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Stock Picking – SDI (update) (SDI.AX)

by | Dec 8, 2016 | Stock Insight

After a strong run, SDI has recently been sold off following the company’s recent profit guidance. We view the issues impacting SDI’s profit to be short term in nature and view the long term investment thesis intact.
In August we wrote about SDI as an “emerging global leader” in its dental product markets. After a strong run, the stock has recently been sold off following the company’s recent profit guidance. However, we view the issues impacting SDI’s profit to be short term in nature, and view the long term investment thesis as remaining intact. In this update, we discuss the implications of recent newsflow and reaffirm our investment rationale for the company.
Stock Picking – SDI (SDI.AX)
Recent SDI Newsflow
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​In advance of its recent Annual General Meeting in late November, SDI released a trading update for the first six months of FY16. While management reaffirmed their FY17 sales guidance of 10% growth for non-amalgam sales and flat amalgam sales, they also provided profit guidance for the first half of $2-2.5m which will be down from $3m achieved in the first half of FY16. The market was disappointed by the profit guidance which management explained reflected in part some material currency moves.We view short term currency impacts as normal for a company growing its international revenue base en-route to becoming a global market leader, however we question if the currency exposure could have been better managed by the company. The market obviously under-estimated currency as a short term risk to profit, given the selling that followed.

While acknowledging that currency movements will impact a business that exports 90% of its sales, we cannot defend the way management communicated the reasons at play behind this lower earnings guidance. Rather than providing the details expected to keep public markets properly informed, management opted to provide minimal information and clarity. As a result, it was not a surprise to see the stock sell off quite significantly. Ironically, it is this poor market communication which forms part of our investment thesis looking forward.


​Our Investment Thesis Reaffirmed
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​There is no fundamental change in our investment thesis. We view SDI as an emerging global leader in a defensive growth market which is well placed to grow consistently at 3-4% p.a. with minimal correlation to the global economy. As the chart below shows, the company has experienced strong growth in Europe and Brazil in FY16 which has been partially offset by US weakness.

Our investment thesis very much depends upon the continuation of two structural transitions the company is currently going through:

1. A shift away from amalgam product sales towards non-amalgam product sales – this remains very much on track with continuing strong growth momentum in glass ionomers and whitening product (non-amalgam) sales momentum in local currency,

​2. A (gradual) shift away from a private family company way of managing and communicating towards publicly listed market standards – this is arguably the slowest moving part of the investment thesis as evidenced by the company’s disappointing handling of this earnings downgrade announcement.

The company continues to be profitable, and has a strong balance sheet with a net cash surplus which leaves it well positioned to fund future growth.

We view the current share price as under-valuing SDI given the significant potential earnings growth we believe lies ahead in the coming years. The SDI business model benefits from excellent operational leverage so shareholders are well placed to benefit from strong future non-amalgam revenue growth. As a result, we remain confident that the current share price provides ample margin of safety.
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The stock had arguably attracted some shorter term investors in the recent rally. One investor recently said to us that “SDI had become the poster child of smaller company value investors, some of whom joined the bandwagon late”. We view the recent sell-off as an opportunity to re-focus the shareholder base on the company’s long term objectives. The recent passing of SDI stock from impatient to patient investors can only be a good thing for long term shareholders.

Some Messages for Management from a Long Term Shareholder
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Please communicate clearly and if possible ahead of time. Your long term and supportive shareholders are likely to look through minor short term disruptions like this if you communicate openly and in advance, and not surprise them with poorly communicated disclosures. In the event there is an unforeseen event, it is always best to open up and give the market a frank, honest and detailed account of what has happened. Investors will pay a premium for high quality management, and high quality management communicates well.

Please provide details on the evolution of underlying earnings when there are numerous factors at play – ie. it is often more meaningful to strip out any one-off factors when appropriate to provide a clear picture of how the business is actually evolving. For example, when providing guidance, it may have been prudent to strip out or at least explicitly explain the one-off effects of currency translation or other abnormal items.
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Beyond this, we appreciate Management’s focus on positioning the company for long term growth. The process of unlocking the value in the business is an exciting opportunity for your long term shareholders.

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​Our Investment Process at Play

​As value investors, we view short term weakness as an opportunity when the long term investment thesis remains intact, like now.
We view recent SDI share price weakness as good news for our investors since it provides the opportunity to purchase more stock at an attractive valuation with a significant margin of safety.

SDI remains a core long term holding for DMX and the TAMIM Australian Equity Small Cap poortfolio. We look forward to a long-term partnership with SDI and believe our investors will benefit.

Happy Investing,

​The team at TAMIM

Stock Picking – Vocus Communications Ltd (VOC.AX)

by | Nov 17, 2016 | Communication, Stock Insight

This week the team at CBG, the fund underlying the TAMIM Australian Equity Growth & Income Individually Managed Accounts (IMA), take an in depth look at their investment thesis for Vocus Communications Ltd (VOC.AX).
This week the team at CBG, the fund underlying the TAMIM Australian Equity Growth & Income Individually Managed Accounts (IMA), takes an in depth look at their investment thesis for Vocus Communications Ltd (VOC.AX)
Stock Picking – Vocus Communications Ltd (VOC.AX)

Company Profile:
​In February 2016 Vocus merged with M2 to become a full-service vertically integrated telecommunications company that sells to consumers, businesses and government customers across Australia and New Zealand. In essence the merger brought infrastructure together with infrastructure. The purchase of NextGen in June 2016 further built out the infrastructure footprint.M2 was established in 1999 and developed, manufactured and distributed digital messaging systems for small businesses. Through a series of acquisitions and organic growth, the company became a national reseller of broadband, fixed voice, mobile, energy and insurance services to predominantly consumer and small businesses.

Vocus was in launched in 2008 and provided IP transit wholesale services to the Australia and New Zealand telecommunications markets. Through a series of acquisitions and organic growth, Vocus expanded to provide fibre, ethernet, internet, data centre and voice services to corporate, government and wholesale customers.Initial investment view:
This is a challenger telco story. VOC has grown organically and by acquisition to become Australia’s fourth largest telco. It now has scale and backhaul assets to compete on a level footing with the other majors and an efficient and lower than peer cost base which will boost its competitiveness.

The NBN will be an industry changing event whereby incumbents with their own networks will lose their competitive advantage. For consumers, NBN will provide the network and Retail Service Providers (RSPs) will sell on the basis of price and quality of customer service. This will be advantageous for challengers with lower costs to serve. While TLS is still likely to dominate the space, we expect them to cede some market share.

Broker estimates have EBITDA growing at a 3-year Compound Annual Growth Rate (CAGR) of 14% and EPS at 18% highlighting strongly ahead of market growth expectations. Even halving the expected growth rate would see VOC still grow ahead of market.

Despite the growth outlook, VOC trades in line with the market. VOC is now trading on 9.8x FY17F consensus EBITDA (8.1x FY18F) and 15.4x FY17F consensus EPS (13.0x FY18F) and offers a 3.3% yield.

Post the recent pull back, it looks to be cheap vs its own history and peers, especially factoring in the growth outlook. For comparison, the All Industrials ex financials is trading on 11.0x and 10.3x FY17 and FY18 EBITDA respectively (source: UBS) and 19.6x FY17 EPS (17.7x FY18F EPS), with 10% EPS growth.

While results in the short term are likely to be messy given the transactions undertaken over FY16, and risks remain over integration, we believe the core business is solid and VOC will be a strong competitor in a highly competitive market.

What is the industry outlook?
​The telco sector is highly dependent on the regulatory environment and technological change. The rollout of the NBN in particular is set to change the industry landscape.

NBN will assume control of the ‘last mile’. This essentially removes the ability of existing RSP’s to differentiate on cost structure on the access network i.e.: i) the incumbent (TLS) loses ownership of the Customer Access Network (in return for NBN cash payments), ii) RSP’s with significant DSLAM infrastructure (e.g. TPM / IIN) will see costs rise from a ULL cost of c$15-$17 today to c$43 per user under NBN, and iii) even infrastructure-light RSP’s (e.g. VOC) will no longer receive scale discounts for last mile network access.

This suggests a more level playing field will exist post NBN with respect to network access. Of course RSP’s will also seek to differentiate via fixed operating costs, bundled content, differentiated offerings, service levels etc. This gives challenger Telcos like VOC a viable platform for growth.

The Figure below from UBS illustrates the level of vertical integration in both Australia and NZ. It’s clear that players are now on a level playing field.

As NBNCo now assumes control of last mile network access: 1) Marginal cost curves lift materially for both the incumbent TLS, and RSPs which have been sweating DSLAM investments, 2) Industry competition may increase as cost curve differentials between RSPs narrow (at least for the customer access network), and 3) Decline of legacy revenue pools such as voice will accelerate.

One way falling industry returns are likely to manifest is via lower fixed margins: for both the previous owner of the last mile – TLS (compensated via government NBN payments), and for players with large ‘on-net’ subscriber bases (e.g. TPM / Optus). Margins will likely remain relatively more stable for resellers (VOC):
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  • TLS: fixed data margins sit at 41% today (DSL + NBN), and voice at 54%. At its Oct-15 investor day, TLS flagged it could feasibly see fixed margins dip to c20% in the long-term as a pure reseller, as it loses ownership of the last mile.
  • TPM: TPM’s subscriber base is split c1,338k on-net, and 329k off-net. Based on revised ACCC pricing, on-net costs sit at $14.68 ULL, and $1.63 LSS today. These costs sit well below NBNCo’s average ARPU (and hence the average cost paid by RSP’s to NBNCo) of $43.
  • VOC: VOC’s all-in off-net cost is likely at a meaningful discount to regulated prices given VOC is TLS’ largest wholesale customer (UBS estimates c$40). While the comparable all-in cost on NBN (A$43) is above VOC’s costs today, the blended NBN ARPU is also higher which should result in MTU’s $ gross margins remaining constant. Also, there is the potential that the all-in NBN cost declines.

What are VOC’s market shares?VOC has a relatively small share of the residential telco, business telco, and energy markets today. VOC’s competitive position in each product market is summarised below:

  • Voice: Nationally there are c10m fixed line services (retail and wholesale) in operation, relative to total VOC voice services of c800k. We estimate VOC has c10% share of the business voice market and c5% share of the residential voice market. Voice is a market in decline.
  • Data: Currently there are 6.4m residential and small business fixed data subscribers in Australia. VOC has 520k data services, implying c8.3% market share.
  • Mobile: There are c30m mobile handset and mobile broadband services nationally. VOC has 167k mobile services, implying 0.6% market share.
  • Energy market: There are 15.1m residential and business gas and electricity subscribers nationally (4.7m gas, 10.5m electricity), VOC has 141k energy services implying 0.9% share.

Bull points:

  • Significant cost synergies to be generated from transactions – VOC has guided to A$13-15m from Amcom acquisition to be realised by end FY17 and A$40m to be realised by the merger with M2 by end FY18 driving a base of earnings growth.
  • Better network quality means reduced customer churn – Gross consumer churn ratio of 2.6% per month is higher than competitors due to its younger customer demographic and sales-centric model, which usually attracts a greater mix of high-churn customers. However, post-merger, the consumer division can provide faster broadband speeds improving customer experience and therefore could see a reduction in churn levels. We estimate a 1% reduction in consumer churn would add 5k SIOs per month, $2.5m revenue. Lower churn would also see total customer acquisition costs decline. Finally, every customer brought on-net also saves A$15-17 per sub providing further upside (assuming 5% of 520k customers means A$5m pa) until NBN strands the assets. This is not included in the merger synergies outlined above. 
  • Increased penetration of on-net buildings – Over the last few years the company has been building out its fibre network but is now undertaking more in-building marketing to sell additional fibre services within its current fibre footprint. Further penetration within Vocus’ existing fibre footprint would incur minimal costs and so could lead to material margin expansion. Each additional customer has been estimated by the market to have a GM of 80%+ leading to large expected EBITDA margin improvement in this business (ie 500-600bps between FY16 and FY20). With lower capex requirements and strong margin improvement from incremental customers, FCF growth should accelerate. Indeed the Independents Expert report had Vocus’ margins improving from c34% in FY15 to 46% by FY21 in its DCF analysis. There is significant scope for increased utilisation with the network at 16% utilisation at FY15. This is likely the biggest value driver for the business with management looking to increase utilisation by 5-6ppts pa. They can leverage this underutilised asset (plus the asset can grow from the current 4000 buildings to up to 10000 buildings) to sell into the SME market.
  • Large opportunity to grow in the SME market – Vocus has historically focused on corporate and government customers, while M2 mostly targeted the SME market. Now Vocus now has access to a significantly strengthened sales force to target the SME market with fibre assets. Indeed VOC is increasing its sales team by 35% in FY17 to capitalise on this opportunity (to 147). There is significant potential for the company to take share in the $2.9bn CBD SME market. DB estimates Vocus taking a further 10% share over the next four years in that market equates to an additional ~$300m of revenue.
  • Potential for NBN-led market-share gains – As the NBN is progressively rolled out, customers will be required to sign up to new contracts and hence there is an opportunity for Vocus to take market share. Vocus improved its NBN market share by 80bps between Dec-15 and June-16, and management has an internal target to increase its share from 6% to 10% of incremental customers by Dec 16 and noted recently that  consumer business has 15% market share of new additions vs 7% total market share.
  • Strong earnings outlook – market has Vocus delivering an EPS CAGR of 21% for FY16-FY19. In a recent trading update they noted corporate & wholesale has exceeded new sales targets in 1Q17, active NBN consumer base has increased by 21.7% since June-16 (+15k vs base of 86k) and VOC’s average $ margin on NBN is consistent with DSL bundles. Management informally comfortable with consensus for FY17.

Key downside risks include:

  • Merger synergies not being achieved – see this as a low likelihood given recent confirmation of expectations at the result
  • Competition driving down ARPUs or market share – this is a risk but VOC is better insulated and confirmed recently that VOC’s average $ margin on NBN is consistent with DSL bundles
  • Poor management of costs leading to margin compression – always a risk but these guys have done many integrations and have executed well to date.
  • Value-destructive acquisitions – acquisitions are off the table for the short to medium term
  • Unfavourable ACCC rulings on access charges
  • Adverse changes in NBN access and usage charges – it is more than less likely that the CVC is reduced rather than increased.
  • VOC has been sold off heavily recently for any one of a number of potential reasons including:​
  1. Heightened NBN concerns which have hit the sector broadly stemming from TPG’s lower than expected FY17 earnings guidance. These concerns centre around margin degradation (as noted previously, less of a concern for VOC given reseller model) and increased competition
  2. Limited visibility into the shape of FY17/FY18 growth (especially with reduced KPI disclosures at FY16 result)
  3. Lacklustre delivered FY16 organic EBITDA growth (per UBS who estimated it to be c6% though the figure is masked by divestments in the period),
  4. Concerns over the pace of decline in voice revenue.
  5. Conservatism around integration risk / synergies.
  6. Resignation of CFO Rick Correll. This has led to speculation in relation to the cultural fit of the organisations as he was from Vocus while the CEO, Geoff Horth was from M2. There has been some churn in the management ranks given the number of transactions undertaken over recent periods.
  7. Selling by James Spenceley of 76% of his holding. Conversely other directors including Vaughan Bowen, Rhoda Phillippo, Michael Simmons and Craig Farrow have increased their holdings modestly.

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Happy Investing,

​The team at TAMIM

Stock Picking – Pioneer Credit Ltd (PNC.AX)

by | Nov 3, 2016 | Stock Insight

Last week some of you may have noticed that the TAMIM Australian Equity Small Cap IMA provided the “Professional’s Pick” in the Switzer Super Report. Today we provide you with that pick: Pioneer Credit (PNC.AX). With a trailing grossed up yield of 7.9% and trading on an undemanding PE, this could be a stock to satisfy everyone.​
Last week some of you may have noticed that the TAMIM Australian Equity Small Cap IMA provided the “Professional’s Pick” in the Switzer Super Report. Today we provide you with that pick: Pioneer Credit (PNC.AX). With a trailing grossed up yield of 7.9% and trading on an undemanding PE, this could be a stock to satisfy everyone.
​Stock Picking – Pioneer Credit (PNC.AX)
As featured in Switzer Super Report​
What is the stock?
​Pioneer Credit Limited (PNC.AX) is the smallest of the ASX listed purchasers of debt-ledgers (after Credit Corp and Collection House).A debt ledger is a collection of unpaid bills or other amounts, such as loan repayments or credit card bills. Companies such as PNC, Credit Corp and Collection House purchase debt ledgers, often at less than 20c in the dollar, from the big four banks, other financial institutions, Telstra and other utilities. Their objective is to recover the debts at a significantly higher rate than they purchased the debt for, thus realising a profit in the process.

How long have you held the stock?
For just over a year.

What do you like about it?
The stock meets our two main investment criteria:

  1. High quality: PNC is an emerging, growing, debt purchaser that has secured a circa 10% share of the Australian debt purchasing market. We view the company as high quality with a solid and aligned management team, a well-defined growth strategy, a strong balance sheet and shareholder-friendly dividend policies.
  2. Significantly under-valued: The company recently reported a net profit after tax for FY16 of $9.5m – up 24%. PNC has provided guidance for its FY17 profit of at least $10.5m. At the current share price of $1.79, this puts PNC on a PE of just over 8x FY17 earnings – a large discount to its two listed peers, Credit Corp (ASX:CCP) and Collection House (ASX:CLH). Our opinion of fair value implies significant upside in the company’s value.

How is it better than its competitors?
PNC is focused upon acquiring debts with ‘long dated’ collection profiles (primarily personal loans and credit cards debts), which enables PNC to develop deeper relationships with its customers over a longer period of time. This is in contrast to telecommunication and utility debts, which are often one-off in nature and thus don’t provide an opportunity to build a longer term relationship with the customer.

The other advantage of having a longer collection cycle is that it provides PNC with a lower turnover portfolio, meaning that PNC is not under pressure to constantly replace/purchase more ‘short dated’ utility type debts.

What do you like about its management?
PNC was founded by Keith John in 1991 and was actually acquired by its competitor Credit Corp in 2006. Keith John subsequently reacquired PNC in 2009 and listed it on the ASX in 2014. John has significant experience in the industry, having led the company through a number of business cycles and remains the largest shareholder of PNC, with a 15% holding. We believe it is favourable for shareholders when a founder manages a business and retains a large shareholding.

What is your target price on the stock?
We believe that the combination of having a low profile in the investment community, trading on a low earnings multiple and having a growing earnings profile, offers substantial valuation upside. Our view of fair value evolves over time but it is fair to say we only invest in smaller companies when we can take a long term view and the valuation upside is high – that the share price can at least double over the medium term. We believe this is a fair expectation for PNC.

At what point would you sell it?
We would sell if we became uncomfortable with PNC’s earnings outlook (we monitor a number of operational metrics in this regard), or if we considered its pricing to be stretched relative its peers.

How much has it added (subtracted) to your overall portfolio over the last 12 months?
The stock is trading at around the same levels as it was 12 months ago, whilst the underlying portfolio to the TAMIM Australian Equity Small Cap IMA is up by 30%. We have been progressively adding to our PNC position over the past 12 months to take advantage of the current low valuation.

Is it a liquid stock?
As with many smaller companies, liquidity is low but there is potential for liquidity to improve as the company’s profile and size increases. In our opinion the journey from il-liquid to more liquid is core to successful smaller companies investing.

Where do you see value?
With a PE of just over 8x FY17 earnings and a strong track record of earnings and dividend growth since listing on the ASX in 2014, PNC is priced on undemanding valuation metrics.

We expect PNC to continue to increase its investment in debt ledgers and grow its earnings on the back of the strong operational achievements it has made to date. PNC is also increasingly focused upon using its customer relationships to offer a wide range of new financial services products (including personal loans and credit cards), which have the potential to contribute meaningfully to its earnings growth over time.

We are high conviction shareholders in the stock and look forward to continued earnings growth and share price appreciation in the years ahead.

Happy Investing,

​The team at TAMIM

Trump vs Hillary – Immunising the Portfolio

by | Oct 16, 2016 | Stock Insight

In the lead up to Brexit Robert Swift, head of the TAMIM Global Equity High Conviction Individually Managed Account (IMA), took the view that one could effectively immunise a portfolio from the effects of potentially massive global economic events like Brexit or the upcoming US Election. Having successfully taken precautions to hold stocks that rode out Brexit admirably he now turns his attention to the US in an attempt to immunise the global equity portfolio against any shocks following the US election. The themes presented here should present strong investment opportunities whatever the outcome of the election may be. Robert also provides us with a list of stocks he is watching with this in mind.
In the lead up to Brexit Robert Swift, head of the TAMIM Global Equity High Conviction Individually Managed Account (IMA), took the view that one could effectively immunise a portfolio from the effects of potentially massive global economic events like Brexit or the upcoming US Election. Having successfully taken precautions to hold stocks that rode out Brexit admirably he now turns his attention to the US in an attempt to immunise the global equity portfolio against any shocks following the US election. The themes presented here should present strong investment opportunities whatever the outcome of the election may be.
Trump vs Hillary – Immunising the Portfolio
Robert Swift – Head of Global Equity
On November 8th America votes for the next President. The USA electoral system is not the same as in Australia. If you want to understand more fully how it works please check this out.
https://en.wikipedia.org/wiki/Electoral_College_(United_States)

We don’t know who is going to win. It looks a close race. Typically voters who prefer the ‘unpopular’ or ‘unfashionable’ candidate will tend to be reticent about volunteering that information.
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The vote for Brexit was a recent case in point. Voting ‘out’ was so unfashionable that respondents lied about their intentions causing the polls to falsely predict a ‘Remain’ victory. Consequently Donald Trump is probably closer to Hillary than the media that we watch and read, would suggest. At a recent conference we attended, a USA based Professor of Economic History suggested that Donald Trump could get 60% of the popular vote – not 60% of the electoral college but 60% of the turnout.

It could easily be irrelevant who wins. The President can’t always get much done if Congress isn’t ‘on side’ and either candidate could find they don’t get the support of the two houses in Congress – the Senate and the Representatives. Conceivably Clinton and Trump could each find themselves stymied by an obstructionist Congress and there will be no major economic or foreign policy shift.

As investors watching this event unfold we have some choices to make if we think that market will react differently. These can broadly be classified as:

  1. Invest for a Hillary win
  2. Invest for a Donald win
  3.  Go to cash since we don’t know who will win and don’t find anything attractive
  4.   Invest in a way that is a ‘win win’ regardless – this includes the stymied result.

1 and 2 are risky in that we might be wrong. We think that Hillary will stand for “more of the same” for USA foreign policy but will ‘punish’ big Pharmaceuticals and (sort of) punish Wall St.

Avoid pharmaceutical companies and maybe be wary of companies that play egregiously unfair games with their tax rates – they look unpopular everywhere?

We don’t really know what Donald would do but it will probably involve much posturing about radical change and would result in quite a volatile ride for global capital markets.

Companies with large cash balances may bring money back to the USA if there is a tax amnesty. We should favour Google, Apple which might have a harder time under Hillary?

If we decide we know nothing we could hold cash. Occasionally that has been a good decision.

If we opt for 1, 2, or 3 and pick stocks we think will benefit, or hold lots of cash, but are wrong, it would be an unnecessary and sub optimal decision. We have thought about it and have decided we can do in USA stock selection what we did with UK stocks before Brexit. Namely we can invest in US stocks that we think are attractive which will be immune from the downside of a win by either side. Before the Brexit vote we decided that large multi-national companies which happened to be listed on the UK Stock exchange were cheap. Glaxo Smithkline, the pharmaceutical company, and HSBC the UK and Chinese bank, were likely to benefit regardless of who won the UK referendum. Both had global products, a global presence, good products, good balance sheets, attractive valuations and a compelling catalyst.

Glaxo and HSBC are both up over 15% since the June 23rd Brexit vote.

Here’s how we think we can do the same again in the USA. We believe 3 trends will continue regardless of outcomes 1, or 2, above. If we can pick the right stocks our investors should do ok and certainly better than by holding cash yielding virtually nothing.1 – The USA yield curve will start to steepenThis means that longer term interest rates will rise relative to shorter term rates. Note we are not claiming that short term rates will be raised (although we wish they would). This steepening typically happens when an economic recovery is being discounted and investors expect more demand for, and a higher cost of, longer term money.

This steepening invariably helps lending banks since they tend to borrow short and lend long where the lending rate resets upwards quite frequently. In short it boosts bank margins on their loan book. Many USA banks are cheap relative to their expected muted but stable, dividend and profit growth. They are also ‘safe’ to the extent that they have raised over $700b of common equity since the first stress tests in 2009. USA banks are a lot safer than they were before the 2008 GFC and while they are a lot less ‘exciting’ now, we think it’s ok to invest in utility type companies which have a tailwind of higher margins. Additionally, the European banks are not well capitalised; the European yield curve is unlikely to steepen; European stress tests by the ECB are a fantasy which gives investors no comfort about their veracity; and they are exiting businesses, leaving it to the Americans.

We could be wrong. Wells Fargo is under fire for unethical business practices but any fine is unlikely to mortally wound the company. European banks are trading on ostensibly much cheaper ratios and so they could outperform if the landscape changes. Given the intransigence of the German government in refusing to use taxpayers money to bail out Deutsche Bank, or the Italian banks, we think “muddle through and uncertainty” prevails in Europe. If Deutsche had to pay the proposed fine of $14bn then it would be a mortal blow – at least to existing shareholders. 2 – Infrastructure spending in the USA has to go upWe have been saying this for a while – especially when I lived there! The decrepit state of the roads, railways, bridges, and schools has to be seen to be believed. It is 60 years since the Eisenhower administration built the national highway system and over 25 years since there was a new international airport opened – Denver. Infrastructure spending is running today at about half the average level of the last 100 years, as a % of GDP. 2.6% vs 5%. This is equivalent to a lot of new $ to be invested. If Trump wins maybe contracts go to USA companies only? If Hillary wins, maybe it goes out to global tender? There is the money and the knowhow! If you have been to a sports stadium in the USA you will see evidence of civic pride and evidence of the will to find the money. We have been to college bowls which hold 80,000 spectators. We think that pride and skill will now be turned to general infrastructure and both candidates are talking about it – a lot. Hillary has promised $275bn of federal spending over 5 years and $500bn in total and Donald twice that, provided by a national infrastructure fund. Hillary’s proposals seem a little more soundly costed but Australians will know all about the debate surrounding that issue!

Check out this website (www.infrastructureusa.org) to get a sense of news and views on North American infrastructure and the political stance of both opponents on the issue.

Which stocks benefit? Construction companies, manufacturers of heavy trucks, Steel companies, Concrete companies, Technology companies and Capital goods stocks. Pretty much everyone and even those pariahs, the banks. It makes so much economic sense and, thankfully, if enacted will allow the era of Zero interest rates to come to an end since the economy will get a boost.

We are invested in Daimler for heavy trucks, Vinci for construction skills and Honeywell for capital goods. We also expect technology stocks to benefit since much of the infrastructure will be wired up.3 – New inventions and innovation, especially in Technology, continuesTechnology is already everywhere and in everything but we can’t see that trend stopping. Mobile phones today contain more computing power than did Apollo 11 for its moon landing.

Neither Hillary nor Donald is going to do anything to prevent the USA develop further. Arguably it will even be given a boost by the new President because Chinese patent applications are now running ahead of those in the USA. It has a geopolitical dimension.

In the digital economy we think there are 3 certainties:-

  • Products and platforms will converge meaning standardization – Betamax vs VHS all over again!? Or not?
  • R&D rises but shelf life falls so winners win bigger; losers completely fail; and it happens fast. Miss a product generation and you will be toast. Valuation may matter less than (product) momentum. Blackberry and Nokia vs Apple and Google phone?
  • The cost will be in the form of loss of privacy and security. Integrity of, and trust in, which platform you keep your data is essential. Yahoo and its Verizon deal now in jeopardy?   


Pretty much everything we own has technology in it and increasing amounts of it. Glaxo SmithKline is now working with Alphabet (Google) to develop bioelectronic medicine. Toray was a manufacturer of seatbelts for Japanese cars but is now also a global leader in membrane technology and designing carbon fibre shells for aircraft. Western Union from the USA uses sophisticated software to transmit electronic payments of over $150bn via 500,000 agent locations in 200+ countries. Anyone remember travellers’ checks?

If we can invest in companies that develop or implement, technology at a good price then we are happy. We don’t invest in start-ups, nor in smaller companies with single products but find plenty of opportunity globally but especially in the USA. We don’t see that changing post November 8th.Stocks on these themes:Below are some stocks which are attractive on our ‘multi factor’ stock selection model. This ranks stocks based on their relative attributes with regards to Valuation, Quality of earnings and balance sheet, and earnings and price Momentum. We call it VMQ. Typically stocks with higher scores outperform those with lower scores but we only invest after verification by performing fundamental analysis on a company’s future prospects, paying careful attention to accounting, strategic and governance shortcomings. Note that we don’t own many of these because our strategy has to be responsible. We don’t put all the eggs in one basket and so select from amongst a range of industries and regions to get the best stocks which, together, provide diversification and a good risk adjusted return.US yield curve steepening – USA listed financial stocks we like:AFLAC (AFL.NYSE) – VMQ Score = 98
A provider of supplemental insurance against income and asset loss with medical especially popular. Dominant in USA and Japan.
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JP Morgan (JPM.NYSE) – VMQ Score = 86.6
A global multi segment bank with investment banking, asset management and consumer banking. It has been through many stress tests and raised a lot of capital. Well placed to benefit from the withdrawal of European banks from the global scene.

Bank of Montreal (BMO.TSE) – VMQ Score = 95
More of a retail bank than JP Morgan this is strong in Canada and the USA mid-West. The build out in asset management and infrastructure financing is attractive.

Principal Financial Group of Iowa (PFG.NYSE) – VMQ Score = 99
An asset management and insurance company with a focus on retirement products.

BB&T Corp (BBT.NYSE) – VMQ Score = 81.7 
A retail bank offering personal loans and mortgages. The stabilisation of house prices and the need to replace aging cars will be a driver of interest margins and loan growth.Infrastructure Spend – Infrastructure, Materials, and Capital Goods stocks we like:Vinci (DG.EPA) – VMQ Score = 85.8
A French listed but global construction company with significant exposure to stable revenue from operating infrastructure such as airports and toll roads.

Eaton Corp (ETN.NYSE) – VMQ Score = 79
A power management company – electrical, hydraulic, mechanical. All aspects of major construction and capital goods investment and replacement covered.

Parker Hannifin (PH.NYSE) – VMQ Score = 68
A manufacturer of components to regulate air, water, and motion. Will be a late cycle beneficiary but share price likely to discount before news flow gets better.

Dow Chemical (DOW.NYSE) – VMQ Score = 93.5
Supplies the raw materials that go into pretty much everything that is made globally.

Cummins (CMI.NYSE) – VMQ Score = 93
Makes diesel engines for trucks and power generators.

Siemens (SIE.ETR) – VMQ Score = 89
A German based but global conglomerate operating in power, transport, healthcare and factory equipment. Evidence it is becoming more focussed should help profits and rating.Technology and Innovation stocks we like:Apple (AAPL.NASDAQ) – VMQ Score = 90.6
A very large cash pile which needs to be deployed makes this hard to gauge but net of cash it is trading cheaply as a dominant mobile phone designer.

Intel (INTC.NASDAQ) – VMQ Score = 95.6 
Moving from relying on microprocessors to a general provider of hardware and software platforms for the digital age.

NetApp (NTAP.NASDAQ) – VMQ Score = 92.7
Software to manage customer data.

Cisco (CSCO.NASDAQ) – VMQ Score = 97
Switching and routing gear for the internet and moving into software.

Xerox (XRX.NYSE) – VMQ Score = 91.5
Imaging and business process and printing services. An iconic name which will come under increasing shareholder activist pressure without an improvement in results.
Consequently we won’t be holding a lot of cash ahead of this election. We will continue to invest in mis-priced companies with identifiable competitive advantages and a solid strategic position. If we are right about these 3 trends we expect to come through November as safely and profitably as we navigated Brexit.
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Happy Investing,

​The team at TAMIM

September Small Cap Stock Review

by | Oct 13, 2016 | Stock Insight

This week the team at DMX review some of their portfolio holdings and the meetings they have had with the Small Cap companies they are invested in. Identifying these types of businesses is both the passion and the bread and butter of the manager of the TAMIM Australian Equity Small Cap IMA. We continue to believe that the addition of a small cap portfolio to your overall investment strategy adds a strong return and diversification benefit.
This week the team at DMX review some of their portfolio holdings and the meetings they have had with the Small Cap companies they are invested in. Identifying these types of businesses is both the passion and the bread and butter of the manager of the TAMIM Australian Equity Small Cap IMA. We continue to believe that the addition of a small cap portfolio to your overall investment strategy adds a strong return and diversification benefit.
September Small Cap Stock Review

 

Elanor Investors Group (ASX:ENN)

Elanor Investors Group (ASX:ENN) is busy securing assets for its two new funds (a $250m ASX listed retail property REIT and an unlisted commercial property fund) to be launched towards the end of 2016

Management have advised that they have a strong pipeline of potential asset acquisition opportunities across the hotel, commercial and retail property space.

ENN’s Hospitality and Accommodation Fund ( http://www.elanorinvestors.com/hospaccomfund.php ) is performing well, with ENN focused on implementing initiatives to continue to improve the operating performance of the underlying hotel assets. We expect at some point ENN to list this fund on the ASX, which would make it one of the few ASX hotel exposures, and, as such, would be likely to be well received.

ENN’s two operating businesses (Featherdale Wildlife Park and John Cootes Furniture) continue to have good growth outlooks. The challenge for ENN is to continue to identify and acquire attractive assets at good prices in order to continue their FUM expansion.

 

Konekt Limited (ASX:KKT)
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Konekt Limited (ASX:KKT) reported a strong FY16 result, driven by strong organic and acquisition growth.As has been widely reported in the financial press, there has been a number of recent corporate transactions in the injury management sector as private equity and other corporate players look to build their presence.

Acquisition multiples and vendor expectations are likely to have risen as a result of this activity, which may impact the acquisition activity of the likes of KKT in the short term.

KKT’s management have a strong track record of generating organic growth. Management have a number of initiatives in place in order to continue to grow the business organically, including rolling out nationally their corporate mental health offerings, the opening of new offices to provide KKT with further scale; and targeting the provision of pre-employment services to corporates that attract high workers compensation premiums such as construction firms and aged care services.

KKT see themselves as an important provider of corporate health initiatives, servicing numerous large Australian corporates.

 

Pioneer Credit Limited (ASX:PNC)

Pioneer Credit Limited (ASX:PNC) reported a strong FY16 result, although it was masked somewhat by PNC’s investment in new products and overhead support.

When we met with PNC they reiterated the difference in their business model versus others in the sector – PNC is focused on acquiring debts with ‘long dated’ collection profiles (primarily personal loans and credit cards) to enable PNC to develop deeper relationships with their customers over a longer period of time (this is in contrast to telecommunication and utility debts which are often one off in nature and don’t provide an opportunity to build a relationship with the customer). The other advantage of having a longer collection cycle is that it provides PNC with a lower turnover portfolio, meaning that PNC is not under pressure to constantly replace/purchase more ‘short dated’ utility type debts.

Over the medium term, PNC is focused on using these customer relationships to offer a wide range of financial services. PNC expect these financial services products (including personal loans and credit cards) to contribute meaningfully to its profit over time.

We also spent some time discussing with the MD and CFO PNC’s valuation approach for PNC’s purchased debt portfolio, and the discount rates they have adopted. We are comfortable with the valuation approach.

 

SDI Limited (ASX:SDI)

SDI Limited’s (ASX:SDI) Management team conducted a national roadshow following its annual results.SDI is focused on positioning itself in its markets as an innovative dental supply company with a strong technology focus (as opposed to the traditional amalgam supplier that many in the industry still see it). This corporate re-positioning is expected to be complete by the end of the calendar year.

To further its innovation, Management expect to invest approximately 5% of sales on research and development initiatives as they look to continue to develop high quality dental products to sell to their customer base in over 100 countries. As an example of their innovation and unique product offering, SDI note that a major multi-national competitor continues to purchase a high end glass product from SDI that is not available elsewhere.

SDI’s product portfolio will be enhanced during FY17 with the release of two new products that Management are positive about – a new LED curing light and a new Riva Glass Ionomer product.

SDI’s

share price continues to perform well on the back of its FY16 result, a positive outlook, improved investor relations and wider market recognition.
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Happy Investing,​The team at TAMIM