The phantom resource bear market of 2018

Jason Teh

What a difference a year makes. This time last year, the stock market was cheering the global synchronised growth story. Now, it is downbeat, fixated on tariff wars that could derail global growth, especially China. In our view, the tariff war is a sideshow to what is happening in China.... Show More

Join the conversation

The bubble in quality

Jason Teh

It is hard to spot a market bubble in the making. As they inflate, market participants often rationalise their investment decisions as to why they are paying higher prices. It’s only after they burst that bubbles become clear. The most recent bubble bursting has been Bitcoin. Now we would contend... Show More

Join the conversation

The sky is not falling, but storm clouds are brewing

Jason Teh

The sky is not falling was the message in September 2017. Our message was that the overall market did not show excessive valuations, which generally is a precursor to stock market corrections. However, our market outlook dimmed due to recent ‘risk-on’ rally, where most of the year’s return was delivered... Show More

Join the conversation

Is the stock market in a bubble?

Jason Teh

It has been about 10 years since the Global Financial Crisis (GFC) began to unfold. Very few were prepared for the financial damage that ensued. And it has permanently impacted the psyche of many market pundits. Since then, there has been no shortage of bear market predictions and lately there... Show More

See 1 more comment

Stefan, good question. SYD’s dividend is about 2x their accounting profits. But SYD does not set their dividend policy on accounting profits as there are large non-cash items (eg. depreciation). Since their restructure from Macquarie Airport in late 2013, SYD has paid 100% of their dividend from cash profits. Hence, SYD’s dividend is sustainable. Page 14 in SYD’s FY17 results presentation highlights the difference between accounting profits and cash profits. There are two follow-up questions you may ask: Why does capex not equal depreciation like normal companies? This question relates to the useful life of the asset. Infrastructure asset useful lives are very long versus industrial companies. If you divide SYD’s depreciation by the PPE, it implies that the useful life is around 20 years based on Australian accounting standards. However, SYD’s concession to operate the airport last to 2097. There is a mismatch between actual useful life (79-year concession life) and accounting useful life (about 20 years). For example, SYD depreciates their runways over 30 years even though the assets probably last 100 years. Sure, there will be maintenance capex but the bulk of the capex was made upfront and won’t be repeated. Given that SYD’s capex program over the last couple of years has been elevated and will continue to be in the next few years you should expect higher depreciation affecting their accounting profit. Why does SYD not retain some earnings like normal companies? This question relates to the capital structure of SYD. If SYD retains earnings their balance sheet will degear more aggressively. At a 100% payout ratio on cash profits, the balance sheet is already degearing but at a slower rate. SYD is a very unique business where they can have an elevated capex program funded from debt while their balance sheet is degearing at the same time.

On Defensives: Perception vs Reality -

James, thanks for your comments. Correlation does not mean causation so please read my previous “Run for the hills” livewire post to understand how the US and Australian economies have diverged in recent years. And yes you are right, SYD and many other Australian companies access international bond markets. However, these interest rates are priced based on Aussie rates (plus a margin if they want to hedge). I’m sure it’s possible for Australian companies to finance their operations with Japanese debt or any other denomination but no company does this as this is a clear sign of mismanagement.

On Defensives: Perception vs Reality -