Learning from a Master

Thursday 31 March 2016 Learning from a master Investing is all about learning from the experts and today Charlie Aitken borrows an investment idea from a master and uncovers a stock that would have the Warren Buffett seal of approval. And with the Berkshire Hathaway annual meeting in Omaha just around the corner, Barrie Dunstan gives us his take on Buffett’s golden rules to buying quality businesses. Also in the Switzer Super Report, Tony Featherstone uncovers a number of stocks set for a turnaround. Sincerely, Peter Switzer Inside this Issue 02 Buffett’s dream investment Best ideas by Charlie Aitken 05 6 turnaround stocks to consider Be wary of the market darlings by Tony Featherstone 10 Buy, Sell, Hold – what the brokers say Ardent Leisure and ANZ Buffett’s dream by Staff Reporter 12 Buffett’s 3 rules to buying quality stocks investment Lessons for investors by Charlie Aitken by Barrie Dunstan 02 14 Sirtex and paying for advice Sirtex and adviser fees by Questions of the Week 15 Stock take: Friendless banks and is Ardent Leisure a takeover target? The big four and Ardent Leisure by Christine St Anne Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the 36-40 Queen Street, Woollahra, 2025 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 SWITZER (1300 794 8937) F: (02) 9327 4366 appropriate professional advice. Buffett’s dream investment by Charlie Aitken One of my seven key structural growth themes is I also believe the best investment ideas are those that “monopoly toll bridges”. It’s a concept I have you see with your own eyes in everyday life. “borrowed” from the master, Warren Buffett, who is Infrastructure assets, such as airports and toll roads, often quoted saying “a monopoly toll bridge is my are classic examples of assets you can assess with dream investment”. your own eyes in everyday life. Today I’m going to write about a company that readers of these notes When you think about that statement it is absolutely from Sydney, Melbourne and Brisbane use either valid, but even more so in a world of ultra-low interest directly or indirectly on a daily basis: Transurban rates, low growth and low inflation. High barrier to Group (TCL); Australia’s true monopoly toll bridge. entry, long duration, infrastructure assets with pricing and volume power will continue to outperform in that TCL owns and operates a monopoly ring of toll roads environment. around Australia’s three most populated cities. You pretty much can’t get around or across Sydney, We are in a world of negative interest rates and Melbourne or Brisbane without paying TCL a toll. negative real yields on most long bonds in the world. The move to “cashless tolling” has made using Anyone who buys a long bond and pays a TCL’s toll roads painless and is part of the reason for government an interest rate, in my opinion, is insane. the structural increase in traffic volumes and toll That is return free risk and I think there are many revenues. Most of us don’t even know on a daily ways of buying bond similar instruments that will basis what our total tolls paid are. All we notice is continue to strongly outperform long bonds in terms TCL direct debiting another $100 from our bank of total returns. accounts every few weeks! Infrastructure assets with long concessions benefit on Click here to look at what TCL owns and the length of all fronts in the current environment. That the concessions. environment will continue as even the US Federal Reserve is backing away from interest rate rise As you can see, Australia’s three largest cities are forecasts. In reality, the world is still cutting interests simply ringed by TCL assets. I’m sure you all rates at the aggregate level and buying long bonds in recognise the toll roads and tunnels in the slides the form of QE. above, and most likely use them. For an infrastructure stock, you have the benefit of The good news for TCL shareholders is TCL falling interest costs on their debt, the ability to management is ‘sweating’ these monopoly assets refinance debt at better rates and longer duration, hard. It’s one thing to have a wonderful monopoly mandated toll rises above inflation, and in some asset endowment, but the real skill is generating the cases, volume growth (traffic growth) that is driving highest economic “rent” from these assets. TCL is earnings and distribution growth. You also have generating high economic rent from their assets. This indebted governments wanting the private sector to was evidenced at the interim result in February where own and operate key infrastructure assets that is TCL raised both revenue and distribution guidance. further driving growth. Thursday 31 March 2016 02 Obviously, to keep growing distributions, you have to keep growing revenue and TCL has years of growth projects ahead of it in the three key east coast cities that will continue to increase traffic and, therefore, toll volumes on its network. (Click the links for the Sydney, Melbourne, and Brisbane networks). You can see why I think TCL has a bright short, medium and long-term future. This is in reality a . “structural growth bond”. The 1H FY16 result delivered double digit earnings growth of +14.6%. The FY16 distribution guidance was upgraded to 45.5c, which equates to distribution growth of +13.8% yoy. In a world where genuine double digit EPS and DPS growth is hard to find, these are highly attractive numbers and in my view there is more to come. TCL consistently states they have further efficiencies Most importantly, this extraction of economic rent is to improve network and financial performance, driving distribution (dividend) growth. I can’t stress utilising technology. This suggests further economic enough how much more important dividend rent will be extracted from this wonderful set of GROWTH is over dividend yield. You always should assets, which will be positive for TCL shareholders. seek dividend GROWTH over basic dividend yield. TCL offers, in my view, structural dividend GROWTH. I genuinely believe TCL should be a core portfolio holding for all Australian investors. Yes, you don’t get fully franked distributions, but fully franked distributions aren’t the be all and end all. In fact, you’ve recently seen fully franked dividends haven’t stopped the Australian banks falling -25%. One of the banks problems is their dividends are flat or falling, whereas TCL’s dividends are rising. I can also see no higher barrier to entry business listed in Australia than TCL. This really is the key point: TCL is all about TCL has no competition, if anything, they have further distribution growth and that distribution growth will enhanced their monopoly position in all key markets. beat ANYTHING a long bond can deliver. This is a very important point. Part of this inflation protection/pricing power is driven TCL has all the attributes I seek in an investment. It is by TCL’s toll mandates. In a low inflation world, the Australia’s “monopoly toll bridge” and if you believe ability to raise prices and therefore revenue is a major in the Warren Buffett approach to long-term structural advantage. investment, you should own it. Thursday 31 March 2016 03 When you are next driving along a TCL owned toll road, ask yourself: why don’t I own these shares? The best investment ideas you see with your own eyes in everyday life. The AIM Global High Conviction Fund owns TCL shares. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Thursday 31 March 2016 04 6 turnaround stocks to consider by Tony Featherstone Identifying turnaround stocks is fraught with danger. A Third, is there a near-term re-rating catalyst? It’s no “market darling” falls from $1 to 20 cents and naïve good buying a turnaround stock if it takes years to investors assume it is a bargain. Then it falls to 10 recover. Many resource stocks fall into that category. cents, wiping out half the new investor’s capital in a Form a view on what could re-rate the stock and blink. when. If a re-rating catalyst is hard to find, or years from eventuating, think twice about buying. Confusing price and value is a sure-fire way to destroy capital. As is relying on share prices to form a Fourth, combine fundamental and technical analysis view on company value and anchoring expectations with turnaround situations. I favour fundamental over to the past. Those who do, inevitably buy stocks technical analysis, but believe charting is especially whose share-price pattern resembles a tombstone, useful in identifying when to buy turnaround and ride them all the way to the corporate graveyard. situations. Identifying fallen stocks that spike higher after a long period of consolidation or sideways That does not mean investors should avoid all movement can be rewarding. potential turnaround situations. The market sometimes overreacts to the slightest disappointment, Fifth, understand the risks. Stocks in steep leaving a stock badly oversold. Contrarians who downtrends have a habit of falling further than the recognise the value snap up incredible bargains.

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