Month: June 2019

Hot stock: BHP

What’s new? To dig an enormous hole in South Australia, or not to dig? That is the question for the BHP Billiton chief executive Marius Kloppers.
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The company is due to make its final investment decision on the $US30 billion Olympic Dam expansion project by the end of this year, but it may delay the call.

As world economic growth slows, demand for commodities follows, bringing prices down. That changes the investment-return calculations for all resources projects.

Such a confluence of factors moving in the wrong direction is giving BHP cause for pause over not only the Olympic Dam expansion but possibly some of its other major projects – such as the outer harbour development at Port Hedland.

It is important to remember that BHP has a treasure trove of world-class ore bodies that will be developed when conditions are right. Chinese GDP growth is in a deliberate deceleration from above 10 per cent to the more sustainable target level of about 7.5 per cent, but BHP believes the long-term demand for steelmaking ingredients – iron ore, metallurgical coal and manganese – remains firmly entrenched.

BHP’s recent foray into the US shale-gas rush may face an embarrassing writedown on the investment, but here again the long-term prognosis for this industry is very appealing.

The US economy will use the enormous shale-gas reserves to reignite its industrial base, reduce its dependence on imported oil and transform its power and transport industries all based on cheaper fuel.


BHP is due to announce its annual financial result on August 22.

The numbers may not appear as eye-popping as the commodity price-spiked record result from last year, but they will be impressive enough.

The real interest will be in the commentary surrounding the company’s cash-flow forecast, which in turn will depend on the planned capital-investment program.

Early last year, the company was parading its plans to invest $US80 billion over five years across a range of projects based on the cash-flow boom from the previous few years. That strategy now looks like it needs to change.


From almost $50 a share in April 2011, BHP’s share price has steadily slipped to the low $30 mark and now sits just above that at $31.60.

The stock has underperformed the broader ASX200 index so far this year by 12.5 per cent.

Worth buying?

If your definition of long term is the time until your next flat white, this stock is not for you.

BHP’s assets take years to plan and develop, billions of dollars to build and then decades to extract the prodigious quantities of ore and petroleum.

If your superannuation portfolio is also a good few years away from harvesting, then make sure you have BHP in it.

Greg Fraser is an analyst at Fat Prophets sharemarket research.

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Tussle over transparency

The federal government and financial regulators want super funds and managed funds to disclose their portfolio holdings.
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The funds support transparency but are working on a way of disclosing their holdings that they say will be meaningful to fund members.

They are in negotiations with the government and regulators to finalise a protocol for disclosure in time for the start date of July 1 next year.

Meanwhile, fund members have been kept wondering how their super is invested. It is not an esoteric point. Would mandatory disclosure of investment holdings have stopped people from investing in Trio Capital and Astarra, for example?

Would the fraudulent super funds have attracted investors had those investors known that Astarra had more than $100 million invested through a company in the British Virgin Islands?

Could full disclosure by managed funds have increased the scrutiny of mortgage funds – funds that were frozen during the global financial crisis, with capital losses to retiree investors?

Some of the mortgage funds that failed were later found to have extensive related-party dealings. They were raising money from investors and lending it to property developers through corporate entities related to the mortgage fund or to the mortgage fund’s directors.

Disclosure among most super funds and fund managers is very limited – usually to the 10 biggest holdings.

Listing investments and the portfolio weightings for super funds will mean the listing of hundreds of investments, but they will help fund members and researchers assess risks.

Some funds argue it is expensive and the listing of hundreds of investments would be meaningless to fund members. But Morningstar Australia’s chief executive, Anthony Serhan, who has been pushing for full disclosure, says it is a matter of principle that super-fund members and investors in managed funds know how their money is invested.

”We are talking about a huge amount of money in retirement savings and a system of forced savings, and for those who manage retirement savings, there are expectations that they are transparent about the sort of securities they hold,” he says.

He says the costs would be minimal if disclosure was introduced gradually.

Some fund managers argue that disclosure of their portfolio holdings would allow investors to buy the shares the funds own and rob them of their intellectual property.

Serhan rejects that argument.

He also points out that Australia is one of the few countries in the world that doesn’t require fund managers to disclose their holdings.

The Australian Securities and Investments Commission is understood to favour a maximum 90-day delay in disclosing portfolio holdings for managed and super funds.

Such a delay would help protect intellectual property and give super funds – especially those with money in unlisted and more complex investments – time to accurately report on their holdings.

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Partners get results

Joining forces … the boards of not-for-profit super funds have a balance of staff and employers. Illustration: Karl Hilzinger Look around the world and one thing about Australia stands out (other than our obsession with sport): the way we’ve constructed and run our retirement incomes system.
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Most attention is usually paid to the sheer size of the retirement savings pool. We use figures I once thought were only used in astronomy – $1.4 trillion today, rising to $4 trillion by the mid-2020s – which will soon put Australia in the bronze, or even silver, medal class.

However, less remarked upon is the unique method Australia uses to govern not-for-profit superannuation funds, which account for $450 billion of the national super pool.

Long ago, in the 1980s, the basic plan was constructed to ensure the system was well managed and governed on behalf of Australia’s working population. It was, at heart, a simple idea: set aside, by law, some of each employee’s salary to provide for their retirement, elect an equal number of staff and employer representatives, make sure they are well trained, and give them the freedom and responsibility to invest the growing pot of money. These are the so-called industry and government funds with equal trustee representation on their boards that are pledged to return all profits to members – hence the name, ”not-for-profit”.

It’s been a great success by any measure. For more than 25 years, there has been spectacular growth among the industry and government funds. Collectively, they have easily outperformed the so-called ”professionals” running retail funds, who operate out of the major banks and insurance companies.

The regulator’s best estimate puts them ahead by close to 2 per cent annually.

There has been no major, or even minor, collapse or scandal in the sector, which certainly can’t be said of some parts of the financial system: ask investors in Trio, Storm Financial or Prime. This is largely thanks to close attention by regulators, and to the trustees’ determination to make sure Australia’s outstanding policy initiative of the 1980s isn’t squandered.

But in recent months, there have been shrill calls from certain quarters for this success story to be abandoned. What looks to me like a manufactured ”debate” has focused on the way industry-fund boards are constructed, with opponents calling for more ”independents”.

Now, no one could sensibly argue about the importance of independence. Like summer by the beach, cute kids and gold medals, it’s pretty close to being a universal verity. But the problem is, the boards of industry funds are currently as independent as the boards of any public company in Australia – more so, in fact, as few, if any, have representatives of management on them. So if that’s not the issue, what’s behind the push?

My best guess is commercial self-interest and old-fashioned anti-union prejudice. While the boards of the not-for-profit funds typically have equal representations of employer and employee trustees, it suits conservatives to call the funds ”union controlled” – something that is patently wrong.

The trustee boards of industry funds such as Australian Super, Cbus, Hesta, HostPlus – and my own fund, Media Super – have equal representation of employers and unions. In my experience, it has been one of the most successful experiments in getting labour and capital to work constructively together that you’ll find anywhere, any time.

Could the system be improved? Undoubtedly. As industries grow and develop, the way they are governed can improve. But getting the balance right is important. If there’s a need for some super-fund boards to seek special talents, they can under the current law.

Across the 80 industry and government funds represented by the Australian Institute of Superannuation Trustees, there are 60 ”unaligned” trustees who have been chosen by their boards to fill gaps in what the regulator calls a board’s skills matrix. Two industry funds have boards structured as three employer, three employee and three ”independent” directors. In other situations, boards have chosen a non-aligned chair. But forcing an influx of accountants, lawyers, financial planners or others from the professional-company-director class isn’t the solution.

Flexibility to manage the variations is already there. Most boards would be comfortable adding non-aligned directors as long as the core element of the successful model remains: equal representation on the boards of not-for-profit super funds. It’s worked a treat so far – and with far superior results to any other way of managing Australia’s precious natural resource, its retirement incomes savings system.

Gerard Noonan is chair of industry fund Media Super and a former editor of The Australian Financial Review.

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Missing contributions

Sour taste … employees are missing out on billions of dollars of unpaid super. Illustration: Simon BoschMore than 19,000 people complained to the Australian Taxation Office in the past 12 months that their super was being paid late or not at all by their employer.
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The ATO can’t yet say how much money is involved, but the previous year nearly 18,000 complaints resulted in $329 million finally finding its way to its rightful owner.

That’s an average of about $18,200 a person – a big chunk out of anyone’s super when you consider it will be missing for at least a few months and the potential impact of such a gap compounded over many years.

Since 2005, the ATO has chased up some $1.7 billion in compulsory super (including interest for late payment). No wonder the Tax Office says in its recently released annual compliance program that, among other things, it will again be ”focusing on businesses meeting their superannuation obligations”.

It’s the fourth year in a row that its targets have included unpaid super.

The ATO will be scrutinising, in particular, cafes and restaurants, real estate agencies and home-building businesses: areas where people tend to work as casuals or subcontractors.

The chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says she welcomes putting employers under the microscope.

”We should never forget that superannuation is actually deferred wages, which means it’s the employees’ money, not the employers’,” Reynolds says. ”And 9 per cent of anyone’s wage is a significant amount of money.”

While only a small percentage of employers don’t meet their obligations, it’s serious for the workers involved, with potentially far-reaching consequences for their retirement, Reynolds says.

However, she’s concerned the regulator isn’t resourced well enough to follow up all the complaints it receives. ”Complaints aren’t handled quickly enough,” she says.

Asked how long it takes to resolve a complaint, the ATO says that in the 2011 financial year the average time taken, including debt collection, was 97 days. That’s an improvement on the average of 196 days the previous year.

Reynolds says another issue is that it’s not always clear to people to whom they should complain. ”Moreover, as the complaint is about their employer, this can put the employee in a difficult position,” she says.

The ATO says employees should speak to their employer first, asking how often super contributions are being made and into which fund. They should then check the latest statement from their fund and contact the fund to confirm more recent payments have been arriving. If they still believe their employer isn’t paying enough, or any, super, they can file an inquiry at or phone the ATO on 13 10 20.


Reynolds says a number of industry funds use the Industry Funds Credit Control debt collection agency to chase up employers who aren’t paying.

”If you work in an industry where employer compliance is a known problem, it’s worth checking if your fund provides this service before signing up,” she says.

The chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, says compliance by employers is 96 per cent, which is unusually high by international standards. ”But that doesn’t mean we shouldn’t aspire to 100 per cent.”

One of the aspects of the Stronger Super program that the ASFA supports is the requirement for employers to report on payslips how much super is being paid and into which fund, she says.

This legislation was passed in June and the new rules will apply from July 1 next year.

”These sorts of details will give employees a much better idea of whether or not their employer is falling behind in contributions,” Vamos says.

Many super funds now offer 24/7 access to your account via the web, so people can also check this way that contributions are showing up, she says.

In addition, regulations requiring employers – large and small – to adopt electronic payment systems for superannuation are set to come into effect in 2014 and 2015.

According to Reynolds, both of these measures ”should make it easier for employers to meet their obligations”.

Reynolds says non-payment of super can be the ”canary in the coalmine” – an indication that a business is in financial strife. ”There is anecdotal evidence to suggest that some employers defer worker superannuation payouts as a way to deal with cash-flow problems,” she says.

In addition to withholding or delaying super payments until the 11th hour – in some cases, for up to a year – there are problems with so-called phoenix companies, particularly in the building industry, where businesses are actually set up to collapse before they pay their debts and super obligations, she says.

In response, there are now proposals for company directors to be held liable for unpaid superannuation.

Currently, employers who fail to make contributions face a superannuation guarantee ”charge”, which is made up of the contributions shortfall, 10 per cent interest and an ATO administration fee. Further infractions can result in the charge being doubled.

Salary sacrifice

The rules are clear when it comes to compulsory super: employers must make payments at least quarterly and the money must reach the fund within 28 days of the end of each quarter.

But what about salary sacrifice – money you voluntarily contribute to super from your pre-tax income?

What stops an employer from dallying, holding on to the money to smooth their cash flow or to earn a bit of interest?

”Where contributions are voluntary, if it’s coming out of your salary, it should be immediately paid to the super fund,” the chief executive of the ASFA, Pauline Vamos, says. ”There are no rules around that, but it’s important employers understand it.”

So who do you turn to if you can’t resolve a salary-sacrifice issue?

It is far from simple.

The ATO says that with salary-sacrificed money beyond the super guarantee, employees ”may have rights to enforce payment of foregone salary or wages under industrial law”.

Key points

■ Non-payment of super totals millions of dollars a year.

■ Almost 20,000 complaints were made last year.

■ The Australian Taxation Office handles most complaints.

■ Voluntary salary sacrifice falls outside the ATO net.

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Reporting season could dim forecasts

Will analysts’ cheery dispositions withstand the blowtorch of reporting season?A CHEERY consensus looks like it has given way to an uneasy consensus in the near term, yet analysts in general have retained a cheery disposition for 2013 for the market in aggregate. It seems unlikely this view will completely withstand the blowtorch of the August reporting season.
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Professional investors and analysts have now entered the month-long bombardment of news, numbers and mind-numbingly long daily bulletins from research departments that is the August profit-reporting season.

The focus should be firmly on the outlook, although there will always be the odd surprise in terms of reported financials for the year or half-year that has recently ended.

A trend looked to have been set for the industrials last week when staffing, maintenance and project services group Programmed Maintenance Services cautiously noted weak market conditions, following laboratory operator Campbell Brothers’ report of ”real signs on the ground” of weakness in the global resources sector (for which Campbell Brothers conducts assays).

It will be interesting to see how analysts adjusted their forecasts overnight last night for Bradken, which makes cast, machined and fabricated components, primarily for the mining sector.

While Bradken yesterday reported a record order book and expected to maintain production at full capacity in the current six-month period, it noted ”limited visibility beyond that due to the global economic uncertainty” and said it would minimise capital expenditure ”until the outlook becomes clearer”.

These outlook statements were reminiscent of those that have been coming out of the US quarterly reporting season in recent weeks.

And drawing the two together, US-based engineering group Jacobs Engineering Group, a $5 billion market-cap company that is understood to have shed some professional staff in Australia recently, was a little downbeat with its succinct assessment of issues facing Australia following its own results statement last week.

A Jacobs executive told analysts: ”Australia is troubled, more so, I think, than most of the rest of the world. There’s a lot of games being played in Australia vis-a-vis the political situation and various taxes and royalties on the extraction of resources.

”And I think a couple of our customers are seeing that as an issue for where they’re going to invest. And so I’d put Australia a little bit on the negative side or at least not as positive as some of the rest of the world.”

Jacobs’ view appears to be at odds with that of construction leader Leighton, which stated in its half-year results announcement yesterday that ”contrary to commentary suggesting a decline in investment activity in Australia, the group’s addressable markets have never been stronger”.

Which brings us back to current expectations for earnings growth in the year ahead. Using calendar-year-adjusted data, calendar 2012 earnings growth expectations for resources segment of our market, as represented by the S&P/ASX 200 Materials Sector Index, have plunged from 4.4 per cent on June 30 to minus 10.1 per cent now. But growth expectations for 2013 have hardly moved at all.

The materials sector is somehow supposed to bounce back with just short of 22 per cent earnings-per-share (EPS) growth in 2013 – even though equity analysts’ colleagues across the hall in the commodities section are projecting the copper price to decline marginally in 2013 from its current level and nickel to just hold its own (while the Bureau of Resources and Energy Economics has projected an iron ore price decline of 3.6 per cent in the 2013 financial year after an 11 per cent fall in the current financial year.

For the overall S&P/ASX 200, the aggregate growth estimates tally to 1.9 per cent for 2012 and 11.4 per cent for 2013. Once again, these expectations represent a significant trimming for 2012 but not for 2013 (at June 30 the expectations were 8.1 per cent and 12.7 per cent, respectively).

Given the current status of the global economy, we’re not convinced the aggregate 2013 expectations are realistic.

Interestingly, the aggregate consensus EPS growth rate for the smaller companies represented by the S&P/ASX Small Industrials is a far more robust 14.9 per cent for 2012, rising to 15.7 per cent in 2013.

We suspect these aggregates will also come under downgrade pressure but the starting point is far better than for the large, company-oriented ASX 200.

Martin Pretty is head of research at Investorfirst Securities.

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