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TPG Telecom – Game of Phones

By Uncategorized

The stock in focus this month is TPG Telecom (TPM). One of the key sources of outperformance for investment managers is identifying and investing in companies exposed to positive long term thematics. In recent times, two broad investment thematics have been demographics and technological developments. One convergence of these themes is in the telecommunications industry, where the rise of the connected society and population growth have seen the demand for telecommunications, particularly data, increase dramatically. At the same time, the roll-out of the NBN has meant that the traditional dominant player in the market, Telstra, is under more pressure, as it needs to evolve its offering in the face of increasing competition.

5G is coming.

What has emerged is a battle for a place in the new landscape, with well-established telco providers including Telstra, Optus and Vodaphone competing with new emerging players, such as TPG and Vocus, while everyone is looking to deal with the market positioning of NBN Co in the fixed line space. A key weapon in this battle will be the emergence of 5G in the mobile space, not only in terms of how it can add to the current customer experience, but also as a potential NBN killer.

TPM’s recent purchase of 5G spectrum and entry into the mobile marketplace with what will be a very competitive offering, has been emblematic of the travails of share prices across the whole telco sector. Investor fears of a protracted and deep price war, combined with the impact of the NBN on fixed line margins have taken the sword to short term profitability.

However, it is important to take a longer-term perspective. The demand for fast and unlimited data is not going to reduce, and whatever the technology is that will deliver the connection that consumers and businesses require, providers of telecommunications will enjoy significant thematic tailwinds in the medium and long term, offering potential rewards for investors looking beyond the short term.

Why Operating Leverage Matters

By Uncategorized

While positive on the global growth outlook, given financial and political challenges coupled with valuations at the upper end of historic trading ranges, investors should take the time to understand the cost structures of the companies they own.

Operating leverage, which is essentially the relationship between a company’s fixed and variable costs, can make a big difference to potential profit and cash flow. Fixed costs (eg. store rents, aircraft leases, loan repayments) are not dependent on the level of output/revenue, while variable costs (eg. commissions, freight, raw materials) change as the level of output/revenue changes.

The higher a company’s fixed costs compared to its variable costs, the higher its operating leverage, which means profits grow faster than sales. But because fixed costs must be paid even when output/revenue slows, profits and cash flows will also deteriorate much more quickly, making them susceptible to slowdowns in the business or economic cycle.

Operating leverage really is a double-edged sword. While economic conditions remain buoyant, companies with high fixed cost structures (eg. airlines, online businesses, utilities) can enjoy profit growth faster than revenue. However, in an economic downturn, companies with a greater variable cost structure can cut costs more quickly to better protect profits, as revenue declines.

New (tax) year, new opportunities – five changes worth considering

By Uncategorized

It’s a new tax year – the arrival of the 2018/19 tax year brings with it many financial opportunities. Elston experts have focused on five of the best and explain how you can take advantage of them.

The arrival of the 2018/19 financial year has brought with it some potential new opportunities to consider:

1. Buying your first home?

From 1 July this year, eligible first home buyers can withdraw voluntary contributions made to their superannuation fund to purchase a first home under the First Home Super Saver Scheme (FHSSS). This applies to contributions made after 1 July 2017. The FHSSS allows eligible first home buyers to save their deposit in the concessionally taxed super environment.

2. Selling your home?

Eligible super members can make super contributions of up to $300,000 per person from the sale of their home after 1 July this year, if they are aged over 65. These contributions don’t count towards the contribution caps and can be made even if the member doesn’t meet the usual age, work and other contribution tests.

3. Eligible for a tax cut?

The tax cuts announced in this year’s Federal Budget have been legislated. The first tranche took effect on 1 July this year, providing savings of up to $530 (see table below). This extra cash could go towards paying off debt or making extra super contributions.

Source: Budget 2018-19 fact sheet, ‘Lower, fairer and simpler taxes’. The tax is calculated taking into account the low income tax offset, low and middle income tax offset and the Medicare levy (at 2 per cent).

4. Want a super deduction?

From 1 July 2017, most people (including employees for the first time) were eligible to claim personal super contributions as a tax deduction. This could reduce taxable income and give super savings a much needed boost.

5. Not likely to max out your super cap?

If super members make concessional (pre-tax) super contributions of less than the cap of $25,000 in 2018/19, they may be able to carry forward unused cap amounts, for use in a future financial year. This is worth keeping in mind, as it means members may be able to make ‘catch-up’ concessional contributions from 1 July 2019, if cashflow allows.

Need help?

At SB Wealth, we can help assess whether any of these opportunities suit you and your circumstances, and adjust your financial plans accordingly.

If you would like to discuss further, please don’t hesitate to call or email your adviser.

Purchase of Pendal Group

By Portfolio

Across the Australian equity component of client accounts, we have bought Pendal Group Limited (ASX: PDL formerly BT Investment Management Limited), an Australian based fund management business with approximately $100B under management across various strategies. Pendal Group operates under two brands; Pendal in Australia and JO Hambro Capital Management (JOHCM) internationally. Pendal is a well-managed business, with a strong balance sheet and a clear growth strategy.

We are positive on the medium-term outlook for Pendal Group for the following reasons:

  • Excellent track record of developing new products and extension strategies with good new FUM inflows;
  • Capital-light nature of the business means they can grow sustainably and maintain an extremely high dividend payout;
  • Longer term increase in asset values underwrites growth in FUM and revenues;
  • Demonstrated ability to attract, retain and reward investment and distribution talent;
  • Disciplined capacity management to preserve investment performance and management fee income;
  • A strong balance sheet and solid cash generation means the group is well placed to provide seed capital for the launch of new products and strategies which will help drive future growth; and
  • Excellent diversification across asset class and geography. High fixed costs do provide a barrier to deter new entrants.

As with all funds management companies’, business risks include the loss of key investment staff and sustained market weakness which both impact the level of funds under management (FUM) and hence revenue. Furthermore, revenues would be negatively impacted by a material deterioration in investment returns leading to lower performance fees as a source of revenue.

The purchase was funded from the sale of Janus Henderson (JHG), also a funds management business. Since initially including JHG in portfolios the company has seen significant management changes, primarily the loss of ex-Henderson staff, which raises concern around cultural integration and the potential loss of legacy Henderson fund managers especially in light of recent changes to remuneration structures.

There has also been a deterioration in performance across some of its largest offerings in Europe and the quantitative Intech franchise resulting in ongoing net outflows with no near-term catalyst evident to turn around the decline in FUM. Given these risks, the undemanding trading multiple seems justified notwithstanding the potential for further upgrades to synergy targets.


If you have any queries, please contact SB Wealth

SB Wealth Client Update

By Portfolio

Our goal at SB Wealth is to be the Private Wealth Management firm of choice for Ipswich and the Western Region. As we continue to grow and pursue our goal, we want to be sure we continue to deliver services that you truly value and are constantly refining the way we engage with you.

To achieve this, we have engaged a third party research firm with over 20 Years’ experience to help us better understand what is important to you. In the next few days, Confirm It Australia will contact you via email and ask you complete a short, anonymous survey which will help shape the services we provide to you.

This is so important to us and we are excited to see the results and continue working on those things that matter to you.

As a thank you for your feedback, you will have the chance to win a $500 Flight Centre voucher*.

If you have any questions regarding the survey, please contact our Client Services Manager Eloise Edwards on 07 3810 8350 or email

Thank you for your ongoing support and we look forward to talking with you again soon.


*Please let us know if you do not wish to be part of this draw.
ere are the terms and conditions for the promotion: (Terms and Conditions)
This competition is authorised under NSW permit number LTPM/17/02245 and ACT permit number TP 17/01780.
All other states do not require a permit for the $500 Flight Centre voucher.

Purchase of Tabcorp Holdings

By Portfolio

Across the portfolios, we have bought Tabcorp Holdings (TAH), a diversified gambling entertainment group offering a diverse product range including wagering, lotteries, Keno, media and gaming services throughout Australia. This purchase has been funded from the sale of Healthscope (HSO).

We are positive on the medium-term outlook for TAH for the following reasons:

  • the Tatts merger adds a complimentary business with stable revenue and long-term exclusive licenses
  • the merger also provides opportunity for substantial synergy benefits
  • increasing lottery sales via digital channels provides scope for margin improvement
  • the combined wagering business enjoys a dominant market position and improving regulatory environment
  • the gaming services division is growing strongly, enjoys inflation-linked price increases and has excellent margins

As with all investments it is not without risks which include operating in a highly regulated industry with increasing restrictions aimed at protecting customers. The online wagering environment where corporate bookmakers have in recent years enjoyed a cost advantage is particularly competitive, and ‘synthetic lottery’ operators like Lottoland pose a threat to the monopoly position traditionally enjoyed by incumbent lottery providers – proposed regulatory changes may, however, help ease both the latter pressures going forward.

This purchase is funded from the sale of Healthscope (HSO). While we remain positive on the long-term industry fundamentals given population growth and ageing demographics, the most recent results showed that organic revenue growth remains more subdued than we had expected.  Also, the threat of regulatory changes in the wake of the pending Federal election may mean that industry pressures will remain in the short to medium term

If you have any queries, please contact SB Wealth

Purchase of Fortescue Metals Group

By Portfolio

Across client accounts, we have bought Fortescue Metals Group (FMG).  FMG is a low-cost producer of iron ore with assets located in the Pilbara region of Western Australia.  In addition to its iron ore assets, FMG owns and operates its own rail and port facilities, capable of exporting more than 170 mtpa of iron ore. This purchase has been funded from the sale of Sonic Healthcare Limited (SHL).

We are positive on the medium-term outlook for FMG for the following reasons:

  • As one of the lowest cost producers of iron ore globally with long life, quality assets located close to key markets FMG is in a strong position to continue its strong operational performance and generate strong free cash flow through the cycle
  • Following significant debt reduction in recent years FMG’s balance sheet is now in a strong position giving the company flexibility to invest in growth options such as exploration or other value enhancing growth projects such as Eliwana or increase shareholder returns.
  • The recent focus on pollution controls in the vital Chinese market has seen the continued decline of high cost, low quality Chinese production, which should provide medium term support for iron ore prices
  • Ownership of key infrastructure assets such as rail, power and shipping not only provides FMG with higher control over key cost inputs but puts them in a strong position within the region

As with all investments it is not without risks which include FMG’s exposure as a single resource producer to volatility in the iron ore price, a slowdown in the iron ore demand from its key market in China and more general risks to production common to all resource companies.

The purchase was funded from the sale of Sonic Healthcare. While their businesses remain fundamentally sound after a period of growth through acquisition, particularly offshore, it will be difficult for management to maintain the same rate of growth going forward without further acquisitions that would pressure the balance sheet, moving outside core competencies or targeting lower quality businesses.  We therefore believe FMG offers greater growth prospects over the medium term.

If you have any queries, please contact SB Wealth

Franking Matters

By Blog, Uncategorized

In a low rate environment, the income or cash flow that an investment provides is important, particularly if you rely on this income to fund your living expenses. While comparing options, you must of course consider their investment horizon and the associated capital risk of the underlying investments over this period. But equally, you must not forget the potential for that income to grow over time.

To illustrate the vastly different potential outcomes over the long term, consider the analysis below from AMP Capital, when contrasting the results in 2016 from having invested $100,000 in December 1979 in either:

i) a one-year term deposit or ii) the Australian share market.

The term deposit would still be worth $100,000 and paid roughly $2,450 in interest, while the shares would have grown to $1.12 million in value and paid $51,323 in dividends before franking credits.

Are you eligible for the franking credit rebate?

Given the dividend imputation system in Australia, which effectively allows companies to pass on a tax credit to their shareholders for tax already paid, the effective after-tax dividend income received by investors may in fact have been more than outlined above. This would certainly be the case for an SMSF investor in pension phase whose income is tax exempt, and as such can take full advantage of the franking credit rebate to supplement their income.

The proviso is that if the investor is entitled to $5,000 or more of franking credits, they must have held the shares for at least 45 days (not counting days of purchase or sale, so in effect 47 days) to be eligible to receive the refund.

Residential property: can it fund your retirement?

By Blog, Uncategorized

If your family is like many Australian families, when you get together for Christmas this year, you might find that the conversation turns to property. As a nation, we have a love affair with residential property, and booming capital city prices of late have done little to change this. We might feel good when the value of the family home goes up, but does this mean we should be relying on residential properties to fund our retirement?

There is no doubt that many people have done well by investing in the Sydney and Melbourne markets. However, capital growth does not pay the bills in retirement. It is income and cash flow that become important, when work income stops.

What does the data say?

Data provided by the Core Logic RP Data Home Value index shows that the average gross yield for capital city properties is just 3.25%. In Sydney, it is lower than the national average at 3.08%, and in Melbourne it is a paltry 2.9%.

This means that $1 million spent on a rental property in Melbourne would be expected to generate $29,000 a year. From this, investors would need to pay costs such as rates, insurances, agent’s fee, body corporate, maintenance and land taxes (depending on the state). This could easily account for $10,000 or more a year, meaning that the net yield is below 2%.

On this basis, a retiree looking to fund a comfortable lifestyle (considered to cost about $60,000 pa) would need to have over $3 million invested in property. By comparison, a $3 million investment in a diversified Australian share portfolio is expected to produce $152,700 of gross income (before any fees and charges).

Income is only part of the equation though. Surely recent capital growth in property would compensate for the low income? Residential property has performed well, although the exceptional rates of growth have been confined to small pockets of the country. Nationally, the average growth rate for the 12 months to 31 October was 6.6%.

While this is a very solid return, by comparison, the top 50 companies on the Australian Stock Exchange grew in value by 10.1%.

Is your money accessible?

While growth is good, retirees often need access to money in excess of their regular income needs. If all your money is tied up in a property, the entire property needs to be sold, as it’s not possible to sell off a bedroom. The sale of a property can also take some time and comes with significant costs. If a gain is made on the sale, there would also be capital gains tax to consider.

It pays to diversify

For many investors, a sensible investment in property can form part of a well-diversified strategy for creating wealth. But to focus only on this investment to the exclusion of all else is foolhardy. Investors need to ensure that they assess each investment on its true merits, rather than making emotional decisions.


Bitcoin – Bubble or a Brave New World?

By Blog, Uncategorized

In recent times, we have seen the rise of so called ‘crypto-currencies’ such as Bitcoin and Ethereum, which have put themselves forward as alternatives to traditional stores of value and currencies. As these and other crypto-currencies gain in profile and popularity and are accepted as a form of payment, it is timely to look at the methodology behind these ‘assets’ and ask – are they a fad or something more?

What is Bitcoin and how does it work?

At its core, Bitcoin is a form of decentralized digital payment system. In a traditional payment system, a clearing house, such as a central bank or financial institution, contains a centralized ledger that tracks asset movement between individuals and institutions within the financial system. Before one individual can transact with another, the assets must effectively pass through this clearing institution. With a ‘distributed ledger’, the record is held and verified by many different institutions and parties throughout the system. This eliminates the need for a central registry to record and certify asset ownership before that ownership can transfer from one party to another and ultimately enables peer-to-peer transactions using a public record, called a ‘blockchain’.

Understanding the security issues

Using blockchain technology, every transaction is verified back to its source, so for example, if A wants to transfer bitcoin to B, the transaction is presented online and represented as a ‘block’. This block is then referred to every party in the network and then compared to the ledger. If the transaction is valid, it is approved and the block is added to the chain, with the bitcoin moving from A to B. In theory, this means that B can securely transact with A, confident that they are truly the possessor of the bitcoin, without having to go through a centralized third party, such as a bank.

Another positive worth mentioning is that because of the distributed nature of the ledger, if one node gets hacked or destroyed, the rest of the nodes still contain the accurate ledger. Of course, this is only true to the extent that the network is isolated. There have been issues with security when bitcoin and other crypto-currencies have interacted with a traditional monetary system, such as exchanges.

Despite this potential weakness, these exchanges have been vital when it comes to increasing the popularity of cyber currencies. However, the vast majority of transactions remain speculative in nature, where traders are buying bitcoin in the hope of selling them at a higher price, rather than using them as a store of value. The value of bitcoin has been extremely volatile, and there’s still a long way to go before they can be considered a traditional asset.

Is there a future for cyber currency?

Notwithstanding its various shortfalls, there are a number of situations where some form of cyber currency and transactions using blockchain technology may have application. Payments in third world countries where there is a lack of a robust banking system and a dearth of cash available is one such application. In the not too distant future, cyber currencies may also provide a viable alternative for people looking for a more instantaneous international transfer of assets, compared to the current slow and expensive international payment system.

While the development and progress of these cyber currencies is interesting from a financial and technological point of view, it is still early days. There is more than a hint of a bubble around them, particularly with some of the newer ‘initial coin offerings’. This is probably best summed up by a recent new cyber currency to be offered to investors – UET, which stands for ‘Useless Ethereum Token’. On their website they state, “Is this a joke, is this a scam? No, it is real and 100% transparent – you are literally giving your money to someone on the internet and getting completely useless tokens in return!”. UET raised over $US5,000 in its first 12 hours. While this may not be a large amount on money, this kind of behavior may suggest that it is a bubble after all.