CEO INSIGHTS – Week Ending 11 August 2017 BY NAOS Asset Management

 “It is pleasing to see that growth in the honey category is being driven by an increase in purchase frequency” Ben McKee, MD, Capilano Honey

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

“Fortescue, BHP, Rio Tinto and Vale sell to traders. These traders do not have blast furnaces. They buy because it’s cheap to borrow money from Chinese banks. Then they put that iron ore in the ground, not in a blast furnace, at the port. And then they go back to the banks, and say, hey, I have collateral, can I borrow more? And the banker says, yes, then they borrow more, and they buy more for the same people…That’s my problem with the [iron ore] business in Australia. One day, this bubble will burst”

Lourenco Goncalves, CEO, Cliffs Natural Resources

Energy

“Against a backdrop of uncertain energy policies, the energy market in Australia remains very challenging, leading to a period of high and volatile wholesale prices”

Sir Michael Kadoorie, Chairman, EnergyAustralia

“As the energy sector undergoes significant change…we continue to support customers and to invest in a sustainable energy future. During the year, 80 percent of residential and small business customers accessed discount products, up from 70 percent two years prior, and the aggregate value of discounts to these customers increased 28 per cent year on year”

Andy Vesey, MD, AGL

“Volatility in gas prices is shifting away from the traditional winter uplift towards a sustained higher level throughout the year with multiple peaks”

Andy Vesey, MD, AGL

Renewables

“Australia’s 2020 national renewable energy target continues to drive demand for renewable energy. We are actively pursuing new greenfield projects, including wind and solar generation and energy storage opportunities”

Yukio Takebe, Chairman, Mitsui Australia

Electric Vehicle Manufacturers

“I reckon it is starting to dawn on them [Electric vehicle manufacturers] that there could very well be a [Lithium] supply issue and I think they are going to have to start motivating some capital upstream to be able to establish that security in their supply chain”

Ken Brinsden, MD, Pilbara Minerals

"They [Electric vehicle manufacturers ] are very active right now [in the lithium mine space] and they have been for the past couple of months”

Alan Rule, CFO, Galaxy Resources

Travel & Tourism

“Virgin Australia’s domestic's performance was impacted by subdued trading conditions including reduced demand for regional travel and for corporate travel. We managed capacity prudently in response to these conditions, with sectors flown declining by 5.9% on the prior financial year. Pleasingly, the underlying performance of Virgin Australia domestic improved in the fourth quarter of the financial year in comparison to the prior corresponding period”

John Borghetti, CEO, Virgin Australia

“Given underlying performance improvements in the fourth quarter of the 2017 financial year and based on current market conditions, we expect the positive momentum seen in the fourth quarter to continue and that underlying performance for the first quarter of the 2018 financial year will improve compared to the first quarter of the 2017 financial year”

John Borghetti, CEO, Virgin Australia

“We continue to see strong spending and visitation growth from Chinese visitors, particularly as they move to free and independent travel” 

John O'Sullivan, MD, Tourism Australia

Agriculture

“Australian wheat is the preferred choice of bread flour makers and manufacturers [like] here because, while it is a bit more expensive, it’s white wheat and the varieties suit Asian breads. The flour market here is growing at 6% per annum but productivity growth on their farms is only 1%” 

Greg Harvey, CEO, Interflour Group Australia

“Asian middle-class demand for Australia’s ‘clean’ and ‘green’ agricultural produce continues to grow and we are focused on increasing supply to these important growing markets throughout the region” 

Yukio Takebe, Chairman, Mitsui Australia

Domestic Economy

“Headline indicators show that the Australian economy remains sound overall, albeit variable. Many households are concerned about job security, wages, and the cost of living. Cyclical investment in mining and construction has underpinned our economy for some time. The next wave of more broad-based business investment that we need to secure jobs and lift wages is important”

Ian Narev, CEO, Commonwealth Bank

“The decline in revenue (over the past 12 months) ­reflected the domestic and global economic conditions that continued to be challenging throughout the period with weakness in commodity prices and business and consumer sentiment slowing general activity”

Japan Post (Owner of Toll Holdings Australia) Market Announcement

Wealth Management

“Our outlook going forward is very encouraging — we’re attracting advisers and we’re growing our assets so we’re in a good space right now”

Chris Kelaher, MD, IOOF

“Our M&A challenge at the moment is we’ve never been busier … and we’re looking at a number of different opportunities as we speak”

Chris Kelaher, MD, IOOF

“The government announces that they would be opening up the modern awards regime and what this means is retail funds like us will be given access to 30 per cent of the market we're currently locked out of. Potentially companies like ourselves will move into that market … given the anti-bank sentiment at the moment, we should be successful in that opportunity”

Chris Kelaher, MD, IOOF

Retail

“Our supermarket sales growth has increased, as Woolworths continues to improve and our specialty tenants have again recorded healthy annual sales growth”

Anthony Mellowes, CEO, SCA Property Group

“Our foot traffic has continued to increase, and this is reflected in the sales performance of our specialties at 3.8%…the core categories of food, liquor, pharmacy and retail services are showing stronger growth, offset by lower growth in the more discretionary categories”

Anthony Mellowes, CEO, SCA Property Group

“The furniture market is directly influenced by consumer confidence, interest rates, unemployment levels and the volume of home renovations and housing sales. Given the likely slowdown in housing sales, the Company believes that same store sales order growth will be challenging in FY18”

Nick Scali Market Announcement

Banking

“A big driver of our net interest income performance was very strong volume growth, up 5.6%, that was driven by home lending and business lending, both up 6% and 5% respectively. Good asset pricing performance, that's really driven by investor loan re-pricing as we moved to meet APRA's prudential rules that were brought in”

Robert Jesudason, CFO, Commonwealth Bank

Telecommunications

“It’s in their [The Telco’s] interest to just flick people to the low speed plans as the lower access charge makes it higher margin for them”

Nicholas Demos, CEO, MyRepublic

“It is entirely possible to provide decent speeds to customers at the current wholesale prices that the NBN charges”

Phil Britt, CEO, Aussie Broadband

Domestic Housing

“Net sales from the Australian business are expected to trend in line with the average growth of the domestic repair and remodel and single family detached housing markets in the eastern states of Australia”

James Hardie Market Announcement

Commercial Property     

“Market rental growth has been strong. We are hindered by 5% cap in many of our market rent reviews, however, we've achieved 4.7% for the year”

Nick Anagnostou, CEO, Folkestone Education

US Housing

“We expect to see steady growth in the US housing market in fiscal year 2018. The single family new construction market, and repair and remodel market, are expected to grow similar to the year-on-year growth experienced in fiscal year 2017. The Company expects new construction starts between approximately 1.2 and 1.3 million”

James Hardie Market Announcement

Childcare

“We are seeing the fundamentals have not changed, and that is the long day care participation rates rising, the population continues to rise, and we're still seeing really good growth in that zero to five age group, which is clearly the one that drives the childcare demand equation”

Nick Anagnostou, CEO, Folkestone Education

Streaming

“[Subscription Video on Demand] is becoming the go-to instant gratification that people are looking for with regard to their content consumption. I think the appetite for paid content is increasing across the Australia population”

Foad Fadaghi, MD, Telsyte

Thank you for reading.

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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.