CEO INSIGHTS – Week Ending 18 August 2017 BY NAOS Asset Management

“The retail industry is changing rapidly, due to technological and social changes. With an elevated level of store closures, largely amongst underperforming brands that have lost relevance with the consumer. Offsetting this is the emergence and growth of a deep assortment of fast fashion and at leisure brands as well as online retailers establishing and growing their physical presence” Steven Lowy, Co-CEO, Westfield Corporation

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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Interest Rates

“I think that the next rate move will be up, rather than down, but it will not be for some time”

Philip Lowe, Governor, RBA

Oil

“We expect oil prices to be range bound between $45 to $60 per barrel”

Peter Coleman, MD, Woodside Petroleum

“There are plenty of signs that the oil markets are continuing their slow and steady rebalancing. Since February, we're seeing drawdowns in both US and OECD oil inventories and last month in July, we saw the largest monthly US crude stock drawdown for more than three years. Growth in oil production in the US is slowing and costs are rising as US activity picks up. And since reaching an agreement in November last year, OPEC has had a generally high level of compliance on production restraint”

Peter Coleman, MD, Woodside Petroleum

Gas

“Although the global LNG market is well supplied at the moment, we expect further growth in demand from Asia. The long lead times mean that we'll need to get ready to meet rising demand over the next couple of years. Lower prices and new government policies supporting the use of gas are contributing to stronger-than-expected LNG demand. China, India and Pakistan all have significant upside potential for LNG demand growth in the mid- to long-term”

Peter Coleman, MD, Woodside Petroleum

Commodities

“World coal demand is increasing. CRU are estimating that there will be some 700 million tons per annum required in growth for coal out to 2035 and all this growth is in Asia. Using the [International Energy Agency’s] new policy scenario, coal-fired generation grows by net 676 gigawatts between now and 2040. Over this period you will see a doubling of installed coal-fired generation capacity in the region, which is certainly consistent with the feedback we have from our customers”

Paul Flynn, MD, Whitehaven Coal

“Half-on-half you’ve seen an increase in the index price for 62% iron ore. But we've also seen a significant change in the level of discounting going on in the market area that we're working in. In the first half, we achieved $A79 a tonne for our iron ore, the second half about $A70. Now, that's all discount related”

Bruce Goulds, CFO, Mineral Resources

Renewables

“We've accelerated our transition to renewable energy supply as costs have come down. We have about 730 megawatts of renewable supply, that will grow to just short of 1,900 megawatts by 2020”

Frank Calabria, MD, Origin Energy

Retail

“Whilst department store sales have been flat over the past 10 years, they now represent 28% of sales in our portfolio, down from 42%. In our Flagship malls, this is 23%. Specialty sales have grown by $4.6 billion to $10.8 billion, representing approximately 70% of sales, up from 58%”

Steven Lowy, Co-CEO, Westfield Corporation

“The Retail Town Centres continue to show strong relative growth of 3.5% funds from operation, and that was really underpinned by continued high levels of productivity, over 8% above the peer group average, [and] increased visitation to the centres”

Mark Steinert, CEO, Stockland

“In Retail, we ended the year with a similar level of operational shop vacancies in the operational assets despite a heightened level of administrations and shop closures”

John Schroder, CEO, Stockland Commerical

“Hardware sales were up 14.4%, with comparable sales up 11.9% driven by Communications, Audio, Cameras, Accessories, Computers and small appliance categories”

Richard Murray, CEO, JB Hi-Fi

“We have witnessed strong growth in a number of customers choosing our Click & Collect service”

Richard Murray, CEO, JB Hi-Fi

“Looking forward, we anticipate variable trading conditions [in office supplies] to continue, with confidence expected to be somewhat subdued and competitive intensity to remain high”

Mark Ward, MD, Officeworks

“There has been significant speculation about the potential impact of Amazon’s arrival in Australia. Mature international markets (USA, Canada, UK) may serve as a guide where Amazon and eBay have historically achieved between 1 per cent and 5.7 per cent of the total retail markets in those countries’’ 

Baby Bunting Statement

“I think the whole Amazon thing has been overblown a bit”

Angus McNaughton, CEO, Vicinity centres

“In rigid packaging, there is an increasing contribution from sectors such as personal care, homecare, and health and wellness”

Malcolm Bundey, MD, Pact Group

"There's a lot of people right now ... in retail and in this industry in panic mode. They seem to be in panic mode with how they're pricing, and we think it's going to continue to be promotional, and at times irrational, going forward"

Edward Stack, CEO, Dick’s Sporting Goods

Domestic Economy

"Although we are in a period of lower sector revenue growth with some parts of the economy experiencing challenges, credit quality has improved"

 Shayne Elliott, CEO, ANZ

"While the economy has kind of been muddling through for a period of time, there are starting to be some signs that things are actually pretty good. There's some weakness I guess in terms of business confidence, but when you look at the actual economic indicators they're pretty good and what that means is that corporates are doing OK. There really hasn't been any major stress in any kind of industrial sectors. So things look pretty good from a credit perspective”

 Shayne Elliott, CEO, ANZ

Rail

“[on the exit of the Intermodal business] The market conditions [for rail] are not favourable. Market volume growth is forecast to be sub-GDP, and the long-term dynamics are shifting to shorter hauls, favouring road transport, as Australian manufacturing volumes are replaced by imported volumes”

Andrew Harding, MD, Aurizon

Construction & Infrastructure

“There is no doubt that the level of building activity in the New Zealand market is still at very high levels. Figures from MBIE show that Auckland needs 13,000 houses to be built a year just to keep up with the demand from the growing population. Yet only around 10,000 are currently consented each year”

Francisco Irazusta, CEO, Fletcher Building

“In Australia, we are seeing signs that the Western Australian market is stabilizing while the Eastern states are more robust. The Australian government's projected spend on infrastructure over the next 10 years should ensure there is strong demand for a number of products we are producing there”

Francisco Irazusta, CEO, Fletcher Building

“Residential approvals [in Australia] have fallen 9% year-on-year with the biggest falls in Western and Southern Australia”

Francisco Irazusta, CEO, Fletcher Building

“It’s no secret the east coast ­infrastructure market is hot and getting hotter. There’s lots of ­activity across NSW and Victoria, and that’s against the backdrop of an improving sentiment back over here in WA as well” 

Jules Pemberton, MD, NRW

Residential Property

“The key thing that would change the direction of the market would be interest rates rising materially and just a general credit contraction, which would normally be accompanied with some moderation in economic growth. I certainly don’t see (those factors) coming into play in the next couple of years and, in terms of the underpinning of the market more broadly and its setting, it could well continue for another five years or more”

Mark Steinert, CEO, Stockland

"It was just 12 months ago that Australia was the hottest thing at Chinese property exhibitions. Now Australian developers are not up here pushing projects and Chinese agents have no appetite for Australian property”

Scott Kirchner, Director, Beller Group

Banking

“Margin expansion was strong in the second half … In part this was driven by the need for mortgage repricing to respond to those regulatory caps on interest only and investor growth” 

Mike Hirst, MD, Bendigo and Adelaide Bank

“We’ve been very pleased with our lending growth and mortgage growth in particular, but we have seen that growth slow in recent months. We have also seen deposit growth slow”

Richard Fennell, CFO, Bendigo and Adelaide Bank

Telco & Media

“We have seen continued customer growth across all key segments. The mobile services were up 219,000 including 169,000 postpaid handheld. Retail fixed broadband services were up 132,000 and retail bundles were up 224,000. Almost 90% of our retail broadband customers are now on a bundle. The proportion of those that are also now on an entertainment bundle grew more than 50% in the year and they now represent one-third of all of our bundles”

Andrew Penn, CEO, Telstra

“You only need to look at the explosive growth in digital video consumption, consumers’ screening time and the ubiquitous connectivity that we now all enjoy. Seven million Australians now stream 1.5 billion minutes of long-form content via the internet every month”

Tim Worner, CEO, Seven West

“We've seen some positive signs of mobile revenue and asset stabilization across the last three halves”

Warwick Bray, CFO, Telstra

“Domain delivered 19% growth in digital revenue notwithstanding a difficult listings environment in the first half. Further depth penetration, yield increases, strong growth in Developers and Commercial, together with acquisitions, were key revenue drivers…Volumes in the first half of FY17 were materially lower than in the previous two years, with a recovery in the second half to more normal historic levels”

Gregory Hywood, CEO, Fairfax Media

“Looking ahead, we expect the broadcast metro markets to outperform the FY17 trend”

Tim Worner, MD, Seven West Media

NBN

“We continue to make good progress in the NBN market and added 676,000 NBN connections during the year taking our NBN market share, excluding satellite, to 52%. Contrary to recent commentary, this has not been through significant price reductions. The pricing on our core plans remain unchanged over the last 12 months although there is no doubt the competition has increased and we have enhanced the value in each of these plans”

Andrew Penn, CEO, Telstra

“The negative sentiment [towards NBN] does not reflect the overall satisfaction rates on the network. While we have seen a higher volume of issues when connecting, they do remain relative to the pace of the build and reach of the network”

Bill Morrow, CEO, NBN

Advertising

“The June trends reports from the Standard Media Index, shows advertising spend by major advertisers in Out Of Home grew 8.5% in the first half compared with a 1.6% fall in total advertising expenditure across all media.. [and] we expect the Out of Home sectors continue to grow over the balance of this year”

Brendon Cook, CEO, Ooh!media

Aged Care

“In terms of the Development numbers, they continue to grow strongly”

Geoffrey Grady, CEO, Aveo Group

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.