CEO Insights - Week Ending Friday 23/09/16

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

“We remain very bullish on the outlook for coal. The coal price had a solid recovery this year. Most of the reason for the sharp increase is supply-related. In March this year, China implemented some coal market reforms which pulled a lot of capacity out of the market. China has restricted coal mines from operating more than 276 days per year and closed a lot of illegal and unsafe mines. A warm summer depleted coal stocks further, Indonesia has also restricted production, and exports are well down [on] previous highs”

Todd J. Barlow, MD, Soul Pattinson

“Longer term, there continues to be a lot of coal-fired capacity build in Asia. Most of this construction is super critical and ultra-super critical power plants which create upwards of 30% less carbon emissions. Most of Asia is choosing coal. It is still the most reliable source of low-cost energy. Even at these low gas prices, coal is less than half the cost of gas. The most bearish reports on coal still have the demand for coal from Asia, increasing at a faster rate than any decrease in Europe or North America, which means that seaborne thermal coal exports are rising"

Todd J. Barlow, MD, Soul Pattinson

“The drop that we had experienced for the last two or three years in China seems to have plateaued. We are becoming much more what I would describe as cautiously optimistic in relation to China”

Jean-Sebastien Jacques, CEO, RIO

“It will vary from one commodity to the other [but] we believe that copper will be the first one to come out of this twilight zone”

Jean-Sebastien Jacques, CEO, RIO

“The lithium chemical market, [in our] view, is going to remain in deficit. Olaroz expansion studies are underway; and we have a strong view that Borax has a rosy future”

Richard Seville, MD, Orocobre

“We've talked a fair bit about the lithium market in the past and not much is known by shareholders on the Borax market. Both the refined borates demand and the mineral borates demand are growing well. We've got a 4.5% compound annual growth rate forecast between 2013 and 2018 in refined borates. And in the agricultural sector or the sector driven a lot by agriculture in the mineral sector, we're looking at slightly less, but still a pretty reasonable 4% compound annual growth rate. We've seen prices bottom in the market; and we're now starting to see some growth in prices in our markets”

Richard Seville, MD, Orocobre

“We look forward to later next year when we expect to see increasing demand for Australia's high quality thermal coal out of South Korea, Japan, Taiwan and the Philippines. Those countries are building new high-efficiency, low-emission coal thermal power stations now which come on line in the second half of next year so we look forward to that demand response”

Shane Stephan, CEO, New Hope Coal

“The Chinese will react rationally, they will restrain supply of coal in order to shift profitability out of their power sector, upstream into mining and share that profit more evenly between the mining suppliers and power generators, that way they keep social stability, they keep both sectors in a position where they are able to pay their workers, they are able to pay interest on their loans and that keeps their society stable”

Shane Stephan, CEO, New Hope Coal

Financial Markets/Interest Rates

“[The ECB] are starting to buy things that are going to be riskier assets and there's greater monetization”

Ray Dalio, Founder, Bridgewater Associates

The ability to produce stimulation by lowering interest rates that makes debt service payments lower and causes spending is at a limit”

Ray Dalio, Founder, Bridgewater Associates

“The Committee judges that the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives”

Federal Open Market Committee

Dairy/Agriculture

“Milk production in key dairying regions globally is reducing in response to low milk prices. While we have seen some improvement in GDT auction prices recently, the high NZD/USD exchange rate is offsetting some of these gains”
John Wilson, Chairman, Fonterra

“The lack of available bank credit to grow has forced farm input suppliers such as Nufarm to play a far more significant role in supporting their customer base, especially in areas of the country where there has been reduced yields caused by adverse climatic conditions”

Paul Binfield, CFO, Nufarm

“Dry conditions in Australia leading up to both the canola planting period and last year's summer crop planting window had a material impact on our growth expectations for the year”

Gregory Hunt, MD, Nufarm

“Over the next year, we expect to see continued pressure on commodity prices and limited industry growth. Our 2016 underlying earnings growth was largely driven by margin expansion”

Gregory Hunt, MD, Nufarm

Housing

“I don't think there's much more upside [in property prices]. [But] I don't think there's any risk of a fall. People will just hang and wait for the next cycle”

Lindsay Patridge, MD, Brickworks

“The value of our land relative to our income is incredibly high. Why is that? Because we all want to live in these fantastic cities close to the coast, and we have not invested enough in transport”

Dr Philip Lowe, Governor, RBA

“The current residential cycle is the highest on record and remains at elevated levels. Conditions vary across the country. As we mentioned, the East Coast is very strong. West Coast is doing it a bit tough. It really is based around Sydney and Melbourne. But to give you some examples, our precast business has nine months' orders on hand. Our brick business in Sydney has over six months' orders on hand. Our builders are reporting to us that they have up to a year's work yet to come through. And we think that there's still a backlog in some places of up to two years. So you can see why we're reasonably confident going forward. As long as people's confidence remains up, we cannot see any reason why that will not continue as it has”

Lindsay Partridge, MD, Brickworks

[Australia has had the] distraction of an election, and so that certainly seems to have had a dampening effect on the number of [home] listings. I can't see to this time next year, but when you look at basic trends in the market, you certainly need to focus on the auction completion rate. I think last Saturday in Sydney it was 82%. Yes, of course, potential sellers saw how it was being sold at that sort of rate and then it dipped down into the 60s, and it was obviously higher 18 months ago. So that's a positive sign, a harbinger you would think and I'm not making a firm forecast, but harbinger you would think of an increase in listings”

Robert Thompson, CEO, Newscorp

Banking

“I would expect that, over time, the return on equity in the Australian banking system would ­decline, because the rate of return on every other asset has declined. It has happened internationally. It has happened on a lot of Australian assets”

Dr Philip Lowe, Governor, RBA

Print Media

“We believe in the provenance of masthead. And there is no doubt that print mastheads are in transition, but they're still very powerful platforms”

Robert Thompson, CEO, Newscorp

“We acquired a regional newspaper group in Australia, a relatively small one in Queensland, but we can see there are obviously consolidation opportunities there”

Robert Thompson, CEO, Newscorp

Telecommunications

“The [broadband] market is a competitive market given the fact that at the moment we've just passed about 2.6 million homes on the NBN in August and it's going to move to over 5.1 million around about June next year"

Craig levy, Head of Consumer Sales, TPG telecom

“NBN is trialling offering a discount for those RSPs [retail service providers] who purchase greater amounts of network capacity, NBN have indicated there will be further unit price reductions in CVC, so this isn't set in stone. NBN is not going to cut its nose off to spite its face”

Mitch Fifield, Communications Minister

Thank you for reading.

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About NAOS Asset Management

NAOS provides investors with niche product offerings in asset classes and sub sectors where they lack the time, resources or expertise to research and invest themselves. We adopt a high conviction, value driven, long/short approach to investing. Our investment approach looks to realise value over the long term by sourcing and combining investment opportunities that present the greatest opportunity to realise positive absolute returns in the form of capital growth and income generation over the long term.

NAOS Emerging Opportunities Company Limited's (ASX: NCC) objective is to provide investors with concentrated exposure to quality undervalued emerging companies, whilst maintaining a focus on long term capital protection.

NAOS Absolute Opportunities Company Limited's (ASX: NAC)  objective is to provide investors with exposure to quality undervalued mid-cap companies whilst having the ability to selectively short overvalued lower quality companies, this aims to minimise the risk of permanent capital loss and produce uncorrelated returns to general market movements over the long term.

In addition, the emerging opportunities strategy is available to sophisticated investors via a unit trust, The NAOS Emerging Opportunities Fund.

For all enquiries please contact enquiries@naos.com.au

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