Tag Archives: Banks

article 3 months old

The Overnight Report: Seller Beware

By Greg Peel

The Dow closed up 75 points or 0.7% but the S&P posted a 1.1% gain to 1083 and the Nasdaq also rose 1.1%.

Let's start with yesterday's trade in Australia. The market opened a little weaker as might have been expected following the disappointing after-market earnings report from IBM which threatened to send Wall Street lower on last night's open. But the ASX 200 turned around to ultimately post a near 1% gain.

The kicker came with the late morning release of the minutes of the RBA's July meeting. From the minutes the conclusion was that the RBA has absolutely no intention of raising its cash rate in the current uncertain global environment unless the June quarter CPI numbers, due just before the August meeting, surprised to the upside. The RBA is actually expecting the headline number to exceed its 3% target limit, but it expects underlying inflation (which excludes volatile items like food and energy and smooths seasonal factors) to have drifted lower. It would thus have to be a very big CPI shock for the RBA to move.

This is good news for the stock market because it means funding costs for businesses will not rise at a time when anyone outside the resources sector is still struggling with the two-speed economy. It should, however, have been benign to weak news for the Aussie dollar.

But the local market does not control the Aussie dollar, foreign markets do. So it was that at lunch time, when RBA governor Glenn Stevens was speaking to a room full of economists, the question was posed as to whether the RBA would hold back on raising rates during the election campaign. The answer should have been bleedingly obvious, given the RBA did exactly that to Howard in November 2007, but Stevens nevertheless confirmed that the RBA didn't give a tinker's cuss whether there was an election on or not. If the RBA needed to raise, it would.

Well the popular media jumped all over that one and decided, erroneously, it meant a rate rise in August. Word spread, and the Aussie has shot up 1.5 cents in 24 hours to US$0.8836 despite the US dollar index being slightly higher in the same period. US stock investors like a strong Aussie irrespective of local funding costs because it increases their winnings. And so we had a strong afternoon in the stock market.

It was a risk, because IBM threatened to bring down Wall Street early in the proceedings last night, and that's exactly what it did. The Dow fell 157 points from the bell. Had that been the end result, the ASX 200 would have been looking a bit high and dry.

There is a groundswell of belief building in the US and elsewhere that Wall Street will have to go lower in the third quarter before recovering for a strong performance in the fourth. You might even say consensus has the S&P 500 at 950 by about September/October and at 1250 by December. The question is: If the S&P is going to go from 1080 now to 1250 by December, why would I wait for 950? Everyone will be trying to buy at 950.

The answer is: because stocks can be bought more cheaply in the third quarter for more significant gains by year-end. But what this also means is that we really have no reason to fear another big plunge, and hence we don't need to buy put option protection. Indeed, high levels of volatility offer the opportunity to sell out-of-the-money puts for a good premium, and then when stock prices drop down in the third quarter you are put the stock at a nice low price that you wanted.

Seems a great idea. Problem is, everyone's doing it. Take a look at a 5-day graph of the volatility measure of the S&P 500, the VIX:

Note that every day volatility jumps on the open, fuelled by weak US data or disappointing earnings reports, and then drifts down again. And note that despite blue chip reports being more negative than positive over that five days, and all the double-dip talk, volatility, and thus demand for protection, is back where it started. Everyone's selling puts, not buying them.

This does raise the spectre that if there were to be some left-of-field calamity, the downside would be accelerated by short put holders bailing fast. But it also means the target of 950 in the S&P may be very hard to achieve. There are too many “buyers” (selling puts is a proxy for buying) trying to set themselves in the meantime.

Now – moving out of the derivatives market and into the stock market, after Wall Street opened down from the bell last night it did nothing but rally all session. And it rallied despite another 5% drop in housing starts and yet another revenue miss from a major – this time leading investment bank Goldman Sachs.

Explanations from commentators for this turnaround were few last night. I'll offer four: (1) When everyone sells puts, the market makers in the middle have to buy stocks to hedge; (2) of course the housing data was weak, hasn't it been for months now?; (3) the blue chips are mostly missing on the revenue line, but the actual beat-to-miss ratio so far in the broad market on the revenue line is 65/35; (4) there was a certain rumour that went around regarding the Fed.

The rumour was that the Fed has noted the huge amounts of cash sitting on US bank balance sheets at present and the sad lack of lending to businesses at present. One of the GFC countermeasures the Fed established a while back was to offer banks to park their cash with the Fed for a 0.25% interest rate. In order to encourage lending, the Fed was about to drop that rate to zero, the rumour suggested.

This, of course, would be a big boost to the US economy were it to occur, but most commentators suggested this is more of a last resort weapon in the Fed's armoury. Either way, Wall Street finished on a strong note, particularly on the broader indices.

Aside from Goldman Sachs, there were good earnings reports from the likes of Harley Davidson and Whirlpool which, as two consumer discretionary names, brings into question the belief the US consumer is dead. And if one needed anymore confirmation that at least some US consumers are alive and well, it came after the bell. Yahoo's post-bell earnings result was disappointing, but Apple's simply blew the world away. Sales of every single i-Thing were greater than Wall Street had expected.

And while all this was going on, all of Ireland, Spain and Greece last night issued sovereign debt which met strong demand. Leaks also suggested that Spanish and even Greek banks were set to pass the ECB's stress tests (results due Friday), and that the only bank so far that might fall short is Germany's Hypo Bank which the government had to nationalise at the depths of the GFC.

All good news from Europe, albeit cynics still believe the stress tests have been set up so that near everyone can pass in order to take the pressure off Europe.

Throw everything into the mix, and it was a good 24 hours across the globe. Last night commodity prices were stronger despite the US dollar index being slightly higher at 82.80, with oil up US90c to US$77.44/bbl on the expiring August contract, and all base metals bar aluminium up 1.5-2.5%.

There are also those looking to buy the dip in gold, so it was up US$8.10 to US$1192.20/oz. But these peaks are getting lower each time.

The SPI Overnight rose 41 points or 0.9%.

It's another big earnings night in the US tonight, with results due from 131 companies including Morgan Stanley, Coke (Dow), eBay, Qualcomm, Starbucks, Wells Fargo and United Technologies (Dow). Fed chairman Ben Bernanke will begin his two-day testimony to Congress so all ears will be peeled.

Australia's highlights today are BHP Billiton's ((BHP)) quarterly production result and Woolworths' ((WOW)) quarterly sales result.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

A Guide To The Australian Reporting Season

By Greg Peel

In the US, listed companies report their earnings results officially on a quarterly basis, with the great concentration being around the natural quarters of March, June, September and December. The June quarter season has just begun.

In Australia, reporting is required only on a half-year basis, although often companies will provide interim quarterly updates. The majority of Australian companies work off a June financial year, meaning December half results posted in February and full year-results posted in August. Increasingly, companies reporting in US dollars (many resource sector stocks for example) are working off a December financial year, meaning their August results are half-years and their February results full-years.

Then there are other companies, such as three of the big banks, which report on an “off” cycle to everyone else. But suffice to say, we are about to hit the major reporting season for the year. Next week and the week after will see the first handful of results, the second week of August sees a lot more, and thereafter comes the deluge. By September it's all over.

It is important for investors to appreciate that the market response to a result has nothing to do with whether or not a company posts a record profit, or a record loss. Responses will only be based on whether a company matched, beat or fell short of analyst forecasts. Every single day of the year, stock prices are building in earnings expectations. Thus an actual earnings result is only providing confirmation of market expectations, and affirmation of pricing, or otherwise. The inexperienced investor is often perplexed when BHP, for example, announces a record profit yet its shares fall on the day. The reason for the fall is usually that the market had expected an even bigger record profit, and thus is disappointed.

One must also not discount the “buy the rumour, sell the fact” effect. A stock may go for a run ahead of its results announcement on anticipation of an “upside surprise”, for example. If the result does surprise to the upside, the stock price can still fall as traders take profits on a successful trade.

Which brings us to the contradictory notion of “surprise”. Ahead of a results season, brokers will usually prepare lists of those stocks which their analysts believe may “surprise to the upside” or “surprise to the downside”. Your old English teacher would probably immediately ask “How can one expect something to surprise? Surely it cannot be a surprise if expected?” However, the butchered English simply reflects an analyst's view that perhaps market consensus is a bit conservative, for example, on a particular stock, and that it will find itself surprised by the result.

In the US, it's very easy to know immediately whether a result has “beaten the Street” or not given a very specific focus on earnings per share (EPS) and revenue forecasts and comparable results. In Australia, we tend to focus on the profit number. This is problematic, given profit results can be impacted by such things as tax changes, asset write-downs, depreciation charges and so forth. Analysts will often speak of a “messy” result, which is one which requires the report to be picked apart before the “real” performance can be gauged. It may not thus be immediately apparent whether the result is a “beat” or not. Sometimes an analyst needs a few hours to arrive at realistic opinion.

This also flows through to the important notion of result “quality” as opposed to “quantity”. The quantity of a result is simply the profit or earnings number which can be compared to last half and the same half last year, as well as previous management guidance and analyst forecasts. But let's say for example, that XYZ beat forecasts by a long margin, but did so because it closed and sold off several shops, slashed staff numbers, pared back inventory lines, brought forward tax losses, fully depreciated machinery – any such notion that suggests earnings were more about downsizing and less about growing revenues. Such a result lacks quality, because it paints a misleading picture of corporate growth.

Another example is banks which post solid trading profits from their proprietary desks in time of high market volatility. It's a good result in a quantitative sense, but not so in a qualitative sense given such volatility is unusual and such profits cannot be expected to always be repeated.

Quality or otherwise can take many forms.

Then having been hit with a series of numbers to interpret from the period past, the market will also take note of ongoing company guidance. Analysts do not only have FY10 forecasts running, they also have FY11 forecasts (and beyond) in their models. Guidance is just as important as the result.

For example, a company's accompanying statement to a result might be something like “We saw difficult trading conditions in FY10 but evidence in the past month or so suggests prices are firming and margins are increasing. We are forecasting an FY11 profit improvement of X”. Once again, the value of X is only important by comparison to analysts' FY11 forecasts, not as an absolute number. But if a company posts a weak result but sweetens it with better than expected guidance for the period ahead, that stock may still find buyers when selling might have been expected.

Note, however, that some companies may choose to provide only near term guidance, or, perhaps citing “uncertain global conditions”, provide none at all. There is no obligation, but the market does tend to assume by default that no news is bad news.

Just when you thought it was getting complicated, we must also consider the notion of “sandbagging”. 

Given it is always better for a company to beat market expectations than fall short, company managers will often understate their ongoing guidance, or even guidance updates they produce leading up to a result. This might strictly be called misleading disclosure, but such an accusation is hard to prove if management argues it was simply being “conservative”. By understating guidance, companies have a better chance of “surprising to the upside” when the true result is revealed. This is known as sandbagging.

Macquarie Group, for example, became known as a serial sandbagger back in its glory days before the GFC. Every half the bank would post conservative guidance and every result would blow that guidance away. But the market became so used to this game that analysts would simply take Macquarie's profit guidance and add 10-20% as a rule before declaring any “surprise”. So it helps not to become too transparent.

On the other side of the coin, some companies have been known to constantly miss guidance, leading to unexpected profit downgrades, which suggests they may be serial over-staters. As to whether this is deliberate or simply innocent evidence of rose-tinted glasses is by the by. Companies which do seem to overstate guidance are usually held in contempt and marked down for such “risk”.

So taking all of the above, the small investor must be wary of any knee-jerk reactions to profit results. BHP might report a record profit, but that does not necessarily ensure its share price will go up. Did the result beat analyst forecasts? Did the result beat company guidance? Was it a result of good quality? Was it a “messy” result? Was ongoing guidance positive? And was it more positive than FY11 forecasts suggest? All of these considerations must be made.

Often you'll see a stock price spike one way and then do an about-turn soon after, or even the next day. Stock analysts can tell you immediately whether a profit result was higher or lower than consensus, but before readjusting their views they will first tune into the conference calls held by management, pick through the details of the report, look at guidance, re-run their models and generally reformulate their outlooks. It may not be until the day after, or more, that an analyst decides, for example, to upgrade a stock to Buy.

So it's best for longer term investors to leave short term trading to the traders, and to wait for the dust to settle before considering portfolio adjustments.

Enjoy results season.

article 3 months old

The Monday Report

By Greg Peel

Thursday night's trade in the US gave us indication that there were indeed sellers lined up to slap the rally, but the good news of the oil spill being plugged and Goldman Sachs settling its fraud case was enough to give the market a kick to the close. Volume on the downside has nevertheless exceeded volume on the upside, so one felt any piece of bad news might have a significant impact. Unfortunately, Friday brought five pieces of bad news.

It began with Thursday's after-market release of a Google result which missed earnings expectations for the first quarter in five. It got worse on Friday when all of Citigroup, Bank of America and General Electric beat earnings expectations but fell short on revenue forecasts.

While market-wide predictions tend to focus on earnings, confirmation of economic recovery can only be made through revenues. All of last year earnings were bolstered by cost cutting while revenue growth was unimpressive. On Friday, the banks were able to show solid earnings but only by bringing back provisions for bad debts to the bottom line. Trading profits and general banking revenues disappointed. For the multi-faceted GE, it was a simple case of cost cutting.

The reduction in bad debt provisions from the banks is a positive sign, but in contradiction, mortgage delinquencies continue to rise.

Making a bad day on the earnings front worse was the first Michigan Uni consumer confidence measure for July. The last survey in June showed a reading of 76, and economists had expected a slight drop to 74. But the result of 66.5 was the lowest since August last year. A reading of 90 is considered “confident”. Consumers clearly fear the double-dip.

The consumer price index result for June was mixed, with the headline rate falling 0.1% to again confirm a disinflationary environment but the core (ex-food and energy) rose 0.2%.

Put all that together and we had a Dow falling 261 points or 2.5% while the S&P lost 2.9% to 1064 and the Nasdaq was hammered by 3.1%.

Last week had seen evidence of investors moving out of Treasury bonds and into stocks, indicated by the ten-year yield pushing back above 3%. Last night that reversed again, and the tens fell to 2.93%. The US dollar index ticked up slightly to 82.57 after a few days of decline sending gold down US$15.50 to US$1192.90/oz. The Aussie risk indicator lost 1.5 cents to US$0.8690.

Base metals in London lost 1-2%, oil fell US61c to US$76.01/bbl and the SPI Overnight dropped 79 points or 1.8%.

We are now entering a five-week period of uncertainty for the Australian market given early election polling is inconsistent. A win to the coalition would be positive for stocks, particularly in the resource sector. But it is unlikely the market will take big bets either way at this stage.

One interesting element of Friday night's session in the US was the movement of the VIX volatility index. Having drifted down to 25 from 30 over the recent rally, one would have fully expected a pop straight back to 30 on a night when the S&P 500 falls 2.9%. But while the VIX did reach 28 mid-session, it actually fell away to 26 by the close.

What this implies is that traders were selling puts on the drop, not buying them as would be the case in panic. We could thus assume that for all the sellers supposedly lined up, there are still buyers looking to take advantage of dips (shorting puts is a way to “buy” stocks and receive premium).

As we move into the new week, movements in the US will again be dominated by earnings reports. But even good reports are battling against ongoing weak economic data. There is a round of housing data out in the US this week which could well spook the market further. Double-dip fears linger, but most economists are holding on to simply a slowdown in the recovery rather than a return to recession. The question remains as to whether the market has not already discounted such a slowdown.

Tonight sees the housing market sentiment index in the US. Tuesday it's housing starts and building permits, and Thursday existing home sales and the FHFA house price index. Thursday also sees the Conference Board leading economic index.

The UK is slated to provide its first estimate of second quarter GDP on Friday, but having only just released its final first quarter result after a delay one can't be sure the UK is ready yet. Friday will nevertheless be important in Europe given the ECB will release the results of its European bank stress tests.

Australia's economic week begins tomorrow with the release of the minutes of the July RBA meeting, and Governor Stevens will speak on effects of the GFC. On Wednesday NAB reports its net second quarter business confidence index while Westpac provides leading economic indicators as at May. Friday sees the second quarter index of import and export prices.

On the local stock front, Iluka will provide its quarterly production report on Tuesday, BHP Billiton ((BHP)) on Wednesday, Newcrest ((NCM)) and Santos ((STO)) on Thursday and Woodside ((WPL)) on Friday. Woolworths ((WOW)) will report its June quarter sales result on Wednesday.

For further global economic release dates and local company events please refer to the FNArena Calendar.

article 3 months old

Next Week At A Glance

By Greg Peel

As we look ahead to tonight on Wall Street, the question is as to whether the very positive news on the settlement of the Goldman Sachs fraud case and the apparently successful plugging of the oil leak by BP will be enough to overcome the reality of weakening US economic data.

The Goldmans settlement provides a big boost for that stock for two reasons. One is that it ends the uncertainty as to just what Goldmans might have to pay up – uncertainty which has hung like a cloud over the stock while other bank stocks have been recovering – and two it is an extremely good result for Goldmans. The upshot is the bank cannot be sued in a civil court. The $550m settlement is shrapnel compared to what the bank might have had to stump up if it were successfully sued for fraud both criminally and civilly.

The result is also a boost for US financial stocks in general, given Wall Street was further concerned that someone else might be next. The Goldmans case has set a precedent, such that if the SEC decides to charge another bank, Wall Street will expect a settlement to be the result.

Tonight sees quarterly results for both Citigroup and Bank of America, as well as economic bellwether General Electric.

A successful plugging of the oil spill will be a boost for the oil industry, taking a lot of the pressure off despite an ongoing moratorium on deep-sea drilling, a boost for the economic fortunes of the Gulf states in the US, and generally a positive psychological boost for the world.

But ever weakening US economic data is the counterbalance, and probably supports the fact the Australian market is struggling to go anywhere today. Next week in the US sees a lot of housing data, and they have the capacity to be quite weak indeed.

Across the week the US will see releases of the monthly housing market sentiment index, housing starts, building permits, existing home sales and the FHFA house price index. The Conference Board will release its June leading economic indicators index on Thursday.

Global markets may be buoyed by a second rate rise from the Bank of Canada if that is its decision on Tuesday, while in Europe anticipation will build throughout the week ahead of the scheduled release of European bank “stress tests”, due out on Friday.

The stress test issue has split the market, with the optimists suggesting most banks will pass comfortably while the pessimists have suggested the ECB will simply start with an outcome it would like and then set the tests so that most banks pass. So if it turns out that most banks did indeed pass, it still won't convince the critics.

In Australia, next week brings the minutes of the RBA's July meeting in Tuesday, the Westpac leading economic index on Wednesday and the second quarter import price index on Friday.

It's a busy week in regards to production reports from the resources and energy sectors. All of Iluka ((ILU)), BHP Billiton ((BHP)), Newcrest ((NCM)), Santos ((STO)) and Woodside ((WPL)) will report.

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

article 3 months old

The Overnight Report: Saved By The Well

By Greg Peel

The Dow closed down 7 points while the S&P gained one point to 1096 and the Nasdaq was flat.

Let's remember back to April when global stock markets were happily hitting their post-GFC highs, spurred on by what appeared to be a solid recovery in the US economy. Pretty quickly the mood changed, and it wasn't due to just one specific factor.

Having believed the Greek crisis was sufficiently isolated, markets were spooked by a realisation countries such as Portugal, Spain and even Italy also had major sovereign debt issues. Europe was threatening to crumble. In the midst of the fear, China was taking steps to slow down its economic growth machine, only exacerbating concerns for the global economy. Out of the blue the US Securities and Exchange Commission announced a fraud suit against Goldman Sachs. A fire on an oil rig in the Gulf of Mexico morphed into the biggest oil spill in history. And hanging over all of it was the Obama Administration's determination to pass tough new financial regulations which threatened to stymie the earnings power of Wall Street banks.

It was an unprecedented set of negative influences, and proved enough to ultimately send global stock markets down 15%. But it is the extent of the list which makes July 15, 2010 such an extraordinary day.

Firstly, yesterday China's GDP was confirmed to have slowed from 11.9% to 10.3% in the June quarter. It was in line with China's policy of soft landing, it was not a collapse, and lower than expected inflation numbers suggested no need for the authorities to tighten further at this stage. The result took some unease out of the market.

Secondly, last night Spain – the country the world has been most worried about given its economy is much larger than Greece's – found strong demand for an E3bn issue of 15-year government bonds. The successful Spanish auction was the last in a session this week which has seen Greece and Portugal, as well as Germany, draw encouraging demand for sovereign debt. Last night the euro leapt 1.5% to over US$1.29.

Thirdly, Wall Street opened with the knowledge Obama's financial regulation bill had made its final passage through both houses of Congress and was now before the president to sign into law. While some in the market saw this as a negative – they would have preferred more success from the lobby pushing to water down the regulation – the fact remains the bill is passed, the speculation is over, and although banks are still somewhat unsure on detail, at least the uncertainty of what might have been has now been removed.

Fourthly, late in the session last night BP announced that it had plugged the leaking oil well and that it was now testing the cap. Tests so far had found no further leakage. BP is erring on the side of caution, but it appears the spill has ceased.

And just as Wall Street was absorbing this news, a rumour ran around the floor that Goldman Sachs had settled with the SEC. The rumour proved to be true. Goldmans has been fined US$300m – the biggest fine in SEC history - and ordered to pay US$250m compensation. Under the settlement, Goldmans is deemed to have simply been remiss, not fraudulent, in its disclosures regarding short sales of CDOs. On that basis, Goldmans cannot have a civil suit brought against it. US$550m? That's chump change compared to what might have been.

In short, a lot of the fear and uncertainty hanging over global markets these past few months has now been either snuffed out or tempered over the last 24 hours. But there is a flipside. The flipside is that the world is now focused back on the US economy. For three months the US has been a safe haven, but now reality is biting.

Two of the most important US manufacturing regions lie in the north east in the Fed districts of New York and Philadelphia. Last night the Empire State manufacturing index was announced to have fallen from 19.6 in June to 5.1. The Philly index fell from 8.0 to 5.1. These are zero-neutral indices in which anything positive means growth, and numbers over 20 are rare. So both areas are still seeing growth, but that rate of growth has slowed substantially and by more than expected.

The producer price index was expected by economists to have fallen 0.1% in June but it fell 0.5%. Such a figure confirms Fed fears of consumer disinflation – at least at the headline, which includes food and energy prices. The core reading rose 0.1% as expected. While low inflation means no chance of a rate rise from the Fed, a healthy economy is one that has to deal with inflation pressures.

Weekly new jobless claims fell by 29,000 to 429,000 last week which is the lowest level since August 2008. This sounds encouraging, but the bigger than expected fall was attributable to the deferral of GM annual car factory shutdowns.

The only piece of good news was that US industrial production rose by 0.1% in June when a 0.1% fall was expected. But then 0.1% is not much to get excited about anyway.

This raft of weak economic data ensured the Dow was down by 125 points early on in the session. I noted yesterday that it looked like the sellers might be lining up again after a week-long rally, and they were, with good reason. The swing factor of course is ongoing earnings reports.

Last night JP Morgan announced an earnings result which blew Wall Street away. However, JPM's CEO was quick to point out the Street-beating result included a write-back into profit of previous provisions against bad debts. So realistically the result was not as good as it appeared as it did not reflect earnings from the present, rather write-backs from the past. But the fact JPM was confident enough to reduce bad debt provisions is in itself good news.

The positive result was nevertheless lost in the wave of weak economic data. Wall Street fell and stayed down for most of the session, at least until the BP news broke. That was enough to turn the market around, and the very late kicker of Goldman Sachs news ensured all of the losses were recovered by the bell.

BP shares finished the day up 7.5%. Goldman Sachs shares, more importantly, rose 4.4% before the bell rang and are up another 5.5% since. The Goldmans news helped to turn around all financial stocks at the death.

After the bell, chip maker Advanced Micro Devices announced a Street-beating result which has its shares up 3% in the after-market. Google announced a revenue number which comfortably beat expectations but it fell short on the earnings line. Google shares are down 4% in the after-market but did have an 11% run up to the announcement over the month to date.

So on balance, the good news is expected to outweigh the bad news as we await the last trading session of the week – one which includes earnings reports from Bank of America, Citigroup and General Electric. The fortnightly Michigan Uni consumer confidence survey will be another factor, as will the June CPI release.

What we saw last night was a switching of focus away from the likes of Europe and China and back to the world's largest economy. It was a zero sum game. No more is this evident than in currency movements. The strong euro and weak US data saw the US dollar index plunge 1.2% to 82.35. While this might normally be a fillip for the “risk indicator” Aussie dollar, and for commodity prices, the Aussie (US$0.8835), gold (US$1208.40/oz), oil (US$76.62/bbl) and London base metals were all as good as unchanged by the end of the New York session.

Overall, this is a positive. The biggest problem we have been facing is European debt disaster, and while this has by no means gone away the fear is beginning to subside. In the meantime, the US economic recovery is indeed slowing but the signs are for simply a slower pace of growth and not for the double-dip recession many have been fearing recently. It is not the stuff that drives raging bull markets, but nor is further disaster imminent. And we still have a long way to go in the US earnings season.

The SPI Overnight was down 8 points or 0.2%.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Bank Upgrade And Broker Conviction

By Greg Peel

The Macquarie bank analysts believe the market is missing an important point. While much has been said lately about rising bank funding costs, which FNArena has covered extensively, consensus has Australian banks hamstrung by the upcoming election. In an environment of pending financial regulatory change, analysts have assumed the banks will not risk the ire of candidates for government by raising mortgage rates beyond a now steady RBA. Bank bashing is an easy election tactic.

But Macquarie notes that the election will soon be held. The banks have been trying to balance out what they can't pick up on mortgage rates with increases to business lending rates, but business credit demand is still falling. Westpac's ((WBC)) recent five-year funding deal cost the bank 135 basis points compared to 100 basis points in November, given the interim blow-out in spreads affected by the European debt crisis. Unless the banks move on mortgage pricing immediately after the election, Macquarie suggests the consequences would be significant. There is simply too much margin pressure.

Hence the analysts believe mortgage repricing is just around the corner. Westpac and Commonwealth ((CBA)) moved early on securing fresh funding late last year, the analysts note, leaving ANZ ((ANZ)) and National ((NAB)) behind. Westpac and CBA have also been trying to slow asset growth in the face of funding increases, while the smaller two are trying to grow their loan books. This means ANZ and NAB face upside funding pressure in FY11, while the Big Two are looking at downside.

On that basis, Macquarie has put both CBA and Westpac on Outperform, meaning an upgrade for Westpac from Neutral. The broker leaves ANZ on Neutral, and is currently restricted from making a recommendation on NAB. But now that bank PE multiples reflect a loss of sentiment, Macquarie has also taken a knife to its target prices. The analysts have lowered their Westpac target by 10%, ANZ by 11% and CBA by 17% from earlier lofty levels.

The move also means ANZ now drops off the broker's conviction list, replaced by CBA.

On Outperform conviction, Macquarie retains Boart Longyear ((BLY)), News Corp ((NWS)), QBE Insurance ((QBE)) and Rio Tinto ((RIO)), but Qantas ((QAN)) has been removed. The broker has Brambles ((BXB)) on an Underperform conviction.

Moving into the commodity space, Canada's RBC Dominion Securities has updated its global sector and stock recommendations.

With sovereign debt risk still hovering around Europe, RBC remains Overweight precious metals. It's too early to say whether the spot uranium price has bottomed, but recent corporate events and government acquisitions are enough for an upgrade to Market Weight for the uranium sector.

RBC believes base metal stock valuations remain attractive despite concerns over the global economic recovery, so Market Weight is retained. But with China tightening its fiscal and monetary policies, steel, iron ore and coal prices are under pressure. The broker has moved to Underweight the bulks.

Lower crop yields in the US mean RBC has downgraded the fertiliser sector to Underweight.

In relation to Australian listed commodity stocks, RBC has added Equinox Minerals ((EQN)), Newcrest Mining ((NCM)) and Paladin Energy ((PDN)) to its “20 best stock ideas” portfolio and dropped Minara Resources ((MRE)).

Already on the list and staying put are Aquarius Platinum ((AQP)), Avoca Resources ((AVO)), BHP Billiton, ((BHP)) and Coal & Allied ((CNA)).

RBC's portfolio lost 17% in the June quarter, in line with the MSCI World Metals & Mining Index. But since its inception in late 2008, the portfolio has returned 27% to the index's 6%.

Morgan Stanley notes that small cap stocks, as a group, tend to rise and fall in 18-24 month cycles irrespective of a turn in large cap stocks in the interim. Small caps have been underperforming for 10 months only now, meaning more underperformance is on the cards. Price/earnings ratios are not yet cheap, the analysts suggest.

That does not mean all individual stocks within the small cap sector must react in unison, and Morgan Stanley has today added four littluns to its model portfolio. They are Mineral Resources ((MIN)), Automotive Holdings ((AHE)), Campbell Bros ((CPB)), and SMS Management & Technology ((SMX)).

article 3 months old

We’ve Seen The Bottom Of The Cliff, Says Cliff

By Greg Peel

Herston Economics chief economist and star of business television, Cliff Bennett, believes we are now looking at synchronised bull markets across global equities. We have seen the bottom, says Bennet. At least, that's his early call with a bit of a caveat that were the US and Australian markets to make fresh lows he might be wrong.

Bennett suggests markets are beginning to price in stronger manufacturing and consumer activity ahead. The euro and Aussie have also begun bull phases to maintain the US dollar's more major bear trend, oil is rallying us forward, but gold will suffer short term weakness before Chinese and Indian seasonal buying kicks in again in the fourth quarter.

Bennett is happy to note that many major banks and broking houses are still advising caution, and also that the recent pop has not changed the views of the serial doomer-gloomers. This, says Bennett, suggests the shorts are yet to change their minds and provides scope for “awesome” potential upside.

If some brokers are still wary, RBS Australia is not one of them. RBS has today made a similar call, suggesting we are now entering the first (financial) year of synchronised positive global economic growth since the FY08-09 declines. Despite still serious macro “pressure points”, the strategists are confident that the gradual economic recovery is sustainable, and that the market has already excessively discounted structural and cyclical risks.

There is a lot of talk that consensus Australian earnings growth forecasts for FY11 of 24% (FNArena: 19%) are too high and will need to be revised down, but RBS suggests the figure is both defensible and achievable. The strategists believe corporate investment and capital expenditure is the next global growth driver, and that positive micro issues will eventually overcome negative macro issues.

To that end, RBS is forecasting a 21% return on Australian equities to end-2010 based on a conservative 12.8x earnings multiple. That means 5300 for the ASX 200 in sixth months and 5600 in twelve.

Obviously, Australian banks stocks need to be part of any substantial rally, and Morgan Stanley suggests that under base-case forecasts, “some” valuation support has emerged.

On Wednesday I highlighted analysis by JP Morgan that suggested bank funding costs will prove the toughest headwind going forward, and the analysts downgraded their FY11 earnings forecasts as a result (Banks At The End Of Their Tether?). But in the same breath JPM noted that the market had already well factored in such funding headwinds.

Bank analysts across the broking fraternity have been pointing out various bank headwinds for a while now, and began to downgrade expectations even as this correction phase was only beginning. Morgan Stanley has once again rattled them off – funding challenges, lower retail bank profitability, and regulatory uncertainty among them, as well as prices that already reflect a return of bad loan provisions to normal levels ahead. So the analysts' view is that it may be time for a pause in bank share price weakness, but this does not mean the problems have gone away.

Cliff Bennett would no doubt count Morgan Stanley amongst those still cautious brokers.

article 3 months old

The Overnight Report: First Three-Day Rally Since April

By Greg Peel

The Dow closed up 120 points or 1.2% while the S&P gained 0.9% to 1070 and the Nasdaq struggled up 0.7%.

After the big surge on Wednesday night, Wall Street opened higher once again backed by news last week's new jobless claims fell by 21,000 instead of the 12,000 expected. These numbers are highly volatile and the smart money largely ignores them, but any dream will do in a market which is once again toying with risk.

It was not all plain sailing, with an initial 90 point rally in the Dow giving way by midday to be only 30 points up, then a rally, then back again, and then finally a kick to the close. Given the disparity of movement among the three major indices, it is clear the buyers were seeking big blue chip names over smaller stocks. Volume was not anaemic but at 1.1bn on the NYSE was nowhere near “heavy”, and short-covering will still have been very much a part of the push.

As has been the case in Australia, US chain stores have spent the month of June heavily discounting their wares in the face of a wobbling economic recovery. Last night the majors released their same-store sales figures for the month, which collectively rose 3.1% against 3.2% expectation. Results were mixed among the group, but June did mark eleven straight months of increases. Wall Street was nevertheless slightly unnerved by a lack of fresh guidance from retailers ahead of result season.

The need to discount was probably supported by last night's consumer credit numbers for May, which showed a seasonally adjusted decline of 4.5%. The amount of consumer credit outstanding dropped by US$9bn in the month to US$2.4 trillion when economists had expected a fall of only US$2bn. As is often noted, the consumer represents around 75% of the US economy so propensity to spend is all important for the recovery. Once again the wobbles are being exhibited.

But the question is as to whether the slowing in the US recovery has been already sufficiently taken account of in stock prices. Is this sudden rally just a breather in the bear market, or as the Americans would say, just a “head fake”, or had the market already overly discounted a drop back in GDP growth? It's hard to believe, but Wall Street has now been up three days in a row and that hasn't happened since April.

Adding impetus to the turnaround has been a slowly growing feeling in Europe that it, too, overdid the fear. All talk at present is on the ECB's “stress testing” of 91 European banks, the results of which will be published on July 23. Early expectation is that the majority of banks will sufficiently pass analysis of sensitivity to levels of eurozone economic slowdown or recession and that only a handful will be forced to recapitalise.

ECB president Jean-Claude Trichet reinforced such a notion at his monthly press conference last night which follows the release of the central bank's policy statement. The bank left its cash rate at 1% as expected, and pointed out it is continuing to offer unlimited liquidity to the market. While interbank lending rates have risen in Europe, demand for ECB loans has been less than feared. And the bank is now easing back its emergency buying of sovereign bonds – its initial reaction at the peak of the European crisis.

Trichet was nevertheless largely guarded about just how tough the stress tests would be. In theory the ECB should set the sensitivity criteria first and then test each balance sheet accordingly, but sceptics are suggesting the bank will look at balance sheets first and then create a test that most banks will pass.

The Bank of England also kept its cash rate on hold at 0.5% last night as expected. The bank signaled no intention at this stage to recommence quantitative easing.

The euro rallied back another half a percent last night to US$1.27, making its brief drop below US$1.20 last month seem but a distant memory. The US dollar nevertheless rallied against other currencies, meaning the index fell only slightly to 83.74. But while a recovering euro is indicative of fear subsiding, it's the Aussie which has become the risk trader's plaything.

Australian economic data and comments from the RBA are now being watched and analysed offshore like never before. Quite simply, Australia is the low sovereign risk proxy for investment in emerging markets, and China in particular. The face of that risk appetite is the Aussie dollar, which having stared at US$0.80 when the euro hit US$1.20 is now back at US$0.8770 after another 1.3 cent rally over 24 hours. Australia's employment numbers released yesterday were all the talk of Wall Street.

With the S&P 500 having reconquered its 1040 breakdown level and then the Dow having reconquered 10,000, the next signal required by the bulls was a return to a US ten-year bond yield above 3%. It's only a psychological round number level, but when the tens opened above 3% last night and held to a 5 basis point increase to 3.04% another stock market rally was on the cards. Rising yields imply investors are taking money out of the safe haven of Treasuries and putting it back into risk assets.

Gold continues to bumble back and forward around the US$1200 mark at present – another round number. Gold should naturally fall as fear abates and a rising euro has sparked selling on that side of the Atlantic. But the US dollar has now also fallen around 5% from its highs which is supportive of gold in USD terms. Last night gold fell US$4.70 to US$1198.50/oz.

It must be noted that this time of the year is typically a period in which gold falls back, given we're in what I call the “dark side of the moon” period between Asian gift giving festivals and subsequent jewellery demand. If risk appetite does continue to return and this rally is not just a head fake, then gold could be set for a more substantial pullback before reestablishing a base.

Oil joined the recovery from pessimism last night in rising US$1.37 to US$75.44/bbl but base metals in London were more wary and closed mixed on small movements. The metals market has now entered the quieter summer season.

It's also worth noting that having risen as high as 40 recently from its low of 15 in April, the VIX volatility index on the S&P 500 has now fallen back to 25 after a couple of sharp moves down. If it falls below 20 in a hurry on an ongoing rally, that rally has gone too far.

The SPI Overnight was up 28 points or 0.6%.

It is interesting to note that both the first quarter 2010 and fourth quarter 2009 results seasons in the US were dominated by scares in Europe – firstly Greece and then wider contagion fears – such that actual results were a bit lost in the wash. The second quarter result season starts on Monday, and this time we are coming out of a fear period (hopefully) rather than going into one. If this is more than just a head fake rally, it will all come down to US earnings results over the next few weeks.
 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

article 3 months old

Enduring The ‘Phoney War’

By Tim Price

“We believe that overall, the [bank stress] tests will be positive.”

- Unnamed banker in London, as reported in the FT.

“The stress test idea is a shambles. The whole thing is a complete joke.”

- Unnamed analyst in London, as reported in the FT.

This last week we have been presenting investment seminars across the country. In this note I would like to highlight the presentation given by one of our guest speakers, strategist James Ferguson of Arbuthnot Securities, and a fellow Money Week contributor.

One of the difficulties with investment strategy when the authorities are trying to resolve banking crises is knowing who to trust. Many banks in the industrialised world are insolvent, but the authorities are unlikely to admit the fact since that has the unfortunate tendency of triggering runs on them.

So instead we all participate in something akin to a phoney war. The more enlightened – or distrustful – keep at a wary distance from anything approximating to a bank investment, while the more daring – or credulous – flirt uncertainly with a sector still in intensive care.

The pragmatic response, then, is to trust no-one; certainly, to trust no-one from within the banking sector itself (and we include the investment banks also having suckled from the government teat), since the likelihood of getting impartial analysis runs close to zero.

As James points out, an actual contraction in bank lending is unusual in a normal recession; it is a feature of a full-blown banking crisis, as the following chart relating to US banks makes clear:

That apparent bounce in bank lending from 2010 is not a recovery, merely an accounting change.

The evidence from post-property bust and banking crisis Japan is not exactly encouraging:

Having suffered from a dysfunctional banking sector for the past 15 years, the Japanese economy has flat-lined. Broken banks make for a broken economy.

But it is not all bad news, as James points out. US banks – helped, admittedly, by an interventionist administration, and how – have been relatively aggressive at reporting loan losses. US bank lending topped US$7.3 trillion at its peak in late 2008; non-government securities added another US$2.1 trillion to take total risk assets of US banks to US$9.4 trillion.

Assuming final loan losses of US$730 billion (the typical loss rate on loans during previous banking crises has been 10%), and already reported securities losses of US$382 billion implies final expected losses of US$1.11 trillion. That figure, US$1.11 trillion, happens to be almost identical to the April 2009 US Department of Treasury's “Stress Test” assumptions. Cumulative losses by US banks reported to the end of Q1 2010 total US$703 billion. A comparison of US$703 billion (cumulative losses to date) versus US$1.11 trillion in expected losses implies, provided these figures can be trusted, that US banks may be almost two-thirds of the way through resolving this crisis. We can at least hope.

So much for the US. Here in the UK, we are some way behind. Growth in UK bank lending has also turned negative:

This in large part because real world borrowing costs are not as low as the base rate would suggest:

James suggests that given the pace of UK bank loss workouts, their earliest return to growth would come towards 2013. UK banks' peak loan and securitised loan assets at the end of 2008 totalled some GBP3.9 trillion. In “typical” historic bank crises, non-performing loans reach 25% and loan losses after recoveries total around 10%.

Expected UK bank losses therefore total roughly GBP390 billion. Realised gross losses to the end of December come to GBP180 billion (i.e. we're not even half way there yet). Expected losses are still to realise a total of roughly GBP210 billion. The run rate in annualised gross retained earnings since July 2007 has been GBP69 billion. UK banks will achieve full loss realisation at this continued rate of profit generation in around January 2013, still some two-and-a-half years away.

Again, there are some reasons to be cheerful:

But equally, some off-setting bad news:

And one of James' most striking charts shows the effects of “failed” Quantitative Easing:

Although we have no strict counter-factual, there is reason to believe that without QE, UK broad money would now be shrinking at a rate of 7%. And this trend in collapsing broad money growth is not restricted to the UK; rather, it's an international problem:

All of which points to profound deflationary pressure in the months to come. The implication for equity investments in particular is not positive.

Among James' conclusions:

- Expect QE to re-emerge before year-end / early 2011

- As banks continue to rebuild their balance sheets, Gilts will be underpinned

- Favour income strategies (Gilts, bonds, high yield stocks) over growth

- Favour FTSE 100 stocks over FTSE 250 stocks (given Sterling hedging from international exposure and lower operational gearing)

- Favour safe, boring defensives over deep cyclicals

Remain underweight the banks (we would still suggest avoiding them entirely). Multi-year balance sheet repair means that any dividend payments will be token at best; banks face an extended period of rolling loss realisation and banks still need to raise significant capital, leaving current shareholders facing the potential for further dilution.

Speaking of phoney wars, the original “Phoney War” started in September 1939, when Britain declared war on Germany shortly after the German invasion of Poland. In the absence of fighting, people were minded to believe that the actual situation more closely resembled peace.

Then in April 1940, the people of Europe were shaken from their complacency when Nazi forces attacked Denmark and Norway. The Euro zone banking stress tests are set to be published at the end of this month.

Whether or not we believe them, many of Europe's banks are in even worse shape than those of the US (likely to be the first developed economy out of the crisis), or the UK (lagging the US by some margin). Either way, the phoney war looks set to be hotting up.

Tim Price
Director of Investment
PFP Wealth Management
5th July 2010.

mail: tim.price@pfpg.co.uk
Weblog: http://thepriceofeverything.typepad.com

Bloomberg homepage: PFPG

The views expressed are the author's, not FNArena's (see our disclaimer).

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article 3 months old

Micro Cap Rising Stars – Silver Chef

This story was originally published on July 01, 2010. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere.

By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed "micro caps" - those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their stories. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the first in the series.

It is important to note that Microequities analyses and selects companies to present at the conference as “rising stars”. Companies do not simply pay Microequities for the opportunity.

*****

Twenty-four years ago Alan English was sitting in a pizza restaurant in the US watching the bustling restaurant staff deal with an influx of orders for home deliveries. Alan was impressed with the speed in which the restaurant was able to move from order to dispatch, and particularly noted such speed was made possible by the use of a conveyor oven. The pizzas were prepared and placed in the oven at one end, and simply rolled off the other ready to be boxed and delivered.

What a good idea, thought Alan. I bet those ovens would go down really well in Australia.

And so it was Alan returned downunder, borrowed money, and ordered a load of conveyor ovens from the States believing he was on a sure winner. But to his surprise, Alan struggled to sell even one. The problem was the ovens were not cheap, and represented a sizable outlay for any typical Aussie pizza restaurant running on slim margins. No one disagreed conveyor ovens were a good idea, but no one could afford to stump up the cash on the spot. Alan ended up stuck with a load of ovens and a big debt.

With the creditors knocking on the door, Alan was getting desperate. It was then he had his brainwave. Returning to those underfunded restaurateurs, he asked if they might wish to rent the ovens instead. This would at least cover his interest payments. Then if they liked the ovens, and business improved through their use, the restaurants could choose to buy them at a later date.

He rented out the lot, and eventually sold them. So was born Silver Chef ((SIV)) and its Rent-Try-Buy business for the hospitality industry.

In 2009, Silver Chef made a profit of $3.5m from what we might call its microfinance business. In 2009, Aussie punters were still being frugal about eating out post-GFC. But this was up from a profit of just over $2.5m in gloomy 2008, which in turn was up from just over $1.5m in 2007. Silver Chef saw no negative impact from the GFC. As at early June, the company had registered profits of $3.22m for the first half of 2010. That's up 288% from the first half of 2009 (noting that the second half of 2009 was much more profitable than the first).

While the Rent-Try-Buy name might be registered, the concept is not a new one, as Alan English readily admits. Companies like Radio Rentals have been offering a similar service for decades at the consumer electronics level. But whereas consumers might rent first and later buy a television because they just want one, Silver Chef's hospitality customers are using Rent-Try-Buy to acquire vital equipment for their businesses. Obviously Silver Chef now offers a wide range of restaurant equipment other than just pizza ovens.

We all know the restaurant game is a dicey one, and that restaurants come and go in a heartbeat. Indeed, six to seven of every ten start-up restaurants fail in the first year. One might consider it a risky business to borrow money, buy pricey equipment, and rent it to the next Masterchef reject who fancies himself as the new Gordon Ramsay, all in the hope the restaurant will thrive, rental payments will be met and the equipment will ultimately be purchased. But Silver Chef does not operate with any naive illusions.

To enter into a rental agreement, clients must lodge a security bond with Silver Chef equivalent to 13 weeks rent. This ensures restaurants are not exploiting Silver Chef simply as a means of financing a misguided dream that can simply be walked away from if it doesn't work out. Contracts are for 12 months, and if the client elects to buy the equipment within the period they receive a 75% rebate of rent paid to date.

Moreover, Silver Chef conducts its own strict credit assessment of each rental applicant and applies an internal credit rating system. On this basis, the company turns away an average 50% of applicants. What this means is that of the restaurants who become Silver Chef clients, only one in twenty fail in the first year. A 5% default rate is a far cry from a 60-70% default rate.

Nor does Silver Chef expose itself substantially to any one client. Of 7,560 clients at present, the largest represents less than 1% of rental income. And rent is paid weekly. On the other side of the coin, Silver Chef does not overly expose itself to its own lenders. Of all assets acquired by the company for rental, currently 95% are earning income. And these are “must have” assets like ovens and fridges, not peripheral “want to haves”. If a restaurant is struggling, the last payment they will stop making is the rent on the equipment vital to its survival.

Despite its Rent-Try-Buy business being made possible by buying rental assets with debt in the first place, Silver Chef is only geared 40% against the $100m worth of assets it currently holds. Of rental and sale revenues generated, $40m per year is used to fund new assets. The company has a facility with BankWest which expires in July 2011, but negotiations with the bank for a new deal are currently underway.

In the first half of this year Silver Chef successfully placed $2.5m worth of new equity and raised another $4m in a 1:4 rights issue which was 50% oversubscribed. The company intends to continue expanding and is currently considering another capital raising ahead, and/or issuing debentures, the interest for which can be paid out of cashflow. But while debentures sound like an interesting alternative proposition for the potential investor in Silver Chef, since 2005 the company has paid dividends equating to an 8% yield, fully franked. Over that period, earnings have grown at a rate of 23.1% (compound). And the company already knows where 70-80% of its FY11 income will come from.

It must be considered that not all equipment purchased by Silver Chef and placed in the Rent-Try-Buy system is ultimately bought by the client. Clients may also which to upgrade to a new model. But Silver Chef also has a successful “remarketing” process for this “back end” of the business. The company cleans and services the returned equipment itself and either re-rents it, sells it through a dealer, sells it over the internet or auctions it over the internet.

The company hopes to have achieved its target for FY10 of selling out 80% of returned equipment within 60 days of return.

Despite its impressive growth in client base (6,500 to 7,560 clients in the first half of 2010), Silver Chef estimates it only has 3% of the Australian hospitality industry as clients. While these now include big chains such as Subway and Domino's rather than just one-off restaurants and cafes, clearly there is further room for growth. Given the success of both its front-end Rent-Try-Buy system and back-end remarketing system, the company has now begun to apply its model to a wide range of equipment required by industries beyond just hospitality. Silver Chef sees its “GoGetta” brand as providing significant potential for growth.

Silver Chef's market capitalisation has grown from $13.4m in 2005 to $46.8m 2010. Despite continuing to grow earnings throughout the GFC, the company's shares suffered like all others to the trough in early 2009 where they reached $1.00. At the time of writing they are at $2.27. Not bad for a company yielding 8%.

To listen to Silver Chef's presentation is like watching The New Inventors, slapping yourself on the forehead and saying “Of course! How obvious”. But the secret to managing a successful microfinance business is careful risk management. Judging by Silver Chef's growth, its diversified customer base, its low default rate and the defensive nature of its earnings stream as exhibited by growing earnings throughout the GFC, the company has its risk management clearly under control.

Silver Chef offers proven earnings growth potential with a solid, fully franked yield.