CEO INSIGHTS – Week Ending 12 January 2018 By NAOS Asset Management

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“In terms of crypto currencies generally, I can say, almost with certainty that they will come to a bad ending. When it happens, I don’t know” Warren Buffett, Chairman, Berkshire Hathaway

As part of the NAOS investment process, we pay particular attention to the comments made by company CEOs 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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Resource Sector

“The good thing for the sector is that after 5 years of being down and seeing only an obsession on costs, during the last 12 months we have seen miners hit an inflection point” Alberto Calderon, CEO, Orica

“We see a lot of activity in iron ore, we see a lot of activity in the next years in metallurgical coal, and we see interesting activity in thermal coal as well as copper” Alberto Calderon, CEO, Orica

Resources M&A

“The ethereal animal spirits [in the resource sector] — perhaps due to the long period of relative stability, the boards and management teams that we’re speaking to seem increasingly keen to take a chance to deliver value through M&A” Arnold Bloch Leibler, Partner, Jeremy Leibler

“After several years of subdued M&A activity, we believe the conditions are now ripe for ­increased activity in the resources sector, given the rebound in ­commodity prices, successful cost reduction programs and ­associated reduced capital investment” Joe Fayyad, Head of Investment Banking, Bank of America Merrill Lynch Australia 

“We expect resources to be much more active in 2018. Most companies have benefited from improving commodity prices and now have strong ­balance sheets. Given declining production profiles, many companies will feel compelled to pursue acquisitions. In the resources sector, usually one transaction acts as a catalyst for other transactions” Paul Uren, CEO, JPMorgan Australia

“We expect metals and mining activity will be more commodity specific but, in general, ­activity is expected to rise and sale processes that are under way in the sector are being strongly contested” Alex Cartel, Head of M&A, Deutsche Bank Australia

Retail

“The business has enjoyed strong fashion trends during the first half of FY 2017-18…Christmas and Boxing Day sales periods performed ahead of expectations to deliver comparable sales growth of 7.4% for the first half” Lovisa Market Announcement

“We continue to achieve strong sales growth” Mark Ronan, CEO, Adairs

“We've been pushing more traffic back into store with click and collect that we launched in November 2016 ... Click-and-collect transactions make up 30-40 per cent of online sales in any given week" Shane Lenton, Chief Information Officer, Cue

“I firmly believe that brands will continue to be king. It will be all about the integrity and authenticity of those brands. If anything, I see the emphasis on brands increasing” Neil Fiske, CEO, Billabong

US Tax Reform

“[The Tax reform] has brought this major change in the silent stock holder in American business who had been content with 35% tax who now pays 21% tax which makes remaining stocks more valuable. How much of it has been baked in? I think 21% has not been baked in. It’s a big factor” Warren Buffett, Chairman, Berkshire Hathaway

Chinese Economy

“Overall, things are better than expected” Li Keqiang, Chinese Premier

Residential Housing

“In this market you either build a lot or build nothing. The market is going down. Prices have gone down about 10% from their peak” Harry Triguboff, CEO, Meriton

“I am seeing a stronger housing market in Perth now that they appear to be at the bottom of their decline” Charles Tabey, Chairman, Century 21 Australia

Wind & Solar Energy

“We have currently got more wind and solar farms proposed than we have transmission lines to carry it” Tristan Edis, Director, Green Energy Markets

Travelling Pets

“Qantas is flying nearly 22,000 pets across its domestic and international network in December and January. We’re seeing a 10% increase in forward bookings for pets compared to this time last year” Cassandra Keogh, Freight Manager, Qantas

Infant Formula & Dairy

“From January 1, no infant formula products will be allowed to be imported into China unless they come from a registered factory and their brand has been registered and approved by the China Food and Drug Administration” John Penno, CEO, Synlait Milk

“There are a lot of small companies which have grown up supplying a market which had very little regulation around it. Now they will suddenly have to face some of the kinds of regulations which are perfectly normal in a more mature market. We think, in time, this will lead to consolidation in the market” John Penno, CEO, Synlait Milk

“The premium dairy business continues to be pressured by the industry’s oversupply of organic milk. We continue to take steps to reduce our organic milk supplies” Cécile Cabanis, CFO, Danone 

Childcare

“[Childcare subsidies] We have really managed to constrain what has been out of control increases in child care costs, to now an increase that, by historical standards, is a much slower rate of growth” Simon Birmingham, Education Minister

Thank you for reading.

Important information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529) (NAOS) for general information purposes only and must not be construed as investment advice. Certain economic, market or company information contained in this material may have been obtained from published sources prepared by third parties. Nothing contained herein should be construed as granting by implication or otherwise, any license or right to use such third party content without the written permission of the owner.

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