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The good, the bad and the downright crazy

Jenny Ruth

Friday 30th May 2003

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Jenny Ruth
Andrew South, chief investment officer at BT Funds Management, says his attitude towards the equities market has become a little more defensive of late.

"We're a little worried about analysts' earnings forecasts for 2004 - they're probably a little high," South says.
"At this stage, we're looking for more earnings certainty if we can find it."

Certainly, the latest report from Contact Energy at the beginning of May was a 13% rise in first-half net profit to $34 million.

South has been reviewing all the stocks in the portfolio one by one. Two which are staying in are Contact and Sky Network Television.

With Contact, it isn't just that the nation is suffering from drought, an electricity crisis and resulting high electricity prices which gets South's favour.

"We do think the price path will rise longer term, but we like the fundamental business. Contact's got a got portfolio of generation assets.

Nor is South paying attention to periodic speculation about what 51% shareholder Edison Mission Energy might do.

Similarly, South is interested in investing in Sky TV because of the fundamental business, not because of speculation that 67% owner Independent Newspapers, which is controlled by Rupert Murdoch, may launch a bid to mop up the minority shareholders once the $1.2 billion sale of its newspapers to Australia-based Fairfax is completed.

"If they do, they do, if they don't, they don't," he says. "We think the fundamentals are pretty good longer term. I don't personally want to lose any more companies," he says.

"All the indicators at the moment as far as churn, new business, capital spending, product offering and programming costs are all in the right direction at the moment."

In particular, Sky TV is a beneficiary of the rising New Zealand dollar because it pays US dollars for its programs.
Catherine Allfrey, portfolio manager of The Tasman Share Fund at Colonial First State, has been selling out of another energy company, Australia-based BHP Billiton but another media company, Kerry Packer's Publishing & Broadcasting (PBL).

Alarm bells started ringing for Allfrey when BHP chief executive Brian Gilbertson resigned suddenly due to "irreconcilable differences with the board" in early January and was replaced by Chip Goodyear, previously the chief financial officer.

The company later clarified the reason for Gilbertson's resignation, saying it was "not related to any concerns by the board about the financial performance of the group" and that there would by no changes in strategy.

"One of our criteria is the quality of management and we took the view that the appointment of the CFO with no operational experience was a poor choice," Allfrey says.

She sold out at above A$10 and the stock had fallen as low at $8.22 by late May.

Gilbertson had been Billiton's chief executive before that company merged with BHP and had built his career as well as shareholder value through a series of acquisitions.

"He got to BHP and kept going. The board was saying, we're pretty happy with the assets we've got. It was happy with the organic growth that was going to come out of the business in the next five years," Allfrey says.

Without the board's knowledge, Gilbertson had discussions with iron ore and copper miner Rio Tinto about splitting BHP Billiton in two, floating off its petroleum assets and selling all its mining activities to Rio. That was a strategy BHP's board obviously failed to support.

Colonial First State is very much a "stock picker" type of fund manager, aiming to focus on companies which have the ability to grow faster than gross domestic product. A strong track record from management and a sound balance sheet are other criteria.

As well as having assets which appeal to baby boomers, the eldest of whom are starting to retire, particularly the Melbourne Crown Casino, Australia's largest casino, PBL also has the potential to deliver double digit earnings-per-share growth through cost cutting.

One of its prime assets is Australia's Channel Nine, the number one free-to-air channel in Australia.

Allfrey explains that Channel Nine had been top of the heap for so long that a lot of fat had crept into programming costs and staffing - "a lot of personalities getting paid a fortune." That's notwithstanding Packer's reputation for running companies very close to the bone.

With pay TV making increasing inroads into television advertising spending (PBL also owns 25% of pay TV company Foxtel), it's time for Channel Nine to go on a diet.

John Alexander, the man who had previously been running PBL's Australian Consolidated Press, Australia's biggest magazine publisher which is definitely a lean organisation, has been brought in to trim Channel Nine's fat.

So far, Allfrey's decision to buy the stock has been rewarded. She bought in at A$7.50 and the stock was trading around the A$9 mark towards the end of May.

Allfrey hasn't neglected the other side of the Tasman. Fisher & Paykel Healthcare caught her eye back in late February when its shares were trading at $9.50. They had been falling from about $10.50 in early February amid concerns that the rising New Zealand dollar would eat into its earnings.

While Fisher & Paykel manufactures its sleep apnea and humidification products in New Zealand, its sales are in US dollars.

Allfrey decided the market's currency fears were overdone and started buying - the shares have since climbed as high as $11.

Backing up her decision to buy was the fact that the population is aging both here and in the company's prime market, the US, which should mean built in growing demand for its products.

As well as the company's efforts at persuading the market that its currency fears were overdone and that the company has rolling hedges covering the next two or three years in place, recent quarterly results from competitors have helped the share price recover.

In late April, ResMed reported record third quarter sales and profits. Sales jumped 31% in the three months ended March on the same quarter last year while net profit was up 33%. Around the same time, Respironics reported a 28% rise in sales and a 23% rise in net profit.

In late May, Fisher & Paykel confirmed it hadn't missed out on the party. Net profit from continuing operations was up 17% to $72.9 million after sales rose 15% in US dollar terms.

This article first appeared in ASSET magazine. To order your copy of ASSET go to or call 0800-345675

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