Tag Archives: australia

I Don’t Understand Why Ausnet Moved 10% Higher After Its Update

Summary Ausnet’s performance doesn’t seem to improve, and the high capex (sustaining + growth) results in a free cash flow negative result. Despite being FCF negative, Ausnet has actually increased the dividend, attracting more income investors. The dividends are currently borrowed by issuing more debt, but with a net debt/EBITDA ratio of in excess of 5, it might be locked out of the debt markets. I still prefer to sleep well at night, and I’m not taking a stake in Ausnet. Introduction Back in June, I warned investors Ausnet’s ( OTCPK:SAUNF ) dividend was at risk because the company had to borrow cash to fund the dividend payments. That’s a red flag for me, and even though a large part of the capex was growth capex, I still don’t feel comfortable investing in such companies. SAUNF data by YCharts Ausnet is an Australian company and you should most definitely use the Australian Stock Exchange to trade in the company’s shares. The ticker symbol in Australia is AST, and the average daily volume is approximately 3.25 million shares while the daily dollar volume is almost $4M. The H1 revenue jump was nice, as was the net profit result The top line looks really good, considering Ausnet was able to increase its revenue by 10% to approximately A$1.07B ($770M). In fact, the income statement looks really good, as not only did the revenue increase by a double-digit amount, operating expenses also fell by approximately 3%. While this doesn’t sound like a big deal, these two factors allowed Ausnet to increase its operating income from A$340M ($245M) to A$455M ($327M), a 34% increase compared to the first semester of the financial year 2015. (click to enlarge) Source: Financial statements The (much) higher operating income also led to a higher operating margin, which increased to 42.5% compared to 35% in H1 2015. The finance costs increased, which is directly due to the fact Ausnet had (and still has) to issue more debt to cover its dividend payments. Thanks to the higher operating income and despite the higher interest expenses, the pre-tax income increased by in excess of 50%. Additionally, the tax bill is much lower as well, resulting in a conversion of last year’s net loss into a net profit. The EPS was almost 11 cents per share. (click to enlarge) Source: Financial statements That’s good, but once you turn the page to have a closer look at the cash flow statements, you’ll start to see why I’m quite worried about Ausnet’s ability to cover the ongoing dividend payments. The operating cash flow was approximately A$284M ($203M), but this still wasn’t sufficient to cover the A$350M ($252M) capex. Yes, the negative free cash flow was lower than in H1 2014, but it’s still negative. And yes, some of the capex is growth capex and doesn’t impact the “sustaining” free cash flow, but still… But the cash flow doesn’t cover the dividend payments Based on the headline numbers, the free cash flow was negative as the total capital expenditures were higher than the incoming operating cash flow. And it doesn’t look like Ausnet is planning to slash the dividend to reduce the total cash outflow from its balance sheet. It has declared another dividend of A$0.04265 per share ($0.03) payable in December, and based on the current amount of outstanding shares, this dividend payment will cost the company almost A$150M ($107M). So I’m worried about Ausnet’s ability to continue to pay a dividend. And I’m not alone with this view. The Royal Bank of Canada (Nov. 18): Dividends are aggressively positioned and balance sheet is going to come under pressure if AST wishes to retain an A range rating. (…) We believe AST has an unhealthy reliance on the dividend re-investment plan to fund capex. And Deutsche Bank (Nov. 18 as well): AusNet reaffirmed guidance for FY16 distributions of 8.53cps, implying growth of 2%. Consistent with full-year guidance, and DB expectations, AusNet declared an interim distribution of 4.27cps. However, on our estimates, cash coverage ratios will remain stretched with the Electricity distribution business facing lower earnings from next year once the new regulatory period begins (lower regulatory WACC). We forecast FY17 distribution cash coverage of c.93%, which makes the company reliant on its DRP to help fund its FY17 distributions. I had the impression I was all alone with my warning back in June for Ausnet shareholders that the company might not be able to meet its dividend commitments, but financial institutions are becoming increasingly wary of the dividend coverage as well and are now openly wondering whether or not the dividend is sustainable, and the “reset” periods in the next 24 months will be important for Ausnet’s ability to generate cash flow. (click to enlarge) Source: Company presentation Investment thesis So there’s no reason why I would have to change the opinion I expressed in the article I wrote in June. Ausnet is paying a very handsome dividend with a current dividend yield in excess of 5%, but I fail to see how the company can afford this dividend. Right now, the current capital expenditures aren’t covering the dividend expenses, and the investment in growth capex will be offset by the expected lower revenues due to regulatory pressure. Ausnet still remains an “avoid” for investors, and even though shareholders might have been lured by the attractive dividend, I fail to see how this dividend could be maintained in the longer run (unless the company continues to have access to the debt markets, the regulatory situation improves or its shareholders continue to use the reinvestment plan). I understand people are attracted to high-dividend stocks, but I’m not comfortable with Ausnet’s dividend policy right now. And yes, that’s an (arbitrary) personal choice. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Carry Trade’s Long Winning Streak Fades – For Now

By Brian Brugman and Sharat Kotikalpudi (click to enlarge) Currency carry trades haven’t worked so well lately. But instead of discarding them altogether, we think investors should just put them aside for now and focus on more promising return sources from other asset classes. For years, carry trades had delivered solid returns before running into their recent weak patch, and there are good reasons why they’ve faltered. But no strategy works all the time, and in years to come, carry trades may well start to pay off again. So, they still belong in investors’ multi-asset tool kits. How Currency Carry Trades Work Carry trades involve selling (or going short) developed-market (DM) currencies with low interest rates and buying (or going long) ones with high rates. A typical carry trade would work like this: an investor might borrow ¥1 million from a Japanese bank, where borrowing costs are set at 0.1%, and use the money to buy a bond priced in Australian dollars that yields 5.5%. By exploiting the gap in interest rates, the investor stands to make a profit of about 5.4%, if the currency exchange rate doesn’t change. But exchange rates do change, and that’s where the risk in carry trades comes from – the unexpected moves in exchange rates. In this scenario, a fall in the Australian dollar relative to the yen could eat into – or even offset – the gains from the difference in interest rates. Diminishing Returns Over the past several decades, the positive interest earned from carry trades has usually been large enough to outweigh modest exchange rate moves. But since 2009, currency carry strategies have resulted in flat or negative returns. (Display). What’s Gone Wrong? To start with, exchange rates have fluctuated more in recent years, because countries with relatively high interest rates have been cutting them. Central banks in Norway and Australia – both large commodity producers – cut rates this year to record lows to help cushion their economies from a sharp decline in the price of oil and other natural resources. When countries with high interest rates start to cut them, investor demand for their currencies declines, their currencies fall in value, and the gap between high and low interest rates narrows, making carry trades less profitable. Zero Interest Rates Upend Carry Strategies The global financial crisis created another handicap – zero interest rates. Because rates are already near zero in the US, Japan and the eurozone, going lower would require a move into negative territory, something most central banks are reluctant to allow. That effectively means those rates won’t fall any more. On the other hand, central banks in places like Australia still have plenty of room to cut rates, and currencies like the Australian dollar have plenty of room to decline in value. As a result, the interest rate gap between high-yielding currencies and low-yielding ones is closing more quickly than it would have if high- and low-rate central banks had been easing policy at the same time. That means carry trades will continue to struggle. Carry Will Recover – But Not Yet These dynamics will change when some of the central banks with zero or near-zero interest rates – the Federal Reserve and the Bank of England come to mind – start raising them. If they keep at it for several quarters, the US dollar and sterling could become attractive carry trade targets relative to currencies from weaker economies with lower interest rates, such as the euro. But this won’t happen overnight. The rise in US rates, once they start to go up, will probably be much more gradual than in past cycles. That means it will take time before DM currency carry trades start to match the sort of returns seen in years past. The Importance of Being Flexible In the meantime, we think investors should focus more of their active risk in fixed-income and equity strategies. Within currencies, we see better opportunities in emerging market carry. It’s easy to get hooked on strategies that deliver consistently strong returns, but focusing on just one can be dangerous. All strategies go through periods of low or negative returns, just as stocks, bonds and other asset classes do. That’s why it’s important to invest in a wide range of strategies – and to know which ones work best in which conditions. We think a nimble, integrated and dynamic multi-asset approach that taps many sources of risk and return is a better way to go. This way, investors can move quickly when a once profitable strategy like the currency carry trade starts to recover. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Brian T. Brugman – Portfolio Manager – Multi-Asset Sharat Kotikalpudi – Quantitative Analyst – Dynamic Asset Allocation

Sell Shell, Buy These Names Instead

Shell is still a great company, but recently it has over-reached. This places it at a disadvantage. We are switching instead to a trio of much better-positioned companies. There are three quality energy companies I bought last month and one I sold. It wasn’t easy selling Shell (NYSE: RDS.B ). I’ve made big money on it before; indeed, the very first article I wrote for Seeking Alpha was about Shell being defrauded by Russia. But lately, Shell seems to be doing enough on its own to warrant concern. Shell’s economic mistakes of paying top dollar for BG ( OTCQX:BRGYY ), insisting on continuing to pursue the high-cost deepwater drilling in the Arctic, just ending with a more than $2 billion writeoff, and spending $2 billion on heavy oil in Alberta only to shut it down show a management that has lost its way in search of the “big score.” We aren’t “big score” portfolio managers. We are slow and steady advisors who like to see incremental gains during bull markets but buy big when we see serious value, typically after a market or individual stock decline. Shell started out just fine, but it is no longer thinking protection and steady growth. With these recent missteps and a return on invested capital that has recently declined to 7.3%, I believe that Shell’s marvelous dividend might now be in jeopardy. We will sell our RDS.B but retain exposure to the oil and gas industry by buying firms that are even cheaper in price per revenues and earnings. Because (in two of the three cases) they have a lower profile to most investors, they are actually down a greater percentage than Shell. All enjoy the same or better credit quality. We anchored this trio with Chevron (NYSE: CVX ). Unlike Shell, Chevron continues to be a company that moves slowly and inexorably toward better returns. Almost alone among the major international energy firms, CVX did not rush into Iraq, Burma, Russia, et al. during the boom times for oil and gas. The company picks its geopolitical partners well (perhaps because it was burned once in Ecuador it is now twice shy). Like us, Chevron chooses steady returns over big scores (that often aren’t.) This is reflected in its return on capital, which is among the highest in the energy sector. Also like us, CVX takes the long view. Its new production, particularly from the Gulf of Mexico and western Australia will provide a growth engine for Chevron for years to come. In fact, two liquefied natural gas (LNG) projects in Australia, Gorgon and Wheatstone will be the primary drivers of Chevron’s international growth in the coming years. These two projects will marry CVX’s massive natural gas finds offshore Australia with the insatiable demand for LNG in Japan and other Pacific Rim nations, lessening their dependence on Russian or Middle Eastern oil and gas. LNG, with both a high and a long plateau production profile (and little capital expenditure), will provide significant cash flow to support reinvestment or increased shareholder returns. We also placed in this troika two lesser known firms, both on the NYSE, that have fallen considerably more than Shell, giving us the opportunity for an even greater rebound when oil and gas firms spring to life again. No matter what the prevailing opinion, we don’t know if the day will come in 2016, the current consensus, or tomorrow if terrorists take production offline in one of the top producer nations. That’s why we buy at least some positions today. The first name we bought is Range Resources (NYSE: RRC ). The biggest risk I see to Range is the Pennsylvania legal and regulatory environment. Pennsylvania has had declining manufacturing revenues for years and is currently facing an underfunded pension plan crisis. By fortuitous happenstance, however, it was discovered a few years back to rest above what may be the most valuable of all the shale oil and gas formations in the country. Rather than say “thank you, Mother Nature” for this windfall and the high-paying jobs it creates, local regulators have slow-rolled many projects and local governments have banned drilling outright. They’ll catch on — or be forced from office. In my opinion, Range has the best position of any energy company in the Marcellus and other smaller formations in Pennsylvania. As fracturing and drilling become more sophisticated, I believe these local objections will wither as they realize the safety of these operations is high, the jobs created are a windfall, and the returns will allow them to bail themselves out of their pension difficulties. Plus, Range has the highest number of the lowest cost multi-year leases of any major firm in the Marcellus shale region. With drilling inventory lasting at least through the year 2035, Range has large blocked-together acreage with low royalty, operating, and development costs. Range will be in the catbird seat as oil and gas prices recover. Antero Resources (NYSE: AR ) is also a big player in the Marcellus formation, including that portion which sits under West Virginia, as well as in the Utica formation in eastern Ohio. Just as CVX has positioned for LNG sales to the Pacific Rim from its facilities in Oz, the major players in the Utica and Marcellus stand to benefit in coming years from LNG deliveries to Europe. Europeans currently get most of their natural gas from Russia. If you are a German or Latvian or Bulgarian shivering in the winter, who would you rather depend upon a supply without geopolitical demands attached, U.S. companies or the bullying and capricious Russian government? Production costs are quite low for Antero. In fact, Morningstar estimates that AR’s natural gas production is still quite profitable at $2.50 per mcf, and breakeven at the current pre-winter spot price. As we approach winter in the upper Midwest and Northeast, of course, that price typically rises. I think it is likely to do so this winter, in particular, with so little new drilling and so many operations shut in. Antero will benefit. In times of pricing pressure, the lowest cost producers always benefit. I believe the quality of Antero’s assets, coupled with management that holds a slow and steady hand in production as well as new exploration, assures them of continued success. Please note: My expectations for increased revenue, earnings and stock price are not based on higher oil and gas prices, but on the lower costs I see as shale, exploration, and transport technologies reduce expenses. Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded! We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.