Week #16 – just three weeks to the EGM
1.
14
Key Questions for Boon and Price before the EGM
2.
Bonds
and Hybrids in Australia
3.
Huge
Issuance of Hybrids in February 2012 – Elstree
4.
Corporate
Australia
5.
S&P
confirms PaperlinX is a dog of a stock
6.
What
did Mr Market say last week?
7.
Price
versus Value - where do 2013, 2015 or 2019 figure?
8.
New
research – Macquarie , Goldman Sachs and PIGS
9.
PaperlinX considers move from Milton Keynes to France
14 Key Questions for
Boon and Price before the EGM
These are serious questions for serious
consideration. Here they are. To read the detailed questions,
please click here.
1.
Disclosure
of legal and financial structure of hybrids, Delaware
2.
Amended
European debt facility
3.
Financial
issues arising from the webinar presentation
4.
PaperlinX
versus its global listed peers
5.
Andrew
Price’s attitude to Hybrids
6.
Quarterly
financial reporting
7.
Transparency
about Board meetings
8.
Access
to Company webinars for all stakeholders
9.
Current
non-executive directors’ misalignment with share holders
10.
Non-executive
directors and Europe
11.
Corporate
Governance – holding too many board positions
12.
SWOT
analysis by Boon and Price
13.
Plans
of Andrew Price if successful at the EGM
14.
A
proposal for non-executive directors’ alignment with equity holders
Some may consider this questionnaire too long, or too
intrusive. Well, I say the future of PaperlinX stakeholders, investors and
employees, is too important not to be addressed with the utmost vigilance.
If this offends incumbents, at whatever level, get
used to it friends as there will be a lot more of the same until PaperlinX is
profitable.
2 Bonds and Hybrids in
Australia
This was written by Alan Kohler in his regular
Saturday morning wrap of the week. It is a service to subscribers of his Eureka
“There are a huge number of new corporate fixed
interest issues at the moment for three reasons:
1.
The
risk-adjusted returns available from shares are unacceptably low, which is
something I've been on about since Christmas, and I've been suggesting lower
exposure to equities for that reason. Many people are coming to similar
conclusions;
2.
Companies
are often able to count these instruments as equity, not debt, because of some
wrinkle in the fine print that allows the interest to be cancelled for some
reason. Ratings agencies and auditors are inclined to define interest that can
be withheld as a dividend, and therefore the security as equity, not debt;
3.
Investment
banks are paying commissions of up to 1.75 per cent to financial planners and
stockbrokers for selling them to retail investors. As we know, planners are
losing trailing commissions from managed investment funds because of the Future
Of Financial Advice (FOFA) reforms that ban commissions, so they are falling on
the commissions on hybrid issues like thirsty folks in a desert.
This is not to say that all hybrid or corporate bond
issues are suspect, only that you've got to read the fine print and only go for
blue chip issuers.
The second and third of the above factor are pretty
disgraceful, in my view. It means, first, that investors think they are buying
debt while companies think they are selling equity.
Someone is wrong, and I don't think it's the
companies. OK, the coupon is fixed, and usually expressed as a margin over the
bank bill swap rate, usually around 7-8 per cent interest in total. But they
are not risk free, and I'm not just talking about the risk of default and the
loss of your money – with most issuers so far, that risk is remote. I'm talking
about the prospect of the interest/dividend being cancelled at the drop of a
hat.
And the third point is simply a reprise of the old
problem with commissions, the one that planners and brokers have so much
trouble getting their heads around: if the buyer is your client, but you are
getting paid by the issuer of securities, that means you have an incentive to
sell the things rather than advise your client independently.
Happy coincidence it is when the client's best
interests are served by buying the securities that pay a commission to the
adviser; too bad if not, because more often than not they'll be buying them
anyway”.
Disclaimer: I
subscribe to Eureka Report.
3 Huge Issuance of
Hybrids in February 2012 – Elstree
A little known player in the fixed income hybrid
space is Elstree Investment Management Limited, AFS Licence Number 225721.
It invests solely in Australian hybrids and fixed
income. It’s run by three industry professionals with a long history in fixed
income. Here is their February 2012 Performance Review.
“Please find attached a performance overview of the ASX
listed credit sector for the month of February 2012, the features of which
were;
·
Due to an unprecedented month of new issuance pricing the ASX listed credit
sector performed poorly in February returning -1.19%. This compares with the
All Ordinaries Accumulation Index and the All Maturities Bond Index returns of
+2.41% and -0.21% respectively,
·
The Elstree Enhanced Income Fund
outperformed the sector by +0.93% this month returning -0.26%,
·
The Fund’s outperformance this month
was driven by the Fund’s under-weight position in bank hybrid securities which
under-performed as new issuance weighed heavily on prices.
Disclaimer: I’m not a
client of Elstree. I think they are very good at what they do.
4 Corporate Australia
If you read the Elstree monthly review, which I
highly commend, the words “unprecedented
month of new issuance” becomes an understatement.
“This month saw 5 hybrid issues announced and priced,
producing around $4 billion of new issuance. Prior to this month, the largest
12 month total of issuance was $4.4b”. WOW!
Why is corporate Australia
Simple answer: they need the money, and they don’t
wish to rely on the banks. This is a global phenomenon which doesn’t bode well
for PaperlinX, as discussed under Price
versus Value, where do 2013, 2015 or 2019 figure?
Only today, AGL Energy Ltd a rock solid energy
utility with a market cap of $6.6Bn was forced to raise its indicative margin
on a new $650 million subordinated note issue from 3.4-3.6% to 3.8-4.0% over
the BBSW. The Notes are dated,
subordinated, cumulative, unsecured notes issued by AGL. See Termsheet here.
By contrast, PXUPA is priced at BBSW +2.40%.
The step-up margin is BBSW+4.65%. Times change.
5 S&P confirms
PaperlinX is a dog of a stock
On Friday March 2, S&P announced its quarterly
rebalance of the S&P/ASX Indices. This included removal of PaperlinX (PPX)
from the All Ordinaries Index – see here.
Now its official – PPX is a dog of a stock. Here is
the history of PaperlinX’s official fall from grace as measured by membership
of ASX Indices.
Date
|
Removal from
|
Price
PPX
|
Price
PXUPA
|
7 Dec 2007
|
ASX 100 Index
|
$2.320
|
$92.00
|
4 Mar 2011
|
ASX 200 Index
|
$0.435
|
$69.25
|
9 Sep 2011
|
ASX 300 Index
|
$0.098
|
$29.10
|
2 Mar 2012
|
ASX All Ordinaries Index
|
$0.105
|
$17.94
|
For the benefit of non-resident readers, the S&P/ASX
All Ordinaries Index is Australia
“The S&P/ASX All Ordinaries Index represents the 500
largest companies in the Australian equities market. Liquidity is not
considered as criteria for inclusion, except for foreign domiciled companies”.
In practical terms demotion means nothing today, as
the event was expected, but it does have implications for the future.
Most institutional and many private investors will
not consider investing in a stock outside certain S&P/ASX Indices. Being
out of the All Ordinaries means that PPX is now in desultory company on the
ASX.
My data provider lists 1,902 stocks currently trading
on the ASX. To put the “the 500 largest
companies” into perspective in terms of choosing a possible sound
investment; there are only 346 of 1,902 stocks with a ROE > 5% and a market
capitalisation > $100 million.
The percentage of reasonable stocks on the ASX is
thus currently 18%. PPX last enjoyed this status in the six months ended
December 2007.
A sound stock could be basically described as one
with a market cap > $250 million and a ROE > 10%. There are only 193 of
these. PPX last enjoyed this status in the six months ended June 2003 which
coincidently is when it was becoming a dominant global paper merchant – think
about that for a moment.
This means that PPX is now in the hands of
speculators and opportunists scavenging over the 82% of undesirable stocks
listed in Australia
6 What did Mr Market say last week?
Weekly
Price Change
|
Comment
|
||
PXUPA
|
$17.94
|
-16.6%
|
Yuk
|
PPX
|
10.5¢
|
+5.0%
|
Highest weekly close in 6 mths.
|
XJO
|
-0.8%
|
||
PPX is still benefitting from two factors:
1. Announcements
of Feb 22 re possible (nothing is certain at present) stopped distributions on
PXUPA out to September 2013; and
2. A likely
win by Andrew Price on March 23.
PPX has now had four
consecutive rising weekly closes. There is lots of chart support and resistance
at 10.0 - 10.5¢.
Looks like a case of buy
the rumour, of a Price victory, then …………. you know what follows.
PXUPA has had eight straight down or even days on
moderate volume before Friday’s down day on heavy volume at the close. There
was a sale of 100,000 @ $15 at the close – see course of sales/trades here.
The seller was a long term
holder, apparently spooked by the valuation that issued on Wednesday. The buyers
were two hedge funds, I knew that on Friday.
Discounting this one
transaction, the price and volume action was a continuation of the previous
eight days.
To put $15 into
perspective, PXUPA has only traded at or below $15 for three days, 11-13
February 2009, when things were incredibly grim.
If you question the
gravity of this time in PaperlinX’s history then read the ASX announcements on
Monday 16 February when PXUPA closed at $28.00, up 107% from the previous close
of $13.50.
Are things as grim now at PaperlinX as they were in February 2009? Hope not.
7 Price versus Value,
where do 2013, 2015 or 2019 figure?
“Price is what you pay
and value is what you receive”.
IMO, someone is making a big mistake here. If PXUPA
is worth $18, then PPX is overpriced at 10-11¢. That’s an opinion. We’ll all
know soon enough.
What we must accept is that value based on projections
out to 2019, or 2015 or even 2013 are mere assumptions.
Does anyone seriously believe that PaperlinX will
exist in its present form in September 2013? I don’t because 18 months is an
eternity when under such pressures. Here’s why:
1.
The
Company admits that its debt is increasing due to suppliers’ tightening credit
terms, see page 19/39 here.
2.
The
Company’s bankers are demanding asset sales.
This isn’t a picture of stability. The instability
and deep value argument is supported by hedge funds now taking out long term
holders, as occurred last Friday. Expect more of that to follow.
These hedge fund guys are in PXUPA for a good time,
not a long time.
One wag recently said to me “PPX is worth either 0¢ or 50¢” and I don’t disagree. PXUPA is a
different story.
8 New research – Macquarie , Goldman Sachs and PIGS
See here.
9 PaperlinX moves HO
from Milton Keynes to Lourdes
I hear Toby Marchant is thinking about
moving his global centre to Lourdes
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