The New Criterion: how to tap Tasmania's economic boom

Tim Boreham

The previous basket case Tasmania is in the midst of an unlikely economic boom. Here’s a (two) heads-up on how to gain an ASX exposure

MyState (MYS) $4.75

There’s something in the air in Tasmania that’s driving an economic renaissance – and it’s more likely to be a tourist knocking the top off a boutique whisky bottle than a whining chainsaw.

“It’s cracking,” says MyState CEO Melos Sulicich of his home state. “There are more cranes in the skyline in Hobart than anyone can remember.”

Hobart Airport, he adds, had its busiest day on record last Boxing Day.

The second smallest listed bank, MyState sources half its loan book from the island state.

Formerly a credit union, MyState merged with Tasmanian Perpetual Trustees in 2009 and then acquired the Rockhampton-based Rock Building Society for $68m in 2011.

Tasmania’s unfamiliar prosperity was one factor in MyState recording a 4 percent increase in half-year net earnings to $15.8m, on loan book growth of 4.3 percent to $4.3 billion “in an environment of regulatory constraints.”

Notably, MyState’s interest income climbed by 6.8 percent to $46m, even though net interest margins (in effect the profit on a loan) was steady at 1.94 percent.

Historically the regional banks have suffered a funding disadvantage over the majors because they have lower credit ratings, even though their capital adequacy ratios are higher.

In MyState’s case, its tier one capital ratio stands at an “unquestionably strong” 11.4 percent, compared with the regulators’ industry wide requirement of 8.5 percent by 2020.

But the infamous tax on the big banks has helped level things out, while the banking Royal Commission is focused squarely on the behaviour of the majors.

The “regulatory constraints” have also helped the minnows, because they don’t have such a high presence in the sectors the bank custodians are cracking down on: investor loans and high loan to valuation mortgages.

Then again, the smaller banks haven’t enjoyed the (upward) repricing of these loans.

In the wash-up, Sulicich reckons MyState still suffers a 15-35 basis point funding disadvantage over the majors, which is no small beer (whether it be Cascade or Boags) when the bank’s net margin stands at 194 basis points.

As with Auswide (ABA), the smallest listed ASX-listed bank, MyState trades at a discount to the big four and the bigger regionals Bendigo & Adelaide Bank (BEN) and Bank of Queensland (BOQ).

There’s a perception these operators face lower growth than the big fry, because their local markets are more constrained but that’s to necessarily the case.

It’s true they have lower economies of scale and relatively higher costs, including relatively more branches. But they can also be more nimble with technology spend and enjoy a higher customer reputation.

Digital channels and the use of brokers mean they can also compete nationally.

Despite Tasmania’s purple patch, MyState’s Tasmanian loans as proportion of its loan book decreased to 48 percent from 52 percent a year ago.

Sulicich is convinced with the construction cycle in its early stages, Tassie should sustain its growth for years to come.

So let’s hope MyState doesn’t lose its two-headed heritage because it’s a favourable point of differentiation – at least for the time being.

Australian Whisky Holdings (AWY) 4.8c

MyState’s Taswegian presence aside, how else can investors can gain an exposure to the southern economic miracle?

Unless the island’s patron state David Walsh lists his Mona gallery, direct ASX channels are as rare as reliable Tasmanian tiger sightings.

Just as Tasmania has produced many a famous footballer but doesn’t have its own AFL team, the state had bred many a corporate export.

Bellamy’s (BAL) remains Launceston based and plays on the Tasmanian clean and green theme, but is really a story about Chinese milk powder demand.

Salmon producers Tassal (TGR) and Huon Aquaculture (HUO) grow their fish locally, but once again it’s about selling elsewhere.

The same can be said for TPI Enterprises (TPE), which grows opium poppies for the pharmaceutical industry under the state’s long-standing protocols.

This leads us to Australian Whisky Holdings, which is playing on Tasmania’s reputation for producing fine single malt versions of the fiery dram.

While the company has export ambitions, it’s only producing enough to meet local demand. “No one is producing in large quantities,” says AWH chief Chris Malcolm. “But there’s a huge demand for premium single malt whisky globally. More younger people are drinking it and more women are drinking it as well.”

Following last year’s failed tilt for the local Lark Distillery, AWH last week mounted a $10m takeover for the 52 percent of the boutique outfit it does not already own.

Malcolm admits he has no idea how Lark’s 29 shareholders will receive the revised offer, although the fact it offers cash and/or scrip should tilt the odds in AWH’s favour. And AWH has the imprimatur of Lark founder Bill Lark, who sold most of his holding in the first offer.

A busy AWH last year acquired the historic Nant Distillery at Bothwell, the subject of a scandal involving the company re-selling its barrels (or unfilled barrels) to more than one investor.

In a two stage process, AWH first acquired the 76 hectare site at Bothwell for $6.35m from Nant’s receivers and then later snared the Nant brand and equipment for $1.9m.

AWH has pledged to buy back the barrels from all of the burnt investors when the grog matures and so far has outlaid $1.9m out of a projected $6-7m.

While the remediation will come at a steep net cost, Malcolm says that the whisky in question has turned out to be more than just drinkable – even the substituted stuff with an alcohol content of 46 percent compared with the standard 63 percent.

AWH also has a 12 per cent of the Redlands Distillery, while Lark also owns the Overeem distillery and – just to mix drinks a little – Forty Spotted Gin.

AWH has just raised $7.85m from sophisticated investors -- the type who drink top-shelf scotch -- in an oversubscribed offer at 3c apiece. The dosh raised will support the buyback scheme and fund an upgrade of Nant’s facility to a capacity of 700 barrels.

Distilling fine whisky means an inherent cash flow disadvantage because the produce is kept in barrels for five to six years. But if you can flog the stuff for an average $132 a bottle and up to $600 a bottle the long-term rewards are there.

While it was not responsible for the Nant drama, AWH must ensure the only whiff from the sector is earthy peaty overtones and not the aroma of dodgy schemes.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

ENDS


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