CEO INSIGHTS – Week Ending 7 Apr 2017 BY NAOS Asset Management

“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong. So APRA quite rightly has said lenders can expect a strong supervisory focus on loans with a very low net income surplus” Philip Lowe, Governor, RBA

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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Commodities

“As a result of Cyclone Debbie and localised flooding, Aurizon has mobilised all available crews and resources over recent days to inspect and commence repairs where possible, on the four coal systems (Newlands, Goonyella, Blackwater and Moura), which are part of the Central Queensland Coal Network. The temporary closure of the coal systems will have a negative impact on FY2017 volumes”
Aurizon Statement

“BHP Billiton confirms that force majeure has been declared for all BMA Coal and all BMC Coal products as a result of damage caused by Cyclone Debbie to the network infrastructure of rail track provider Aurizon”
BHP Statement

“Coal export volumes from Abbot Point, Dalrymple Bay Coal Terminal, Hay Point and Gladstone will be significantly affected until floods recede and repairs to the rail systems are completed”
Glencore Spokesman

“In the last 18 months the industry has seen around 700,000 to 800,000 tonnes of price-related cutbacks and as a result forecasts of a market surplus have fallen substantially and we now see the market moving into a small deficit this year”
Arnaud Soirat, CEO of Copper and Diamonds, Rio Tinto

“With continued modest growth in demand, a substantial supply gap [for copper] may emerge by the beginning of the next decade. This could result in higher prices. I think there is broad agreement that copper has continued upside ahead”
Arnaud Soirat, CEO of Copper and Diamonds, Rio Tinto

“Make no mistake the business I lead is pursuing further domestic supply agreements - and has taken proactive steps to supply the east coast gas market”
Zoe Yujnovich, Chairman, Shell Australia

Housing & Home Lending

“APRA will continue to observe conditions in the residential mortgage lending market, and may adjust the [recently announced] measures, or implement additional ones, should circumstances warrant it”
Statement by the Australian Prudential Regulation Authority

“Conditions appeared to have strengthened in Sydney and remained strong in Melbourne. These cities had continued to record brisk growth in housing prices and auction clearance rates had remained high”
Statement by the Reserve Bank of Australia

“I don't see [the measures] having any particular profitability impact because, in the end, we are all trying to make sure that customers are getting the right loan for them…that is in our long term interest, just as it is in the customer's long term interest”
Brian Hartzer, CEO, Westpac

“In response to continued growth in our investor lending and forward projections of this growth, we’ve taken the decision that we need to temporarily pause new investor lending”
Andy Rigg, COO, Credit Union Australia               

Retail

“The challenging retail trading conditions flagged at the half year results announcement have continued, with all states experiencing negative comparable store growth in Q3, particularly Western Australia and the Australian Capital Territory. Underlying customer numbers continue to be below the same time as last year, resulting in negative underlying comparable sales of approximately 4% for the half year to date”
The Reject Shop Market Announcement 

“Customers are reducing their discretionary spend [and] our promotional activity has not generated the incremental foot traffic required to grow comparable sales”
Ross Sudano, MD, The Reject Shop

Interest Rates

“The Reserve Bank has a challenge because it wants interest rates to stay low, so that consumers and businesses are continuing to be stimulated, but they don't want that to turn into too much debt on the housing side”
Brian Hartzer, CEO, Westpac

M&A

“There’s more commitment to public market M&A for sure. Upfront equity raisings, pre-bid stakes (which are harder for banks to do these days) and off-market bids with less than 90 per cent minimum acceptance conditions have increased in frequency recently”
Aidan Allen, Head of Investment Banking, Citigroup Australia

“It’s been active in terms of publicly speculated situations, particularly in the last month. But I’d say there’s a lot that we and no doubt others are working on that are not yet public, that gives us confidence this will be quite a good year for the M&A market”
Paul Uren, Head of Investment Banking, JPMorgan Australia

Domestic Economy

“With the acceleration in export values and volumes, we’re also seeing acceleration in our standard of living”
Steve Ciobo, Trade Minister, Australia

“The three Free Trade Agreements are underpinning a surge in exports which is driving Australia’s economy and job opportunities These landmark agreements are fueling growth in Aussie exports, which is creating Aussie jobs”
Steve Ciobo, Trade Minister, Australia

“For the third successive quarter, we had an increase in the terms of trade, on this occasion by just over 9 per cent, the largest quarterly growth since June 2010. Real net national disposable income or, in other words, living standards, rose by 2.5 per cent in 2016, with an especially strong ­result in the December quarter where the agricultural sector made such a significant contribution”
Scott Morrison, Treasurer, Australia

“Some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest”
RBA Statement

“A reduced reliance on interest-only housing loans in the Australian market would also be a positive development”
RBA Statement

“You can only hope that some of these dizzy values that you see people paying for houses now, you hope that they stand up on any economic correction”
Don Argus, Former CEO, NAB

“If you progressed to just an interest-only environment, that’s only going to lead to tears”
Don Argus, Former CEO, NAB

“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong. So APRA quite rightly has said lenders can expect a strong supervisory focus on loans with a very low net income surplus”
Philip Lowe, Governor, RBA

Infant Formula & Daigous

“It’s a very vexing issue for us as we end up out of stock for our poor customer. We used to be out of stock on infant formula for Bellamy’s and now it has moved to a2 milk and others’’
Brad Banducci, CEO, Woolworths

“Keeping supply a little bit short of demand was key to the success of a2 from an investor’s perspective. Bellamy's ran out of stock and a2 were really in the sweet spot, in my opinion, to catch that market. Then Bellamy's really experienced an inventory issue’’
Albert Tse, Founder, Wattle Hill 

Other

“After a long and difficult transition, the [music streaming] industry is once again seeing growth”
Lucian Grainge, CEO, Universal Music

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