5 March 2021

ARB Buys Truckman

ARB Corporation has bought Truckman Group LTD, a UK-based manufacturer and distributor of utility accessories mainly focused on rear-of-vehicle products such as canopies/hard tops, bed liners and general utility vehicle products. Truckman is described as the nationally recognized brand leader in the United Kingdom; ARB states that it meets its expanding international distribution and aligns with its evolving product strategy. The Truckman business is based at its head office and central distribution hub in Birmingham UK.

This purchase is being funded from ARB’s existing cash resources and is expected to operate profitably from the commencement of ARB ownership, effective 2 March 2021.

I own ARB Corporation shares in my family superannuation fund and investment portfolio.

Qube Holdings Selling Part of its Moorebank Development

Qube has announced that it is in advanced stages of negotiation to sell a major part of its Moorebank NSW development to Logos by disposing of warehousing and development but retaining ownership of its intermodal rail/road terminal facilities which fit well with its primary logistics business running ports, its rail infrastructure and grain handling terminal.

Qube is also understood to be a potential buyer of Toll’s bulk freight operations, oil and gas logistics arm and potentially Toll’s government services arm. Japan Post which bought Toll Holdings has experienced well-publicized difficulties, and Toll was clearly a company with many problems—which Japan Post discovered after purchase. Toll’s purchase by Japan Post is an object lesson in the pitfalls of not doing adequate due diligence.

I own Qube Holdings shares in my family Superannuation fund.

Xero Buys Planday

Xero Ltd has announced the acquisition of Planday, a leading workforce management platform with more than 350,000 employee-users across Europe and the UK. It simplifies employee scheduling, allowing businesses to forecast and manage their labour costs.

Planday is described as an open platform that integrates with Xero, other accounting solutions and other workforce related apps, to deliver a real time view of staffing needs and payroll costs, alongside key business metrics.

Following the acquisition, Planday will expand its presence into other markets where Xero operates supporting Xero’s long term growth plans.

I own Xero in my family superannuation fund and investment portfolio.

Bleak Outlook for Fixed Interest Investors.

The Australian Dollar is being traded in a narrow band around US$0.77 due to Reserve Bank money market operations designed to keep it steady to facilitate export markets. Those investment houses who bought long-dated treasury notes when interest rates were significantly higher have made windfall gains as interest rates fell causing long-dated treasury notes (a.k.a. government bonds) to rise in value. These could then be sold at a premium as market related yields fell. Those now buying long-term bonds are buying at historically low yields and are at great risk if market forces drive yields up and resale prices down. The governor of the Reserve Bank of Australia has reiterated that it is not expected to raise interest rates before 2024, as per the financial press of 3 March. Read Buffett on Bonds below.

Is Woolworths Making Another Big Mistake?

Reports that Woolworths are planning to embark on a veterinary/pet supplies joint venture make me wonder whether the Woolworths management know what they are doing? Over many years well-conducted veterinary practices received a windfall of new client whenever a nearby practice was purchased by a corporate owner. The corporates did not understand that personal relationships between a vet, a pet owner, and the pet were the vital ingredient in successful practice, and many clients quickly found their way from a newly owned corporate practice to a privately owned and operated practice nearby. Woolworths can sell heaps of pet food off the supermarket shelves, but it is not equipped to run a relationship business. Nor will, in my opinion, selling pet insurance end happily. For 33 years I advised a large number of successful veterinary practice owners and observed that veterinary corporates in the small animal world regularly demonstrated an inability to hold onto many clients.

I recall the Woolworths Masters Home Improvement hardware disaster. I was one of a large group of stockbrokers, professional investors and advisers to whom then CEO of Woolworths, Michael Luscombe gave a presentation soon after announcing the Masters hardware project, which was aimed squarely at market leader Bunnings. Michael Luscombe’s hubris was on display, but his presentation was unconvincing—as were his answers to challenging questions. It is now historical record that Masters Home Improvement was a huge disaster. Bunnings had many of the best sites tied up, had a proven business model, and exclusive deals with various premium brands. As current Woolworths chairman Gordon Cairns said recently, “Woolworths opened their first Masters hardware store which was a failure, and they then repeated the failure fifty-one times.”

Veterinary Practices Booming

Meanwhile, privately-owned veterinary practices—particularly small animal practices—are booming with a huge increase in the population of pet dogs during Covid-19 restrictions. This is particularly evident in Melbourne, where dogs leading their owners on street walks can be seen more regularly than before lockdowns began. The most profitable veterinary practices concentrate on veterinary treatment. It has long been recognized that small animal practitioners don’t make their profit selling pet food.

Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders 27 Feb 2021.

All investors can benefit by reading the wisdom of Buffett, readily available on the internet.

Buffett on Bonds

“Bonds are not the place to be these days. The income available on a ten-year US Treasury bond was 0.93 % at year end. This had fallen from the 15.8 % yield available in September 1981.

In certain large and globally important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide-whether pension funds, insurance companies or retirees-face a bleak future.” 

Buffett’s strategy has been to buy good businesses and shares in good businesses, hold them long term, and reinvest the dividends providing suitable acquisitions are available at a sensible price.

Charlie Munger 

Charlie doesn’t know which is worse: “Tesla at $1 trillion or Bitcoin at $50,000.”

Charlie Munger is Warren Buffett’s long term business partner.

My comment is that with all the world’s leading car makers heading down the electric vehicle route at speed, any significant advantage that Tesla has will be eroded. Recent market activity valuing Tesla at the aggregate of the value of all major global car manufacturers appears to be a massive bubble.

As for Bitcoin, it is important to recognize that—as any student of macroeconomics knows—most of the conventional money supply is created inside regulated banking systems (far more than by central banks) as client A sells an asset, deposits the proceeds, most of which are loaned to client B to assist in buying an asset off client C, who deposits the proceeds and so on. A money multiplier effect creates a series of deposits and loans and multiplies the quantum of money on deposit. Bitcoin lies outside the conventional banking system and to date is unregulated. It is likely to be a haven for money associated with unlawful activity and hence it is highly likely that by international agreement between central banks and G10 governments that substantial regulation of Bitcoin will occur, probably requiring notification of all transactions involving conversion of funds into and from Bitcoin, leading inevitably to questions as to the source of funds. Ultimately Bitcoin’s blockchain processing will not withstand international regulation of the conversion gateways.

Greensill is a Risky Business.

Greensill Capital operates a debt factoring business on a massive scale which requires large reliable sources of funding. The suppliers of funds to Greensill provided finance to its clients secured against their invoices for goods sold to their clients who are slow payers. Whilst theoretically the security for its finance was against the invoices owed by those who purchased goods off Greensill’s customers, the chain was judged to be too weak by the suppliers of funding to Greensill. This was because a large proportion of Greensill’s funding was to factor the invoices owed to one large global group of businesses associated with Sanjeev Gupta—best known in Australia as head of OneSteel, which produces a range of steel products at Whyalla in South Australia. The international funders of Greensill required their financing instruments to be backed by insurance policies covering Greensill’s loans. The insurers became alarmed at the concentration of loans related to businesses associated with Mr Gupta and gave notice on 1 September 2020 that they would not be renewing insurance cover from 1 March 2021. Greensill has been unable to obtain new insurance and hence its funding is drying up as invoices are settled to the lenders but leaving customers, such as Mr Gupta’s OneSteel, without continuation financing on current invoices. In turn, this is reported to be threatening the continuation of businesses employing 50,000 workers internationally of which 7,000 are in Australia. In a strange move, Greensill went to court to attempt to force the insurers to renew their cover despite having been given 6 months-notice of non -renewal. The court ruled against Greensill.  A likely outcome is that Greensill will be bought out cheaply by a group with substantial capital who will be able to conduct an orderly reshaping of its business. Whether Mr Gupta’s business empire will be able to find other sources of funding remains to be seen.

Too much concentration of lending to one large group of businesses exposes the financiers to too much risk. This form of business is regarded as too hot to touch by our main stream bankers.

About Graham Middleton

I sold my interest in the Synstrat Group on 30 June 2020 and will not be starting another business but remain in contact with many old friends mainly in the dental, medical and veterinary professions. Any information on investments is general information and it is important that readers do their own research including checking company announcements and financial results. Most companies can be researched by starting with the ASX 200 or ASX 300 and hitting on the company stock market code. Take other professional advice as required. 

Those who find my newsletters of value are invited to show their appreciation by making a donation to the Delany Foundation a registered charity which supports schools for kids in Ghana, Kenya and Papua New Guinea. Donations are tax-deductible. www.delanyfoundation.org.au

Best Wishes to all,

Graham Middleton