CEO INSIGHTS – Week Ending 3 Mar 2017 BY NAOS Asset Management

“We are encouraged by the improved US macroeconomic outlook following the presidential election, while investment income should benefit from higher bond yields in all major markets”  QBE Insurance Market Announcement

As part of the NAOS investment process, we pay particular attention to the comments made by company CEO’s and business leaders in order to gain a greater understanding of the current investment environment and key trends that may be emerging. Below are quotes from the week which in our view detail some of the most important and prominent industry trends and economic factors impacting their businesses.

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Dairy

“The first half of this financial year has been a particularly challenging time for Murray Goulburn. Record rainfalls and high levels of competitor activity have reduced our milk intake, impacting revenue and our ability to fully recover fixed costs and overheads. In addition, although the recent increases in the global prices of dairy commodities are welcome, they have not recovered in time to impact on MG’s first half sales volume”
Ari Mervis, CEO, Murray Goulburn

Domestic Economy

“The underemployment rate remains elevated and at near-record highs, implying a greater degree of spare capacity in the economy than indicated by the unemployment rate alone. Labour market dynamics are increasing the instance of mortgage stress in certain regional economies and Genworth expects these trends to drive elevated mortgage delinquencies in these regions”
Georgette Nicholas, CEO, Genworth

Fiscal Policy

[Urban transport infrastructure spending] increases demand, takes the pressure off ultra-low interest rates, increases the productive capacity of the economy because people can move around and it takes the pressure off housing prices”
Philip Lowe, Governor, RBA

Housing

“[We] feel pretty comfortable with where house prices are sitting, given we are lending at an average LVR [loan-to-value] ratio of 70 per cent. There is nothing that would concern me about the overall macro-economic environment"
Patrick Tuttle, Co CEO, Pepper Group

“In residential development, it was another solid period for communities in Australia. There was a mix shift in the half with a lower proportion of settlements from the higher priced New South Wales market compared to the prior corresponding period. Of the 628 apartment settlements in the half in Australia and Europe, we have collected cash on 86% to-date”
Tarun Gupta, CFO, Lendlease

“In Australia we are working with our buyers that require more time to arrange their finance. Notably, we've seen increased use of alternative non-bank sources of finance and also a higher proportion of cash buying”
Tarun Gupta, CFO, Lendlease

Commodities

"Robust lithium market fundamentals persist...We have strong demand for our products, both industrial and battery grade. And our pricing is firming in this product to approximately $10,000 per tonne on a Free on Board basis. Demand is accelerating, but there are significant headwinds for new production. Forecast supply will take longer than analysts' models predict, leading to a stronger for longer pricing"
Richard Seville, MD, Orocobre

"Announced government electric vehicle targets will require just over 500,000 tonnes of lithium carbonate equivalent per annum between 2015 and 2020. Current production is around 200,000 tonnes per annum. So there is still significant additional demand to come"
Richard Seville, MD, Orocobre

Insurance

“We anticipate that the market backdrop will remain challenging in 2017, although indications of modest improvement are now emerging. The rate of decline in global [insurance premium] pricing is easing and, while there is variation between markets, we anticipate that pricing in markets other than Australia will be broadly flat in 2017”
QBE Insurance Market Announcement

Global Economy

“We are encouraged by the improved US macroeconomic outlook following the presidential election, while investment income should benefit from higher bond yields in all major markets”
QBE Insurance Market Announcement

Retail

“[We are in] an economy where retail spending, particularly in NSW and Victoria, is above decade averages. It is underpinned by housing sector activity, lower unemployment and the wealth effect from higher home prices. With respect to housing activity, housing finance commitments, one of the key elements supportive of home and lifestyle retail spending, are positive in comparison with decade averages, although outside the eastern states there has been moderation from levels of one year ago. Similarly, dwelling starts paint a mixed national picture with strong results in NSW, Queensland and Victoria and weaker results in the other states”
Gerry Harvey, Founder, Harvey Norman

“We give customers a reason to come into a shopping centre, come into our store and we know that experience is really important. That might be store design, or service from our team who are all trained well and motivated and passionate about retail and our brand”
Peter Johnson, CEO, Cotton On

“People are also upgrading their televisions to become smart televisions. Because of the Internet of Things, everything is talking to your television now”
Gerry Harvey, Founder, Harvey Norman

“Furniture and bedding continues to be a good business for us”
Gerry Harvey, Founder, Harvey Norman

“[In the tools business especially] we'll start to see some demand improving we think as we move through the half
Peter Birtles, CEO, Super Retail Group

“Leisure has started the second half very well and in terms of sports, we have experienced a slightly slower start to the second half of the year with growth at 2%. But the post-Christmas week was a really strong week”
Peter Birtles, CEO, Super Retail Group

Automotive

“We saw very strong automotive revenue and earnings growth in New South Wales and New Zealand. and above budgeted results in Queensland and Victoria”
John McConnell, CEO, Automotive Holdings

“It's also notable that the broader automotive market is still showing record new vehicle sales in both Australia and New Zealand”
John McConnell, CEO, Automotive Holdings

Oil & Gas

"If compliance is high by OPEC and non-OPEC, then I think [oil] prices will reach $US60. If it was higher it would be better, but $US60 is fine”
OPEC

Energy Crisis & Renewables

“You’ve got the Queensland government talking about pretty significant renewable energy targets”
Mike Henry, Head of Australian Mining, BHP

 

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