proportional allocation of new shares.

Incidentally AIA is a small shareholding in the Share Investor Portfolio and at 5000 shares my entitlement will come to 312 shares, of which I will take up in full. At NZ$1.65 per share the cost to me will be just over 500 bucks.

The only gripe that I have (I am only happy when I am moaning) is at $1.65 it is a pretty hefty discount to Tuesday's closing price of $1.92.

The capital raising will be fully subscribed.

Related links

Download the AIA offer prospectus and associated documents here.

Auckland International Airport @ Share Investor

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Tuesday, January 26, 2010

Economy 2010: Taking the long way

Further to a post I made yesterday about opportunities to buy cheaper stocks, I touched briefly on the state of the economy.

Let me expand on that if I may today and we will forget it again for another 6 months, because I know it is easy to bitch and moan about this stuff as I have done on a number of occasions.

In my opinion the current economic downturn is going to take years to recover from. We have seen a relaxing of the fervour that started in September 2008, following the collapse of big financial institutions the world over and since then we have had an apparent lift in confidence due to trillions of dollars of borrowed and the printing of currencies (cheers China!) and a subsequent lift in various financial indicators; slow down in jobless growth, small GDP growth, global trade improving, etc, etc.

As I said above though, this move towards the positive is based on borrowed money and it has to be paid for, eventually.

As many of you will know, including myself, a mortgage like that can be hard to pay back when your income might now be less than it once was and while you are paying that back other forms of spending will be cut back and clearly that impacts on the economy. This huge unprecedented debt is going to constrain the economy in New Zealand and in every other country deep in debt. Even China, who is the lender, will be impacted because we wont be buying as much of their quality produce - only a hint of sarcasm there.

Most of us, but not all, will need to be prudent to survive the next 5 years. Cut back where we can and pay down debt if and when we get the chance. More debt taken on during this time will merely postpone the inevitable hounds at the door. It aint hard, it just takes some discipline.

While we are not in a 1930s depression era economic downturn, we are going to suffer, I think, economically for as long as those folk in the 30s did, in our own way. Constraint, low or no growth and inconsistent and unsustainable upturns will be the order of the day, until that debt is discharged.

There are also other shocks to come from the heady days of economic growth during the 20 years pre 2008. Complex derivatives failures and commercial property shocks look set to come and spoil what confidence we may have gotten back.

This is all part of the economic cycle however and is nothing new and there will be opportunities to buy as others must sell cheaply to pay down debt levels.

On that last positive note, for me anyway, I will bring an end to my gloomy outlook - see you back in 6 months for an update.

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Sunday, January 24, 2010

Market Correction: Excitement Building!

Once again global stockmarkets are rightly nervous about the so-called economic recovery in the United States, with Obama acting like Robin Hood without an arrow and rumblings of credit clampdowns in China, the DOW has lost almost 5% in one week as a result.

It is bloody exciting!

I was getting sick of the disconnect between the reality of a debt led "recovery" and the fantasy of investors in stockmarkets like the DOW, who have pushed that particular market up by over 40% in less than a year -incidentally that is the largest bull run since the 1929 Wall Street crash and we know what happened after that particular market "recovery".

Yep 40%, does anyone think we are doing that much better now than we were this time last year?

Not this fellow.

I last bought stocks in July and haven't felt tempted yet until The Warehouse Group [WHS.NZ] shares took a dive recently, simply because some companies are overvalued compared to 12 months ago.

The excitement is building now for me as there looks like reality could have dawned on some and they could be rushing for the exits as I am happily ready to enter the market again at a better price.

One the economic outlook, there is anecdotal evidence on my part - I tend to trust that more accurately than what economic soothsayers are being paid to say - that the economy in New Zealand, while not completely buggered, is still hanging on a knife edge between growth and recession and it appears that any growth is going to be sporadic and a long time coming.

There just isn't any money out there.

A good time to buy assets if you do have some moola and the NZX is likely to take its lead from the US market where it dropped by over 200 points last Friday.

Happy buying.

Recent Share Investor Reading

Reason to be cautious on Nuplex forecast

2009 was Nuplex Ltd [NPX.NZ] worst year on record, with a massive capital raising big losses and a huge dilution of value for their shareholders.

2010, according to Nuplex, is going to be their best year on record with an estimated profit of between NZ$120-135 million. This is after 3 profit upgrades in the last 6 months.

This is good news for the company and as shareholders you might be thinking that and you are probably right to think that but then I believe you must treat these results with an element of caution and this is why.

Like their worst year in 2009, management did not "foresee" that coming and according to managing director John Hirst the 2010 upgrade has been:

"...proving as difficult to forecast the upside of the post global financial crisis period as it was the downside at this time last year..."

In addition to management's inability to forecast accurately, their current forecast is expressed as, earnings before interest, taxes, depreciation and amortization (EBITDA). This measure of accounting practice can be used to hide detail that should be known by the shareholder and is pretty much the accounting equivalent of hiding nuts under shells. Unfortunately it is used far too often by lazy, ineffectual accountants directed by lazy dishonest directors to hide bad figures from shareholders - look deeper Nuplex shareholders!

Given the inability of the company to accurately forecast results over the last 2 years and also given that the same management who governed the company into their worst ever year in 2009 and left them on the brink of bankruptcy (they would have gone down the tubes if not for generous shareholders) are still at the levers of power, one would have to take a closer look at Nuplex forecast for 2010, especially when one considers their "cavalier" attitude to accounting practices and therefore their shareholders .

Beware.

Nuplex @ Share Investor

Nuplex rights decision a dilemna for shareholders

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Thursday, January 21, 2010

Cadbury Acquisition a good deal for Kraft

I am still following the Kraft Inc [KFT.NYSE] acquisition of Cadbury PLC [CBRY.LSE] . A conditional deal for sale of Cadbury to Kraft has been approved by Cadbury management but it still needs the approval of both Kraft and Cadbury shareholders.

Nearly 10% shareholder of Kraft, Warren Buffett, publicly came out against a deal on Jan 5 and today on CNBC indicated that he would have voted against the acquisition.

The latest comment, if it isn't just being made to blow off some steam, appears to suggest that Kraft is paying too much for the maker of Dairy Milk, Jaffas, Chrunchie , Moro and other well known brands but this is where Buffett and myself part company.

Cadbury is a global brand and has dominance in the majority of the markets that it operates in, New Zealand is no exception.

Because of its strong brand position globally, its potential to grow in all its markets - especially in Asia - and the largely untapped market for Cadbury in the United States -where Cadbury is a minor player - the price to be paid for full control of the company must show a healthy premium to its recent trading activity. Cadbury has a strong economic moat - good brands, with high cashflow with a reasonable barrier to entry by competitors.

Warren Buffett seems to be ignoring this fact and it seems contrary to previous indications by him that in order to gain control of a company during an acquisition a premium is more often than not paid.

The price being paid by Kraft for Cadbury isn't the deal of the century but it is approaching fair price - on Kraft's part - considering what Kraft are getting for their shareholders moola.

Locally, New Zealand media have been speculating that Cadbury's Dunedin factory maybe the subject of staff cuts and that local brands maybe for the cut. While this is of course possible because of Kraft's high debt levels due to the acquisition and pre-deal debt levels, it would be folly on Kraft's part to repeat the recent mistakes of Cadbury in New Zealand and in other global markets.

I am having sugar overload over this deal. The Kraft acquisition of Kraft is not yet a fait a compli however, so there is still room for a diabetic attack. There is still time for other Cadbury tyre kickers like Hershey to make a higher bid for some of the sweet brown stuff.

Cadbury @ Share Investor

Bitter - Sweet Chocolate Business
Cadbury could learn a thing or two from 1980's Coca Cola Experiment

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Tuesday, January 19, 2010

Stock of the Week - Reprise : The Warehouse Group

In this Stock of the Week we are going to be looking at New Zealand's dominant general retailer The Warehouse Group [WHS.NZ].

I picked it in June 200 9 as a Stock of the Week and am including it again in 2010 for much the same reasons.

It has been trading at a pretty steady share price for the last 12 months (marking time until news about its sale is forthcoming) at a range between NZ$3.00 - $4.55 and represents value whether you want it for a quick buck for its probable sale or if a sale falls through and you want a good solid company for the long term portfolio.

It approached around the middle of that range, closing at $3.88 today.

On its long-term merits the company has a dominant position in its sector of the retail market and a great cash flow that helps contribute to a gross dividend north of 8%. Spectacular in these days of 3-4% returns for term deposits or 5-6% for rental property.

Retail is struggling these days but that isn't going to last forever and The Warehouse is coping well with the current recession. It historically does well in recessions because of its low price perception.

Its 2009 Christmas trading period was flat in terms of sales and that is no surprise as other retailers experienced similar trading. The key will of course be the margins.

The company has recently met its own forecast for profit in its October release of its 2009 full year profit (see 2009 annual report for details) and its forecast for FY 2009 is on track to meet last years profit of $90.76 million.

I am looking at taking the plunge again to add to my holding.

Good luck!

Disclosure - I own WHS shares in the Share Investor Portfolio

Stock of the Week Series

Reprise - Contact Energy Ltd
Restaurant Brands
NZ Refining
Ryman Healthcare
Mainfreight Ltd
Fisher & Paykel Healthcare
Xero Ltd
Auckland International Airport
Sky City Entertainment Group
Burger Fuel Worldwide
Michael Hill International
Contact Energy Ltd
The Warehouse Group
Fisher & Paykel Appliances
Stock of the Week: Telecom Ltd

The Warehouse Group @ Share Investor

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The fight for control begins soon

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Sunday, January 17, 2010

Bitter - Sweet Chocolate Business

The scramble for a king-size block of Cadbury PLC [CBRY.LSE] by Kraft Foods Inc [KFT.NYSE] fascinates me. I love business and investing but I have to confess also to be somewhat of a chocoholic - doctor it has been 3 minutes since my last bite. In a protracted bid that has been going since a formal offer by Kraft was made in November 2009 after it telegraphed interes t in the Dairy Milk maker in September the takeover process has been full of harsh words, threats, finger pointing and egos from all sides of the chocolate vat.

Since then Kraft has been rebuffed twice by Cadbury and those harsh words have been flowing like Cadbury Creme eggs between the CEO'S of Kraft and its sweet milky target Cadbury. Meanwhile Kraft's biggest shareholder, Warren Buffett, has issued a press release urging Kraft not to pay too much for the company.

In this sickly mix of nuts and fruits comes interest from just about every major chocolate company in the world. Ferrero Rocher, Nestle', and Hershey have all been on the radar but all seem to have been dismissed as having short pockets or not serious, save for Hershey which seems to be mulling over a formal bid of its own according to some sources.

The problem for Kraft is that Cadbury contend that its shares are worth more than what they are offering and Kraft's bid significantly undervalues the long-term prospects of the company and they will have to increase their bid before the January 19 deadline if they want to take a chip off the Cadbury block.

I have to agree with Cadbury. The company has a strong presense in most parts of the world and its brand and products - no matter what some might think of its sweet milky almost chocolate free taste - dominate the minds of consumers and their sweet ways when they make a decision to buy a quick convenient snack.

This brand awareness has made Cadbury one of the worlds most successful chocolate makers in the past and that is unlikely to change any time soon.

For these reasons alone Kraft need to raise their offer and any other company considering a move on Cadbury must also take into account the company and its fine pedigree.

Warren Buffett, as a 10% holder of Kraft stock, was against Kraft's bid principally because of its intention to issue new shares in Kraft to help pay for the purchase. I have just been reading Warren Buffett on Business: Principles from the Sage of Omaha, a collection of Warren Buffett's letters to Berkshire Hathaway shareholders and he makes it very clear in a number of his letters that he is against the dilutionary effects of such transactions for the predator company if it doesn't present value for the predator. Of course the price paid for the company is a key factor as well and if the price is right for the takeover then the preferred option of purchase for Buffett is cash and preferably non -borrowed cash at that.

Cadbury would be a great company to own. Good cash flows, strong brands with a competitive moat and profit to boot.

Any suitor will have to pay a premium to take control of the purple one and Buffett has stressed he doesn't want Kraft to be that suitor but if he wants a piece of it - and I think he does - then Kraft and any other buyers are going to have to sweeten the deal beyond the current valuations put on Cadbury's assets.

I cant wait for the next move!

Cadbury @ Share Investor

Cadbury could learn a thing or two from 1980's Coca Cola Experiment

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