Reflection on 2012 and the worsening macro road ahead

I am having a hard time being positive about the next couple of years unless some serious changes occur to monetary policy in the US and Eurozone.  Politicians continue to kick the can down the road, while the “Takers”, those who consume more than they produce (via government benefits, cushy jobs etc), are currently far more vocal than the “Makers” (Those who actually contribute to society), whose incentives to produce are currently being curtailed by taxation policies designed to bleed the wealthy of resources and redistribute it to those who did not earn it.


I have been gradually unwinding my book, paying down my mortgage, and sidelining cash to move into distressed assets in the future.  BHP is a forever stock to me, but I think there is better buying down the road so I have sold down my shares for now.  The gas industry is going to reduce the western world’s reliance on OPEC, which is one of the few positives I have for our economic outlook. (Hate big oil?  I’d much rather buy my fuel from BP than a cartel that controls 1/3 of the world’s oil supply and makes a mockery of human rights).


I think Australia is pretty well positioned, we are a stable environment in the growing APAC region, and we are well resourced, but I don’t see the ASX200 going to 7000 next year.  More likely it will bumble along at 4500 with the possibility of a major financial lockup caused by US, Eurozone, and Japan treasury debt and putting us into the 2000 range.  Quality assets will be going at century-low prices, and at that point it’s going to be “risk on” for me in a big way.


I’m not positive on the RBA’s ability to influence housing demand by lowering interest rates – people are losing their jobs, housing prices are falling, and apartments are going up everywhere.  I always thought the optimal number of properties to own was one, but if I can get a 10 year fixed mortgage at 4%, and a 7% rental yield, I’ll have a significantly de-risked investment which is positively geared (I’ve done the numbers, you need about 200 basis points yield above your borrow rate to break even).  The plus side of any overbuilding is that if they are built properly, the buildings are going to be there for 100 years.  People can bag the Brisbane tunnels all they want, fact is we’ve got the tunnels there now, and we can use them for centuries.


My car has nearly 250,000 km on the clock, and apart from a regular service (keeps it running well) costs me nothing.  But when I see the current offers car manufacturers are putting out, I’m tempted to look at buying new!  A brand new Nissan with 5 years finance at 0% comparison rate?  I feel sorry for anyone looking to offload their used car.  Nobody’s going to be interested.  In fact, it might be a good time for me to trade up to something nicer and send my old beater to the scrapyard.


Bottom line is that now is not a good time to be in debt.  Economics is all about allocating resources efficiently, and the reality is that everyone is going to have to allocate their resources more efficiently – that’s not just at a personal level.  Businesses and even Governments, will start getting rid of the “passengers” who aren’t pulling their weight.  Don’t take it personally if you’re axed, and don’t be bitter.  You might be a good worker (unlikely, you probably suck) but you aren’t required.  Why should anyone keep you on?


The best sector for “takers” is going to still be the Non-Profits, where the benefactors money is frequently misspent, and those in charge believe their good intentions place them above criticism.  I’m just going to focus on enjoying life and keeping my expenses low, that way I could be flipping burgers and still keep my head above water.  The vagaries of economic life only matter if you’re over-committed.

BigAir – Home of the Happy Dance (BGL)

It’s not very stoic to celebrate when an event outside your control affects your life positively, but it does feel good to have your original reasoning validated by a response in the market.


Even though EBITDA for FY12 was slightly lower than I’d anticipated, BGL shot the lights out, recently paying a maiden 1c dividend, and acquiring Allegro Networks to broaden their Queensland coverage.  BGL’s share price appreciation has also rewarded patient shareholders, from the 18c mark only 2 years ago to 55c today.


So what does this mean for the future of my holdings?  The business is now somewhat more mature, although ironically more and more of the clients I deal with in my day job are buying BigAir links – generally to service areas in which copper connections aren’t fast enough to meet new demands for application delivery.  Getting line of sight still presents a challenge but turning on a 10M/10M internet link, in a week’s notice, for very little install cost is impossible for any other technology to approach.


Interestingly while I’m now out of the telco business there has been more and more in the press about congestion in 3G/4G networks as consumer demand swamps infrastructure which the 2 major carriers are expanding as fast as they can get approvals for. I’m anticipating 4G demand to outstrip available spectrum in the next 12 months, which will hopefully convince Stephen Conroy to do something actually useful for telecommunications in Australia and shut down the 700MHz analogue TV networks and re-purpose the spectrum for 4G.


Another trend I’m seeing is my clients are rolling out more and more wi-fi network for their customers to use, particularly for things like big event days where mobile networks struggle under the load.  First Aid crews need to carry two-way radios because mobile phones are unreliable in these situations.  NBN to every home isn’t going to solve this problem, and I think anybody would be hard-pressed to dream up a more disastrous project than NBN, complete with farcical business case, incorrectly prioritised network design (straight to access network – why not build the core/transmission network first and let the private sector build wireless access POPs and more DSLAMs), and to crown it all; a deal to buy, and then shut down, the Optus HFC network to “increase uptake” (ie reduce competition) of NBN.  Smash the machines!  Create jobs!


What this all means is the BigAir are serving 2 niche markets at a scale against which it is not practical to compete.  Their national Wimax network is enterprise-grade, and while their accommodation facility offerings have a lower barrier to entry, most of BigAir’s competition are organisations of the “two bit” variety.  I’m anticipating further growth in the business and have no plans to sell my shares for at least the next 12 months.


At the risk of sounding cynical, here’s a joke:


What’s the difference between Pizza Hut and NBNCo?


Pizza Hut Delivers.

BSA – FY12 figures with some alarm bells (BSA)

Since my previous post on BSA’s latest result, the share price has now fallen back to the 20c mark, with a more lacklustre performance for year end.  Let’s take a look at FY12 numbers:


Revenue up 22% to $492m

EBITDA up 1% to $16m

NPAT $5.8m

EPS 2.57c


If we look at HY12 numbers, you wonder where the money went.  Another $230m through the door, and yet profits for the full year are lower than the half.  If you think that’s bad, it gets worse.  Although net cash has gone from a $10m deficit to $10m surplus in the past 2 years, the company is now in a working capital trough, meaning more cash will be shelled out soon.


EBITDA margins have shrunk, and so has NPAT margin.  While there is some promise in the technical maintenance division, the Foxtel contract is going to undertake a slow and inexorable decline.  BSA just doesn’t have the same margin of safety it had 2 years ago.  Given the poorer outlook of the business, I’ve decided to exit my BSA holdings for a small loss, given that I’m anticipating future earnings will continue to shrink.  HVAC just doesn’t seem like a good business to be in.