Investor Update. Justin Braitling Director November 2010. Investment Philosophy.
The Manager employs a bottom up, fundamentally driven security selection process. The Manager believes the best investment opportunities are found in well managed companies with strong fundamentals that can be purchased on attractive terms:
Consistent with these basic principles. In selecting securities to short sell as a source of portfolio funding, we find the best “shorting”opportunities are found in poorly managed companies with weak fundamentals that can be sold for more than they are worth.
IMF is forecasting growth of just 2-3% for US and European economies.
-Insufficient to create employment growth-
-Unemployment stays high for protracted period undermining confidence
-Deleveraging continues as household debt is reduced
-Consumption falls to more sustainable levels as household save more and spend less
-US housing slow to recover given
6 million homes at various stages of foreclosure
Change in US$ size of GDP from 2000 to 2009
Change in US$ size of GDP from 2010 to 2019
The economy should strengthen further as we move into 2011
Businesses and Households are still very cautious
Uncertainty continues around Government policy resulting in ongoing delays with investment decisions
We need to see:
Legislation passed to provide clarity on project economics
Backlog of projects approved and sanctioned
Stability return to financial markets
-Wages to “catch up” >5%
-Record Population growth
-Income tax cuts
-Households are underspending
-Household wealth is up 20% since 2009
higher interest rates and costs of living
Banks: Outlook is weak
Industrials: Outlook is strong
Resources: Outlook is strong
Defensives: Sector looks expensive
Credit growth is much softer post GFC as deleveraging trends continue
Business credit will recover but disintermediation trends ensure credit growth will fall short of prior experience.
Mortgage lending will slow as real estate inflation will be much lower given poor affordability.
Margin pressures continue as banks cycle cheap funds with more expensive debt post GFC , banks struggle to pass on increases to customers.
Fee income also under pressure
Government and regulatory oversight will lead to increased competition along with higher capital and liquidity requirements
Banks: High return businesses in a low growth environment.
Funding Costs are High
Manufacturing– The stronger Australian dollar has diminished the competitive standing of domestic manufacturers. Key positions Bradken, Caltex, Amcor.
Ag / Chem– DAP market to be over-supplied in the medium term. Domestic competition continues to rise foreigners coming in (Agrium)
Key position Incitec Pivot.
This leads to overweight positions in domestic media & retail – Seek, Myer, Harvey Norman
Key beneficiaries will be Transfield, Worley
This has created an opportunity to buy a high quality business at a cyclical low – James Hardie
Upside Priced In – expected growth is largely factored into the price, with the valuation range based upon forecast FY12 earnings
Cheap Comps – Asciano (PN) QR’s largest competitor, is a cheaper play on growth in Coal.
Any shortfall in Coal Volumes -90% of FY12 earnings being coal related, any external impact on these volumes would significantly impact QRN
Entrenched Culture and Cost Structure: QRN has a highly unionised workforce.
# It all comes down to price and management. At the bottom end of range with the retail discount, QRN is a reasonable investment. The potential is there to transform QRN but are management motivated enough?