The TAMIM investment team is always diligently researching, reading and scouring the internet for information and ideas that will shape our investing future. Ever since Google renamed to Alphabet we bump into friends and clients alike who wonder what this new company is all about. This week we decided to take the opportunity to explain the various working components of the new Alphabet.
The TAMIM investment team is always diligently researching, reading and scouring the internet for information and ideas that will shape our investing future. Ever since Google renamed to Alphabet we bump into friends and clients alike who wonder what this new company is all about. This week we decided to take the opportunity to explain the various working components of the new Alphabet.
Google’s Larry Page released a letter last August 2015 announcing the re-configuring of Google into a conglomerate called Alphabet.It described Alphabet as a new holding company that would be composed of the following independent operating units:
The Google search engine and related businesses—including Android, Gmail, and YouTube, to name a few;
Calico – the health care company whose goal is to lengthen life expectancy;
Verily – the home of the company’s “smart” contact lens;
X previously Google X) – its R&D arm;
DeepMind – artificial intelligence;
Access – all of the company’s high-speed Internet initiatives;
Jigsaw – the think tank/tech incubator formerly known as Google Ideas.
It is going to be quite amazing to watch the growth of a company that quite literally is changing the world on front of our eyes. To read more click the following article.
At TAMIM we invest in stocks – not markets. The recent volatility in markets has highlighted to investors the need to own high quality growth stocks in their portfolios. Our partners at CBG utilise their growth focused investment style to highlight an interesting Australian investment, SpeedCast.
This week Michael Newbold from the manager of the TAMIM Australian Equity Growth IMA takes time out to discuss SpeedCast. While the Australian stock market seems to have taken a hiatus from its downward movements, it is extremely important to remember that this is not a set and forget market. You constantly need to be reviewing your portfolio and much like we do in our portfolio committee’s, constantly re-evaluate your investment thesis for holding a particular position. It is also extremely important to review the various asset classes and investment styles of your investments. We know that your asset allocation decisions will be as important as your stock picking decisions. For a further discussion on asset allocation and stock picking please call us to arrange a time for one of our directors to meet with you.
SpeedCast is a high growth telecommunications business with leverage to increased satellite services demand and VSAT (two-way satellite ground station with a dish antenna that is smaller than 3 meters) penetration to deliver these services. Through organic growth and acquisitions, SpeedCast has strengthened its competitive position in high growth industry verticals & emerging geographies across APAC.
At the FY15 result in February, SpeedCast delivered 38% revenue and 42% EBITDA growth despite FX headwinds (20-25% of revenue is in AUS/EUR vs reporting currency being USD). Management is targeting double digit organic revenue and EBITDA growth pa over the medium term while progressing with its acquisition strategy in order to build out its verticals e.g. energy or martime. The industry is highly fragmented with the majority of competitors being localised with lower quality-of service, inferior expertise/technical capabilities, and diseconomies of scale. This provides synergy opportunities for SpeedCast.
SpeedCast is currently trading on 33x FY16F EPS with a modest 2.7% yield. It offers strong double digit organic revenue and EBITDA growth plus upside from acquisitions. Please note that EPS is impacted by amortisation of customer contracts. SpeedCast is trading at a more modest 19x adjusted for this impact.
Company background
SpeedCast is a leading provider of satellite-based communication networks and services in the Asia Pacific region and to the global maritime industry. It designs, implements, integrates, operates and maintains communications networks combining satellite capacity and network infrastructure. SpeedCast also provides a range of value-added products and services, including user applications (voice, video conferencing and video surveillance), network optimisation (firewalls, filtering and data compression) and network monitoring and management (including reporting tools and remote access for IT technicians).
SpeedCast serves over 1,000 customers across over 3,000 terrestrial sites, predominantly in Asia Pacific (though its global presence was enhanced over CY15), and 1,700 offshore rigs and vessels with satellite services. SpeedCast is headquartered in Hong Kong but has a local (Australian) management presence.
What do satellite service providers do?
Satellite-based communications networks enable real-time broadband communications in areas where traditional terrestrial infrastructure is either unavailable or unreliable (eg due to war, natural disaster etc). It provides remote users with digital communication capabilities similar to those available at the corporate office. This includes making telephone calls, providing internet access and running applications to facilitate everyday operations. SpeedCast’s communications network has a global reach that uses 60+ different satellites, 15 different satellite operators and 30+ teleports. SpeedCast’s two largest customer groups are maritime and energy, which accounted for 31% and 18% of CY15 revenue respectively.So how does SpeedCast make money?
SpeedCast generates five main types of revenue that can be classified into three buckets: service revenue (fixed monthly fees), equipment revenue (sale of equipment on which they earn a margin) and wholesale VoIP revenue. Key industries for SpeedCast are set out below along with example customer industries.
How big is the addressable opportunity?
The global satellite services market is estimated by management to be worth US$5-6bn with SpeedCast’s biggest competitor having a c6% share (vs SpeedCast at c3%). The industry is therefore highly fragmented and a strong candidate for consolidation.Key earnings drivers
Growth in demand for satellite communication services by the maritime industry. Strong growth in this area is likely to be driven by acquisitions, the upgrading of older satellite systems to VSAT technologies, rising demand for bandwidth, improving crew welfare via entertainment and communications and tightening regulatory requirement involving safety systems.
VSAT continuing to gain market share. Very Small Aperture Terminal (VSAT) technologies offer two-way communication via antennas and small satellite dishes and are SDA’s primary offering. VSAT is cost effective, provides ample bandwidth and is available for use in remote locations. Increasing MSS penetration is a risk. SDA increasing its market share of the VSAT providers. SDA is looking to win market share from both smaller players in the market and the two heavyweights, Harris CapRock and RigNet. Reflecting its recent investment in scale, SDA recently won a contract from Harris CapRock.
Bolt on acquisitions. SDA acquired four businesses in the past year and is in the hunt for more. Acquisitions are targeted which operate in segments/geographies where SDA is underrepresented to add scale in an existing vertical. Targets have historically been immediately accretive on an earnings basis and we would expect this hurdle to be maintained.
Expanding geographies. SDA recently entered the African market through its acquisition of Geolink. It is talking about opportunities in Latin America and the Middle East and may do this either organically or through acquisition.
Expanding verticals. SDA recently entered the energy space through its acquisition of Hermes. Harris CapRock and RigNet (combined 60% market share) are the two major players in this space and SDA has won two tenders in the past week in this area, one from Harris CapRock. These two operators have been dealing with internal and external issues with reports of customer dissatisfaction providing an opportunity for SDA.
Growth in value added services such as video conferencing, surveillance, VoIP, firewalls, L-band services and remote access management. Having already invested in the systems and hardware, these services can further integrate the client with SDA and encourage a longer-term relationship and contract.
Catalysts for share price movement
We believe there are 2 likely cause of a positive share price re-rating. This would be either an accretive bolt-on acquisition or an announcement of large contract wins in the energy sector.
Keep your eyes peeled for any corporate announcements and we wish you enjoyable and successful investing.
This week Robert Swift discusses Pfizer and sheds light on why making investment decisions based on a tax outcome as opposed to an investment outcome is not always optimal.
The underlying fund for the TAMIM Global Equity High Conviction IMA, managed by Robert Swift, has owned the global biopharmaceutical company Pfizer for a few years now, and as an investment it has been strong performer for the portfolio. It was originally an attractive investment due to the fact it was undervalued, but also for the following reasons:
Strong pipeline of drugs albeit mature – Lipitor (cholesterol), Viagra and Celebrex (anti inflammatory). These drugs were heavily geared to an aging population which is the current situation in the USA, and also that of the rest of the world which buys them
Acquisitions of Warner Lambert, Pharmacia and Wyeth in 2000’s all showed that the company could develop and buy growth. These acquisitions are getting harder (eg Astra Zeneca proposal was effectively blocked by UK politicians)
No material problems with governance or accounting
We are now at the point where we believe the risk/reward trade-off is no longer in our favour, and our proprietary VMQ score while still favourable is not at the attractive levels it was when we first entered the position.
Pfizer operates in a sector facing common challenges. All pharmaceutical companies have an increasingly higher research and development (R&D) spend in order to come up with the next blockbuster drug. But that means more and more capital is at risk with each drug investment: i.e. the capital intensity is rising and it strikes us that many drug companies are looking more and more like car companies where it costs so much to develop a new car platform, that a failed model can jeopardise the whole business. Generics are also coming to market faster which erodes periods of super profitability for the established companies; and recently a political threat is now posed by Bernie Sanders and Hillary Clinton where we perceive both would be happy to bash the large US pharmaceutical companies.
Pfizer is also about to do a tax inversion deal. As we wrote in late 2015 as we pondered our investment: “It has been widely documented that a key rationale of the Pfizer-Allergan mega merger is tax minimisation. By re-domiciling the company in Ireland, Allergan’s home, Pfizer will have the ability to avoid US taxes on $128bn of profits earned outside the United States.” A tactic commonly referred to as ‘tax inversion’.
Exploitation of this tax ‘loophole’, while great for potentially increasing shareholder value in the short term (and is not a sustainable way of growing earnings), presents a dilemma for the US government which has the authority to block the transaction. If they allow it to happen will we see a further rush of companies looking to follow in Pfizer’s footsteps? Or, could this deal be the catalyst for legislators to review and overhaul US corporate tax policy, acknowledging that high corporate taxes on USA based companies are not the way to encourage inward business investment?
Pfizer is not alone. Many multi-nationals in the US and UK are fed up with high costs, capricious regulations, and relatively higher taxes. It is not surprising that Pfizer are trying to minimise corporation tax since they already incur higher costs of doing business in the US including the funding of expensive healthcare and pension plans. Currently HSBC is ‘running the numbers’ on whether it should relocate to Hong Kong.
We are troubled by this deal not because of the tax benefits, but because it appears to be the only reason to do the deal. Corporate finance 101 taught us that the underlying purpose of a merger was to achieve a result of 1+1>2. Attempted tax arbitrage may fall into this category but for the wrong reasons.
So, if the regulators and governments allow the merger to proceed, it is our view that Pfizer may have just bitten off more than they can chew…doing something for tax reasons alone is seldom a good reason.
This is true for both business and portfolio investing, “Tax alone shouldn’t drive the decision.”
The complexities associated with merging two companies of enormous size and differing cultures across multiple jurisdictions will alone present its own series of problems and if there are no true benefits to be ground out then it’s a deal that leaves us lukewarm.
Which is why prudent and active portfolio management is the key to long term investment success for any portfolio. The underlying fund of the TAMIM Global Equity High Conviction IMA is performing better than just about any international fund over the medium and long term (go ahead and compare us to your other favourites). After extracting some handsome gains in which we believe was a lower risk investment, Pfizer is now no longer a part of our investment portfolio and we will happily leave any further upside to the investor who was kind enough to take the stock off our hands.
The above scenario and resulting thought process is how we encourage you to think about your personal investments. If there are clouds gathering over a company within your portfolio, don’t ignore the warning signs as we are starting to see happening with Pfizer. This even more true if tax implications are the sole reason for your decision.
At TAMIM Asset Management we speak to hundreds of DIY investors on a weekly basis, as they seek to achieve improved returns from their investment portfolio. A common theme we come across every week is where an investor has decided not to sell their shares due to capital gains tax implications. BHP seems to be one of the most common coming across our desk at present.
This is true for both business and portfolio investing, “Tax alone shouldn’t drive the decision.”
At Tamim, we speak to hundreds of DIY investors on a weekly basis, as they seek to achieve improved returns from their investment portfolio. A common theme we come across every week is where an investor has decided not to sell their shares due to capital gains tax implications. BHP seems to be one of the most common coming across our desk at present.
This week we discuss Pfizer and shed light on why making investment decisions based on a tax outcome as opposed to an investment outcome is not always optimal. We ask DIY investors reading this to reflect on any poor investment decisions made in the past that were a result of worrying too much about the effect of taking a capital gain. Prudent portfolio management is the key to long-term investment success. After all, you can’t go broke realising a profit.
The underlying fund for the Tamim Global Equity High Conviction IMA, managed by Robert Swift, has owned the global biopharmaceutical company Pfizer for a few years now, and as an investment it has been strong performer for the portfolio. It was originally an attractive investment due to the fact it was undervalued, but also for the following reasons:
Strong pipeline of drugs albeit mature – Lipitor (cholesterol), Viagra and Celebrex (anti inflammatory). These drugs were heavily geared to an aging population which is the current situation in the USA, and also that of the rest of the world which buys them
Acquisitions of Warner Lambert, Pharmacia and Wyeth in 2000’s all showed that the company could develop and buy growth. These acquisitions are getting harder (eg Astra Zeneca proposal was effectively blocked by UK politicians)
No material problems with governance or accounting
We are now at the point where we believe the risk/reward trade-off is no longer in our favour, and our proprietary VMQ score while still favourable is not at the attractive levels it was when we first entered the position.
Pfizer operates in a sector facing common challenges. All pharmaceutical companies have an increasingly higher research and development (R&D) spend in order to come up with the next blockbuster drug. But that means more and more capital is at risk with each drug investment: i.e. the capital intensity is rising and it strikes us that many drug companies are looking more and more like car companies where it costs so much to develop a new car platform, that a failed model can jeopardise the whole business. Generics are also coming to market faster which erodes periods of super profitability for the established companies; and recently a political threat is now posed by Bernie Sanders and Hillary Clinton where we perceive both would be happy to bash the large US pharmaceutical companies.
Pfizer is also about to do a tax inversion deal. As we wrote in late 2015 as we pondered our investment: “It has been widely documented that a key rationale of the Pfizer-Allergan mega merger is tax minimisation. By re-domiciling the company in Ireland, Allergan’s home, Pfizer will have the ability to avoid US taxes on $128bn of profits earned outside the United States.” A tactic commonly referred to as ‘tax inversion’.
Exploitation of this tax ‘loophole’, while great for potentially increasing shareholder value in the short term (and is not a sustainable way of growing earnings), presents a dilemma for the US government which has the authority to block the transaction. If they allow it to happen will we see a further rush of companies looking to follow in Pfizer’s footsteps? Or, could this deal be the catalyst for legislators to review and overhaul US corporate tax policy, acknowledging that high corporate taxes on USA based companies are not the way to encourage inward business investment?
Pfizer is not alone. Many multi-nationals in the US and UK are fed up with high costs, capricious regulations, and relatively higher taxes. It is not surprising that Pfizer are trying to minimise corporation tax since they already incur higher costs of doing business in the US including the funding of expensive healthcare and pension plans. Currently HSBC is ‘running the numbers’ on whether it should relocate to Hong Kong.
We are troubled by this deal not because of the tax benefits, but because it appears to be the only reason to do the deal. Corporate finance 101 taught us that the underlying purpose of a merger was to achieve a result of 1+1>2. Attempted tax arbitrage may fall into this category but for the wrong reasons.
So, if the regulators and governments allow the merger to proceed, it is our view that Pfizer may have just bitten off more than they can chew…doing something for tax reasons alone is seldom a good reason.
This is true for both business and portfolio investing, “Tax alone shouldn’t drive the decision.”
The complexities associated with merging two companies of enormous size and differing cultures across multiple jurisdictions will alone present its own series of problems and if there are no true benefits to be ground out then it’s a deal that leaves us lukewarm.
Which is why prudent and active portfolio management is the key to long term investment success for any portfolio. After extracting some handsome gains in which we believe was a lower risk investment, Pfizer is now no longer a part of our investment portfolio and we will happily leave any further upside to the investor who was kind enough to take the stock off our hands.
The above scenario and resulting thought process is how we encourage you to think about your personal investments. If there are clouds gathering over a company within your portfolio, don’t ignore the warning signs as we are starting to see happening with Pfizer. This even more true if tax implications are the sole reason for your decision.
The Pain Report will provide you with a weekly independent and objective commentary on the global economy, in an attempt to help you identify the key forces which will shape the world in the years ahead. For example, I believe that the most significant and defining economic phenomenon of our time is the rise of the Asian middle classes. I urge you to beware the prism through which you view the world, and to be aware that much of the western media’s negative and sensationalist coverage is biased against the so-called emerging nations. In my view, the decades ahead will see an era of prosperity, enlightenment and opportunity that very few today are predicting. If any of the above resonates with you then please read “The Pain Report”.
Oh my, where do I begin?
Why not start with some charts.
But wait a minute.
What about this one?
Worked it out yet?
That’s right, commodity prices, particularly oil prices, have plummeted which has led to a sharp decline in the value of world trade, whilst volumes have remained relatively flat. There is also some strong US$ impact. As I have said many times, ‘statistics if tortured sufficiently will confess to anything.’
And no one, and I mean no one, can ‘spin’ a story, mangle and manipulate statistics like we can in the investment industry.
We are not ‘masters of the universe’, we are the ‘masters of spin.’
I give you 1990, and Japan is different.
I give you the Tech Bubble 2000, and P/E multiples don’t matter.
I give you 2007/2008, and debt doesn’t matter anymore.
I give you 2016, and Australian house prices are not overvalued.
But there is one person who does not mince his words. There is one man who is caustically abrasive and brutal in his sugar free, spin free servings of the spoken word. Here are some of his words.
“Space for monetary policy seems to be exhausted.”
“Expansive fiscal policy could cause further crisis.”
And just in case his illustrious audience in Shanghai hadn’t got the point, he went on to say.
“Fiscal, monetary policies have reached their limits.”
In essence this straight talking man had just told the finance ministers and central bankers of the 20 largest economies in the world to go home, because there was nothing more that they could do. So as we await the much anticipated G20 communique we have this little snippet from the WSJ. (with emphasis on little as the font size is without doubt little!)
“Downside risks and vulnerabilities have risen, including growing concerns about further slowdown in global economic activity,” a G-20 draft reviewed by The Wall Street Journal said. “To enhance our readiness to respond to emerging risks, we will explore policy options that the G-20 countries may undertake to support economic growth and safeguard financial stability.”
You see it wasn’t meant to be this way. The G20 meeting in Shanghai was meant to be an opportunity for China to showcase the magnificent transformation and liberalisation of its extraordinary economy. It was to be an opportunity to marvel at the wondrous and elevated state of the Shanghai Composite. It was to be a moment of back slapping self-congratulation of a job well done. A moment when Kuroda and Draghi could claim they had saved the world through the magical wand of ‘shock and awe’ monetary policies. But, in February 2016, a certain Wolfgang Schaeuble crashed the party and delivered the words all those assembled in Shanghai didn’t want to hear.
Of course everyone already knew this and on the way to Shanghai the world’s celebrity central bankers and finance ministers would have seen The Economist whose front cover read, ‘Out of ammo?”. Or they would have read the latest edition of Foreign Affairs with the ever irrepressible Larry Summer’s article, ‘ The Age of Secular Stagnation.’ A small footnote, Larry Summers is the son of two economists and the nephew of two Nobel laureates in economics. And you thought I was boring with two degrees in economics. I only took the second one to find out what the first one was about!
Now one thing I did learn a lot about, and actually found rather intriguing, was the notion of a ‘liquidity trap.’ I was then fortunate enough to experience one in real life.
Japan.
I was never the same ever again.
I saw the debt build up.
I saw the denial…this was the biggest lesson of all.
I saw the collapse.
I learnt a lesson.
Then I saw it all over again in 2008. (Yes, there was the Tech bubble, but that was valuation not debt) Am I seeing it again in 2016?
First up lets agree amongst friends that there is too much debt. Exhibit A China, exhibit B emerging market corporate debt. And we’re also seeing lots of denial…Exhibit C is the Sydney house price debate. But this time, unlike in 1990 or 2007, we have doom and gloom on the front page of every quality and influential publication. This tells me that the markets have done a pretty good job discounting the message I have been telling you since September.
That message is a simple one. We are witnessing the deflation of a global credit bubble…and this time it is coming from the east, not the west. It could get messy, or it might just involve some gentle hissing without a bang! And that is all I am thinking about at the moment. This means I’m looking at falling HK real estate prices, declining South Korean and Taiwanese exports, Brazil, South Africa, Russia, Japanese and European bank stocks falling et al…it’s a long list.
Moving on from my prognostications, let’s look at the markets.
It’s been a pretty good week, except for Australia. In my previous weekly commentary I suggested markets could rally…well they did, except for Australia. So is it all over and we’re back to the races…not so fast. Instructive in this regard is the US Dow Jones Transportation Index, which I have shared with you before. Remember it was this index which gave us some early warning signals as to what was to come. You can see that we could still rally quite a bit more and still be in a bearish downward channel.
Now let’s look at an index of European banking stocks, which I have regularly featured in my weeklies.
This is still scary and has a lot of ‘healing’ to do before we are close to announcing the all clear.
Then there is this one, which I know means so much to so many of you…Australian banks.
Not so good.
So let’s take a step back and look at a longer term chart.
Maybe we shouldn’t have done that!
If you tell me what you think, I’ll tell you what I think.
Actually that’s not fair as you already know what I think.
And on that note have a good weekend.All the best,
