Declan Johnston and Rachel Stone
Deborah Knight, Financial Review Sunday: The chorus of criticism continues over the Commonwealth Bank’s handling of its financial planning scandal despite this week’s eventual apology by Ian Narev. It took the Bank’s boss seven days to respond to a scathing Senate report, with many victims of the fraud still not happy. In an exclusive interview with Jemima Whyte, Ian Narev says the bank will withstand the crisis.
Commonwealth Bank
Ian Narev, CBA: I apologise unreservedly. We are truly sorry to all the customers who received poor advice. We are truly sorry.
Jemima Whyte: Investors are concerned about reputational damage. Can you measure if there has been a reluctance to go with CBA financial planners in the last six to 12 months?
Narev: It’s really important to look at reputational damage Jemima in the long term. There is a lot of tendency to look at these things day to day and say what is happening today, what’s happening yesterday? On those basic metrics the level of activity right across that business and right across the Commonwealth Bank are actually very strong. We’ve seen no significant downturn at all at the time we were talking about now, I just would never take for granted on any issue if you don’t do the right thing that that’s going to continue and we came out and spoke to customers and made our position clear. Now, of course there are going to be some customers when this happens that for various reasons don’t want to deal with the Commonwealth Bank. At the moment we’re not seeing that at any discernable level but we never ever take these things for granted.
Whyte: The criticisms that you’ve been a bit slow to react, what do you think about that?
Narev: I understand the criticism. These events go back by definition, we’re saying that we are mediating customers that got advice as far back as 2003 and understand that for those customers, there is a feeling of why did it take so long. I understand that because of the events that happened, people have grounds to be cynical about why we are doing it and what we are going to do. Obviously I can understand that. What I am saying is that we are approaching this with a customer in mind and the best of faith.
Whyte: How much do you think that politics is playing in this with the timing of FOFA?
Narev: I don’t think this issue is about FOFA. I have said that management needs to run businesses well and responsibly and there were aspects in this business how they were not run that way a few years ago. Since then, we have significantly transformed the business.
Whyte: What about the idea of divesting the funds management of financial planning business?
Narev: We’ve spent the last four years investing heavily in this business, new systems, new management, new management structure, new compensation plans and new culture. That is assign that we like the business. And we actually think that the idea of giving customers good affordable advice is a really critical part of what a financial institution ought to be able to do.
Knight: Ian Narev there and on our panel this morning, Justin Braitling, chief investment officer of Watermarks Funds Management and the AFR’s chief political correspondent, Phil Coorey. Good morning to you both. Phil to you first. The reaction by the CPA, it’s almost a case study into how not to handle a crisis, it really has been criticised. Do you think Ian Narev has done enough to avoid a judicial inquiry or a royal commission into the entire industry?
Phil Coorey, AFR: He has only because the government is satisfied, no one else in the political establishment Is but the government is the government and they are the ones who call Royal Commissions and they’ve firmly ruled any such action. Their reaction by the Commonwealth Bank was too slow and should have come far early but they are prepared to leave his where it is.
Knight: And the timing of this couldn’t have been worse for the government, the week that the Wine Backer FOFA got underway and the financial advise laws. Will the PM be forced now into a back down on that?
Coorey: They’re not going to back down on that, they are going to try. Mathias Cormann is going to spend the next six days trying to convince the Senate to not disallow the regulations.
Knight: Because Clive Palmer is very against it isn’t he?
Coorey: They’re dead. I spoke to Palmer over the weekend and the Comm Bank scandal has only reinforced the views of against what the government is trying to do that they shouldn’t be doing it so it’s dead.
Knight: Dead in the water. Short lived legislative changed. Now Justin are you surprised that there has been no significant change or damage to the CBAs business? Customers aren’t really turning away from the bank.
Justin Braitling, Watermark Funds Management: Sure. I mean the shares are not far off their all time high just under $82, so there has been very little impact on the value of the company, if you believe the share market and there was not a single research note written during the week from any of the break analysts which is interesting as well and for a company that has generated $9 billion worth of profit this year, the advisory business is very small. It’s a rounding error really in the overall profitability of the bank.
Knight: The victims of the fraud in the crisis might think otherwise.
Hong Kong protests
Deborah Knight, Financial Review Sunday: Business and politics, they’re on a collision course in China. Hundreds of thousands of protesters took to the streets this week demanding Beijing allow greater democracy in Hong Kong. Prominent members of the business community have sided with the Mainland government but critics say they should back Hong Kong’s autonomy.
Narrator: It was the biggest protest in a decade. Police struggled to control the crowd of half of million people calling for greater democracy. The unusually large turnout was prompted by recent statements from the central government that Beijing still controls Hong Kong and its leaders and judges should be patriotic to China. The pro-democracy camp says it’s bad news for business.
Anson Chan, former Hong Kong Chief Secretariat: What matters to business is, first of all, the rule of law and independent judiciary. Business needs the assurance that, if they get into disputes, whether with private parties or the government, there will be a fair hearing by an independent judiciary.
Narrator: Others say the business environment will not be affected.
Andrew Leung, Hong Kong Legislator: The multinational will still find Hong Kong a reasonably good place to stay as their headquarters. You still have a lot of opportunity in China through Hong Kong.
Narrator: Since the handover in 1977, companies operating in Hong Kong have relied on it’s high degree of autonomy under the ‘One Country, Two Systems’ formula. So observers were surprised when Hong Kong’s Chinese press recently ran an ad denouncing democracy advocates who were threatening rolling protests. It was placed by Ernst Young, KPMG, Deloitte, and PricewaterhouseCoopers.
Chan: Companies seem to have arrived at the position that it is better to roll over and pull their punches rather than stand their ground.
Narrator: Following the march, activists staged a sit-in in the financial district until they were dragged away by police and arrested. They have threatened to occupy Hong Kong’s CBD in the future.
Leung: We have a group of people trying to hold Hong Kong’s economy into ransom.
Narrator: The government says it supports moving toward democracy but only if Beijing can vet the candidates. Pro-democracy groups want public nominations.
Chan: The best way of ensuring political stability in Hong Kong is to deliver on universal suffrage proposals and that all our rights and freedoms are protected.
Knight: And the AFR’s China correspondent Lisa Murray joined us sometime ago via Skype. Lisa, you were just in Hong Kong, is Beijing putting economic pressure on Hong Kong to toe its line?
Lisa Murray, AFR: Beijing’s never been afraid to use its economic muscle in Hong Kong and we saw this week a People’s Bank of China official actually saying a thinly veiled threat that Hong Kong should cherish its position as a leading player in the offshore Yuan trading market. That is actually a huge and fast-growing market. Hong Kong is only the biggest in a handful of trading hubs. Sydney’s trying to become a hub. So any move by Beijing to affect Hong Kong in terms of its position would be significant. Having said that, Hong Kong’s dominant position makes it important to Beijing and Beijing will need to take that into account.
Knight: So what’s more worrying to companies in Hong Kong, the protests or the erosion of Hong Kong’s autonomy?
Murray: These are the two competing concerns, the first is that the city will be shutdown in a series of protests we don’t know when they will start or how long they will go for. Business groups have warned that it will throw the city into chaos. But I think the bigger concern is the longer term concern and that is recent statements by Beijing that Hong Kong should be patriotic to China. That suggests that Hong Kong’s strong and independent legal system may be influenced by Beijing and, let’s face it, many companies set up in Hong Kong because of that legal system, rather than setting up in Shanghai. So that would be hugely significant to Hong Kong.
Street Talk
Deborah Knight, Financial Review Sunday: The sale of BHP Billiton’s Nickel West operations is gathering pace with six bidders entering due-diligence. Street Talk can reveal that Trafigura, Glencore, X2, Sherritt International, MMG, and Jinchuan are all vying for the asset which could fetch over $800 million. Due diligence is likely to take a few months and BHP is keen to finalise a deal by the end of the year.
Market Minute
Deborah Knight, Financial Review Sunday: Time now for our Market Minute and Medibank Private is, this week, set to kick off the first round of an investor roadshow for its planned $4 billion IPO. But the early high turnover of shares in recent floats is raising questions over the health of our IPO market. Here’s Philip Baker.
Phil Baker, AFR: After a couple of quiet years everyone thinks it’s a great idea to float their business again but why are so many shares changing hands as soon as the company makes its debut on the ASX? Of course the first few days of trading are closely watched; who’s riding the wave of optimism and got their head above water, who’s sinking and who’s just treading water. But it’s the flurry of activity in shares available for trading, also known as the free float, that’s got everyone talking.
When it comes to the 10 largest floats over the past three months, as much as 20 per cent of shares available change hands in the first five sessions of trading. For some, it’s even higher. Genworth Mortgage Insurance; 63 per cent, Monash IVF; 54 per cent and the Burson Group; 35 per cent.
The brokers behind these deals include Goldman Sachs, Macquarie Group, UBS, Commonwealth Bank, and Morgan Stanley.
Maybe floats these days are being propped up by hot money or hedge funds from Asia rather than your typical retail investor. Maybe retail investors are still a little gun shy in the share market or buying businesses from private equity, or maybe brokers are simply sidestepping them. Either way, it will be interesting to see how brokers treat retail investors when the really big floats need to be sold, such as Healthscope or Medibank.
Self-managed super funds
Deborah Knight, Financial Review Sunday: Self-managed super funds expect to get a stamp of approval in the next week or so when businessman David Murray releases interim findings from the financial systems inquiry. Once from the domain of the rich and the financially savvy, self managed funds are now much more mainstream. And with a million Australians going it alone on their retirement savings, the shift is shaking up the rest of the industry.
Sue Dahn, Pitcher Partners : If self managed super fund members were all located in one city, it would be the six most populated city in Australia after Adelaide.
Jeremy Cooper, Challenger: The choices people are making to go into the SMSF sector and the choices people make once they are in there send some very strong signals to the rest of the market.
Eddy Meyer,Financial Review Sunday: Cute nickname aside, the self managed super funds or SMSF are being eagerly embraced by more Australians than ever as they take control of where their retirement savings are vested. A decision that involves important considerations.
Dahn: They need to be aware that the buck stops absolutely with them. That they need to project manage the range of services that a self managed super fund requires. Annual accounts, audits, tax returns and other compliance requirements.
Cooper: If you start outsourcing and hiring professions to do some of the work for you, it can become relatively more expensive. By the time you’ve got about $200,000 it becomes reasonably cost competitive with other forms of superannuation. As you have more assets, proportionately, the costs start going down.
Meyer: Industry and retail funds fall under the regulator of APRA whilst self managed funds are regulated by the tax office without the same protections.
Cooper: Theoretically you could loose all of your retirement savings in one transaction and sadly, that does happen. Sometimes property investments can be dangerous if that is the only asset in a self managed fund which does happen and if there are borrowings or gearing involved, that can be very dangerous.
Meyer: But there are upsides too. Self managed super funds have outperformed APRA funds in the past eight years. $500,000 invested in a self managed fund at the start of the 2005 financial year would have been worth almost $905,000 eight years later. The same amount in an APRA related superfund. $730,000, a difference of $170,000. Even after deducting higher fees and charges, the self managed super fund still out performed more than $150,000. That performance has been driven by self managed super fund trustees heavily weighting their port folios with Australian shares in a period dominated by the GFC.
Cooper: They’ve also been strong performers of cash. And if you think through that period of time, cash – particularly termed deposits – and cash management accounts in banks – the risk free rate that has been achieved on that has been very high.
Meyer: Treasury figures show that Australians are paying $20 billion in super fees. Three times higher than in Britain. Industry funds in particular have traded strongly on their low fees and no commissions. But while fees for setting up and managing SMSFs have been criticised for being higher, they have started to come down in the past few years.
Cooper: There’s a big message to the financial services industry, this move to the self managed sector. A lot of people are asking themselves what signal does this give and that is one of them. That you can see the fees and you can bargain them down.
Meyer: David Gall says that low fees are important but should not be the only consideration.
David Gall, MLC: The primary objective should be to look at overall net returns getting from the funds. So one thing to get value and very important that we actually look at the fund outcome and of course it are those earnings that are funding a comfortable lifestyle and retirement.
Knight: Let’s go back to our panel now and Justin – you’ve seen a boom in self managed super funds in your game but there really are a lot of issues for investors to consider aren’t there?
Justin Braitling, Watermark Funds Management: That’s right. If you are managing it yourself, then you have to make those allocation decisions yourself and if you look at a typical self managed super fund, they have about a third of their assets invested in cash and termed deposits, a third in listed shares which is quite high and a third in property and managed funds and a raft of other assets.
Knight: And what about listed investment companies, because that’s another option
too.
Braitling: Sure. I’m involved in two listed investment companies, LIC have done very well recently. They are on a more competitive footing now versus managed funds under the FoFA reforms and they have done very well. They’ve outperformed managed funds typically and the company structure has some clear advantages over a trust structure in the way it distributes its incomes to share holders through fully franked dividends. So we are seeing a real resurgence in the interest in listed investment companies.
Knight: A lot of interest there. And Phil there is a focus too on the Government’s tax concessions for Superannuation, Communications Minister Malcolm Turnbull raising this week. I know this government has major budget problems but would they ever dare and touch the growing super nest egg?
Phil Coorey, AFR: I think they will have a look at it next term. They’ve squarely ruled out this term – I think they have enough on their plate at the moment. The White paper into taxation that Tony Abbott is about to commission will take all of that into account but there certainly has been a developing consensus that perhaps the superannuation tax concessions are too generous. It’s an area ripe to go at.
Knight: Watch this space.
Domino’s Pizza
Deborah Knight, Financial Review Sunday: Well it’s been a record run for pizza giant Domino’s finishing the year as one of the top 5 performing stocks on the ASX, and today Financial Review Sunday can reveal the results of CEO Don Major’s latest $5 million technology project. It’s a new push on social media harnessing customers to market their own pizza creations.
Don Meij, CEO Domino’s Pizza: We used to be a retailer, we then migrated to being an e-tailer and, as of today, we’re going to be a ‘me-tailer’ as well.
Knight: It’s the social media experiment, turning fastfood into fast money, both for Domino’s and its customers. A digital application allowing consumers to build their own pizza empire.
Meij: You get to create your own pizza on our pizza chef platform. Then you get to share that pizza. You can share it with anybody in any of your social networks. You can also market that pizza, we’ll allow you to attach videos, we’ll allow you to attach little photos and so on, and now we’re going to pay you every time you sell that pizza.
Knight: The pizza mogul app may sound like just another gimmick but it has the potential to engage customers across dozens of social media sites saving millions of dollars in traditional advertising. It’s experimental thinking like this which has seen Domino’s dominate marketing in the digital age.
Jason Orthman, Hyperion Asset Management: They have over a million Facebook fans, over 60 per cent of their sales through Australia are online. Their leadership in technology and social media is unmatched here in Australia.
Knight: The latest social media experiment is the brainchild of CEO Don Meij, a man who has literally worked his way up from the bottom, starting as a delivery driver for the chain in 1987. With Meij at the helm, the pizza giant has become a ‘market darling’. He predicts 80 per cent of sales will soon be conducted online.
Meij: I definitely see a time, and it’s not that far away, where you won’t physically need to talk to someone.
Knight: It’s a business model proving to be economically efficient. The need for less storefront staff and restaurant fit outs allowing much greater returns. From an investor point of view, Domino’s remains a strong bet. On the most common measure of earnings multiples, which is how much the market is willing to pay for each dollar a company earns, Domino’s is at the higher end trading at 38-and-a-half times earnings, double the market average.
Meij: Typically we’ve been giving forecasts of about 15 per cent growth, we’ve actually achieved closer to 21 pe cent, 22 per cent compounding. So I think if I look out in the next three to five year window I can’t see any reason why we won’t grow at 15 per cent plus. And of course with everything that we have, that could go for beyond 10 years.
Orthman: A lot of that comes down to their store rollout growing their store network from 1300 stores to 2750 over the next 10 years, and also continuing to engage the consumer.
Knight: Domino’s has 600 stores across Australia and New Zealand, and that’s moving quickly towards 800. It operates in 6 countries and is the market leader in France, the world’s biggest pizza market. Boldly it expects to lead the competition in Japan in 18 months and double store capacity in Belgium and the Netherlands.
Knight: As you say, you’ve been involved personally in building this business from the ground up, is there a succession plan, a clear one in case?
Meij: Absolutely, at the end of the day it’s not my job to actually anoint somebody, that’s the job of the board but they’ve got a great group of people to be able to choose from. Whenever I talk to my family, if I get hit by a bus, if they appoint that person, they appoint that person, they appoint that person, keep your shares. The business will continue to go forward. After that pool of about 10 people, sell your shares.
Knight: So there’s no plan to step away?
Meij: No, this is one of the most fun jobs you could ever have.
Knight: Yeah Don Meij certainly leading an impressive business, but Justin, do you think there’s a risk that some of the companies, like Domino’s, these smaller companies are, perhaps, overvalued. There could be a bubble in this sector of the market.
Justin Braitling, Watermark Funds Management: Well 38 times certainly is a premium pizza. It’s true a lot of these smaller companies with a strong growth profile are trading at inflated values and that’s because, in Australia, we don’t have a lot of growth sectors so some of these emerging growth companies with an emerging growth profile are trading at very high valuations because institutional investors are prepared to pay a very full and high price for these strong earnings trends that these companies are delivering. If you look at an average PE as opposed to an index PE or an index weighted PE for the market, what you find is that the average valuation is actually very high and we haven’t been at these sorts of levels for many years. So there is a lot of risk with small companies here particularly. That is why stock pickers generally are finding it quite hard to find ideas now because of these very high evaluations.
Knight: Something to keep an eye on. And Phil, you’ve been a Pizza Hut delivery boy in your time. Dominos is putting pressure on Pizza Hut in particular?
Phil Coorey, AFR: It has for a long time. I can reveal that those little peperonis that Pizza Hut went to were a result of the cost pressures from Dominos over a decade ago so they have been eating into their market for a long time and now we read today that 80 franchisees of Pizza Hut are taking the parent company to court because the parent company is trying to cap the price regardless of where the outlet is, just to keep Dominos at bay. So that’s all the market isn’t.
Knight: It’s a competitive war, the pizza war.