We all know the story of Cinderella. Transformed into a glamorous princess, she was the belle at the ball. However, the celebration abruptly stopped at midnight, when her gown turned back into rags and her coach turned into a rotten pumpkin. Show More
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
There are moments in life where unnecessary risk is taken despite the warning signs. For example, swimming outside the flags at the beach when the surf looks exciting. The flags are there for a reason, it protects you from turbulent currents that could suck you out to sea. For the... Show More
“You can hold a rock concert, and that’s okay. And you can hold a ballet, and that’s okay. Just don’t hold a rock concert and advertise it as ballet.” ~ Warren Buffet. Show More
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
While many investors fret about bonds or bond-like proxies from rising interest rates, the real danger lurking in the shadows is the prospect of rising risk premiums. Interest rates globally have already normalised, or maybe there is a little more to go. However, bond-like stocks already have wide risk premiums.... Show More
Are Australian bond-like proxies going to suffer a bondcano moment? Certainly, stocks that have defensive characteristics have been sold down in recent months. And bond bears would have it that they are collateral damage from rising US yields. However, we believe this is a false narrative. Hence, we need to... Show More
...Or that is what some equity pundits masquerading as bond experts want you to believe. They predict that a ‘bondcano’ of rising interest rates will lead to collapsing prices for bonds and bond-like proxies. Show More
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
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
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.
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.