The Month In Review: November 2009
Patrick Stewart
RBA, ETS and The Rivkin Report
For the second month in a row, the Reserve Bank hiked up interest rates; another 25 basis points on top of the 3.25% we were sitting at, or should I say another $47 in monthly repayments for a typical mortgage holder on a $300,000 mortgage. This is where we began the month and it finished with the Dubai debacle, not to mention the Federal Liberal party’s ongoing woes throughout November. So with all this happening, all the corporate action seems to have been overshadowed. Although this last month has probably been our quietest for some time, it may possibly have been our busiest in regards to corporate actions taking place on our existing recommendations.
Both Elders Ltd (ELD) and Brickworks Ltd (BKW) issued their new stock within the first few days, and have since traded pretty evenly with their issue price. BKW made a run up towards the $13.00 mark mid month, though that was short lived and the stock has since retreated lower. ELD made a similar move hitting 18c, though it also retreated closer to the issue price of 15c. On the topic of BKW, the stock went ex dividend on the 19th, paying a fully franked 26.5c dividend, and more recently, the company held its Annual General Meeting (AGM) and as we expected, business is moving along nicely. With good results for the year and a promising outlook for the future, our catalyst to continue holding the stock remains in place.
We entered into Transurban Group (TCL) in mid October at $4.34 in the hope of a capital raising to fund two possible toll road projects. TCL is a well managed company generating very stable yet increasing earnings. Last year, the company made the admirable decision to limit future distributions, with them to be paid only from operational cash flow. This decision, along with other capital management initiatives, has helped TCL gain the respect of the investment community as a disciplined financial operator. These moves by the company obviously sparked some interest from overseas investors, as we saw a takeover bid for TCL come from two of Canada’s biggest pension funds for a conditional and non-binding offer of $5.25 per share. The bid was rejected by TCL and the share price instantly rocketed up over 20%. This left us at a crossroads as to what our next move should be. As our catalyst for holding had still not been realised, we were eager to see that out, though in saying that we were already well above our entry price. The company rejected the bid, but said it is willing to negotiate better terms… so TCL’s open response to the bidders suggests a deal being done is a good chance. TCL remains a hold.
Our first trade for the month was made on Amalgamated Holdings Ltd (AHD), in what could be one of the last $500 trades, as they become evermore scarce. This one seemed too good to overlook… a 1-for-5 entitlement. On $500, it doesn’t seem overly attractive, though it was the extra shares the company was offering that piqued our interest. Going ex on the 6th meant we had two days to get set, and with the offer price at $4.10 vs. the share price of $6.00, we definitely couldn’t pass it up. Our only concerns with AHD surround the minimal amount of capital the company is hoping to raise… $107m, and with 70% of the raising having already been supported by pre-committed institutional shareholders, this only leaves us retail investors with roughly $32m to split. This really is a situation whereby a few too many shareholders send in too much and it could lead to large scale backs across the board. So we have recommended all who took part to only send in a conservative amount of $5000 to $10,000. New shares commence trading Wednesday, 9 December.
Mirvac Real Estate Investment Trust (MRZ) could be the most successful trade of the year, and a typical Rivkin trade as well… the takeover! This one had an entry price of 49c and a bid already on the table from parent company and largest shareholder Mirvac Group (MRG) at 51c. Considering the offer was supported by the independent directors of the board and that MGR already own 24% of MRZ, the likelihood of the bid going through was a near certainty. Well, within a short period of time (nine days to be exact), the bid was raised to 59c, with the share price matching it exactly. We saw this as an opportunity to exit, resulting in a little over 20% profit in less than two weeks!
The last trade for the month was a buy recommendation on BHP Billiton Ltd (BHP). While the banking sector and the strong Aussie dollar have got the headlines with the ‘carry trade’ being the hot topic, many commodity prices have continued to strengthen. In particular, spot iron ore and coking coal prices have gone through the roof (not surprising considering both are the key ingredients in steel). Iron ore and coking coal are two of BHP’s biggest products (with petroleum making up the big three), so even though BHP is trading above $40.00, its gains have still trailed those of its products and accordingly, we expect analyst upgrades should start to catch up to spot prices. More recently, we’ve seen a growing trend in the number of global investors switching to sectors with a China influence. And of course, Australia’s future has become very much tied to that of China, and in particular, Australia’s mining sector is best exposed. With all this in mind, our catalyst is clear, and while the stock was trading at $40.30, we thought it time to make a move and buy the stock.
Let’s move onto some general interest news, and a lot happened this month. We started with Malcolm Turnbull as the opposition leader backing the emissions trading scheme (ETS), and finished with an unlikely Tony Abbott heading the party opposing the ETS, and the favourite Joe Hockey finishing a distant third in the race for leadership. Dubai World’s decision to defer interest payments of $US59 billion of liabilities in a planned debt restructuring unnerved investors, which became evident as markets around the world dipped around 3% instantly.
To the month ahead, and apart from the much anticipated holiday break, we’ve received plenty of corporate action already. To begin, on a not so festive note, interest rates were raised for the third consecutive month, making it the first time ever that the RBA has done that. This brings our official interest rate to 3.75%. Now onto some good news, and everything that’s happened so far seems to be surrounding our existing recommendations. Lend Lease Primelife Group’s (LLP) takeover offer from Lend Lease Group (LLC) was raised from 31c to 35c, increasing our profit to 12.9% and should result in an 18.6% profit for those members who bought the stock at 29.5c. Indophil Resources NL (IRN) finally received the takeover bid we were waiting for… a friendly takeover at $1.28 per share; pretty amazing considering the stock traded as low as 21.5c in January!!! The bid came from Chinese gold mining producer Zijin Mining Group, which means it will be subject to the Foreign Investment Review Board (FIRB), though considering IRN’s main asset is the Tampakan copper gold project which is located in the Philippines, we see FIRB approval as a near certainty.
That’s it from us at the Report. Please everyone enjoy the holidays, share with your friends and family, and we will be back with you in the New Year. Have a Merry Christmas and a Happy New Year.