The Federal budget & other recent events

May 2012

In this blog, your diarist shares some observations from recent events and meetings.

Oakeshott Questions PM Deal

The above heading in the Australian Financial Review on Friday 11 May 2012 again raises the prospect of a change in government earlier than the scheduled election date in the December quarter 2013. While Burrells would normally be somewhat apolitical, your diarist has written in previous blogs of the negative impact on the economy and markets of the current Federal government and the previous Queensland state government.

A change in Federal government should add 10% to the Australian stock market. Moreover the market will only require a reasonable probability of change, for some positive sentiment to be translated to share market prices.

The last hung parliament was in 1940 when Robert Menzies was elected as Prime Minister and held power with the support of independents. Part way through that term Curtain was elected Prime Minister and won at a landslide at the next election.

Independent MP Rob Oakeshott knows the probability of a Queensland style rout at the next Federal election is increasing and may seek the cudos of change to a winning team. Your diarist remains optimistic that a significant change in the Federal government landscape may occur well before the December quarter 2013.


Mirvac

Your diarist attended a Mirvac Board dinner in Brisbane recently. The Firm‟s independent research report (included in this month‟s Bourse) was an insightful briefing paper in advance of meeting the Board and senior management. Our property specialist, Michael Mayrseidl, has been of the view for some time that Mirvac was undervalued.

Key takeaways from the meeting were:

  • Strong and competent senior management
  • Chairman engaging and astute
  • Large quality property portfolio owned by the Mirvac Stapled Security is underrated by the market, more focused on Mirvac‟s unit and development arms
  • Major upside to Mirvac when the George Street preleasing is completed (refer research)


Crown

Blog readers may recall your diarist visited Macau last year and was impressed with the City of Dreams complex in Macau which includes the three hotels: Crown Towers, Hard Rock Hotel and Grand Hyatt Macau, connected via a circular shopping mall with the casino in the middle.

Talking to a Melco Director recently, I raised the question clients mostly raise on Macau concerning any change in Chinese government policy towards Macau. The answer was to the effect that the Chinese government is very supportive of Macau as Chinese love gambling and their population is quite enamored with the ability to go to Macau.

Burrell research has Crown valued at $10.45, with the stock having moved up $1.00 in recent months to just above $9.00. (Refer Crown research included in February Bourse)

The Packer play via Crown in Sydney is of interest. It is reminiscent of the Murdoch play for the Courier Mail in Brisbane. Murdoch purchased the Sunday Sun, set up the Sun as a stalking horse with a daily newspaper, this kept the price of the Courier Mail depressed and as soon as Murdoch was successful the Sun was closed down.

Echo Entertainment is now a separate entity from the previous merged Tabcorp that owns the Sydney Star Casino and the Queensland casinos including Jupiter‟s. Mr Packer has as his stalking horse a new casino at Barrangaroo, the Lend Lease development on the western side of the Harbour Bridge. At the same time he has taken an interest via an options play in 10% of Echo and applied to the NSW and QLD governments to increase the holding above that threshold.

Mr Packer has recently increased his interest in Crown by 2% to 48% and has placed his interest in Foxtel for sale. Such proceeds would allow him to retain his overall interest in a merged Crown/Echo takeover.


Interest Rate Cut

The RBA 0.5% interest rate cut foreshadowed in last month‟s Blog is an important move. The exchange rate almost immediately from $A:US 1.05 to 1.00. These twin moves set the seen to act as a catalyst to commence a change in the negative sentiment prevalent over the last two-three years on Australian equities markets.


Federal Budget

2,100 attendees at the PWC budget breakfast on the 8th May were asked to indicate yes/no as to whether the budget would be positive for the Australian economy. An extraordinary 78% voted “No”, in an audience which would generally be much more evenly weighted towards such matters.

John Howard indicated that this year‟s budget was almost exclusively about politics and very little about economics. The handout mentality in advance of the Carbon Tax was seen as not resonating with the electorate. Howard commented that the electorate is increasingly concerned about Australia implementing a Carbon Tax at a reasonably high level when none of the competing countries have done so and in fact the momentum for such action a couple of years ago has disappeared.

The superannuation contribution change from $50,000 to $25,000 concessional from 1 July 2012 is poor policy, ignoring the genuine needs for those over 50 to supplement their superannuation at that critical time in their lives. It is a reprehensible change.

Tim Nicholls the new Queensland Government State Treasurer revealed that the total Queensland government debt was currently $65b and had been scheduled under the former government to increase to $80b. To put this in perspective, Mr Nicholls noted that this level of debt is of the same order as the Federal government debt at the time John Howard came to power and it took over a decade to reduce this debt to nil, even with the substantial taxation powers of the Australian Federal government. In strong contrast, Queensland government revenues from the GST are forecast to fall because the GST does not apply to food and other staples and is so more dependant on discretionary expenditure which has not grown.


RIO AGM

Your diarist attended the RIO AGM in Brisbane on the 10th May. As noted in the previous blog, we are concerned that BHP and RIO have not paid sufficient dividends to shareholders and that these low dividend policies are a key reason for the share prices trading materially below valuations.

Your diarist asked the Rio Chairman Mr Jan du Plessis as to whether Rio would be prepared to adopt a more progressive dividend policy and noted the figures in the short form Financial Statements presented to the AGM as shown below:

USD Mln 2011

Net cash generated from operating activities

20,030

Equity dividends paid to owners of Rio Tinto

2,236

The Chairman noted that he personally had sympathy with the viewpoint, although noting that institutional stake holders tend to be more ambivalent.


Europe

Recent elections in France and Greece have again placed the issue of European stability back on the agenda. France lurched to the left with the election of a new President as did Greece.

John Howard in his address commented that the Euro was fundamentally flawed in that an elite group had imposed monetary union on their countries, with no real prospect of any fiscal unity, given the historical divergence of the strong independent countries of Europe. He commented that ultimately the Euro zone was likely to become a smaller group of countries than it currently comprises.

The austerity measures insisted upon by Germany have certainly made the point that southern Europe has been profligate with its expenditure. However the electorates in Europe understand that the USA policy of firstly restoring economic growth is a better policy as it is only economic growth which will produce the tax and other revenues to enable the debt/GDP ratios to be reduced.


Conclusion

The low valuations in Australia together with some tentative positive signs give your diarist cause for a more optimistic outlook for the Australian market, whereas the strong run in overseas markets may well be curtailed in the short term with a new focus on European sovereign debt issues.

Happy Investing…


Chris Burrell

 
If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

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