Aussie Ebbs on Politics, Flows on Economics

By David Dittman • March 21, 2013 • Pacific Digest

I refer not to a picket-sign-pocked workers’ strike–or “industrial action,” as such events are known Down Under–but to the continuing strife at the top and throughout Australia’s Labor Party, headed by vulnerable as vulnerable can be Prime Minister Julia Gillard.

The Australian dollar dipped below USD1.0380 in early trade on March 21 from USD1.0406 after Labor backbenchers engineered a challenge to Ms. Gillard’s leadership of the party atop a minority government.

However, the aussie bounced back to a six-week high of USD1.0441 after the release of a solid reading for the HSBC Flash China Manufacturing Purchasing Managers Index (PMI) for March

During a midday press conference now former Minister for Regional Australia, Regional Development and Local Government and Minister for the Arts Simon Crean asked Ms. Gillard to call a “leadership spill”–which, translated from Australian, is a declaration that the leadership of a parliamentary party is vacant and open for reelection.

The intramural squabble resulted in the status quo ante, as Ms. Gillard remains the Labor Party leader and is now virtually assured of enduring in that post until the Sept. 14, 2013, Australian federal election.

Opposition Leader Tony Abbott, exploiting Labor’s chaos, moved to suspend normal work before Parliament in favor of a debate on a no-confidence motion in Ms. Gillard’s prime ministry. Although Mr. Abbott’s move was supported by several independent members of parliament the opposition didn’t have the numbers to drive to open such a debate.

Mr. Crean, who from November 2001 through November 2003 headed the Labor Party, endorsed a return by Kevin Rudd, the former prime minister and Labor leader who Ms. Gillard supplanted in June 2010.

Ms. Gillard, during Question Time in Australian Parliament, acquiesced to Mr. Crean’s request–after she sacked him from her cabinet–by challenging aspirants to “take your best shot.” She and Deputy Prime Minister and Treasurer of Australia Wayne Swan were reelected unanimously.

Mr. Rudd, for his part, demurred. According to The Australian:

About 20 MPs went to Mr. Rudd’s office to urge the former prime minister to challenge Ms. Gillard but shortly before the 4.30pm caucus ballot he announced he would not run, ending the leadership challenge.

“When I say to my parliamentary colleagues and to the people at large across Australia that I would not challenge for the Labor leadership, I believe in honouring my word,” Mr. Rudd said.

“I said that the only circumstances under which I would consider a return to the leadership would be if there was an overwhelming majority of the parliamentary party requesting such a return, drafting me to return, and the position was vacant. I am here to inform you that those circumstances do not exist.”

The Rudd-Gillard rivalry has left Labor unsettled for nearly three years. Ms. Gillard was Mr. Rudd’s deputy when she challenged his leadership in June 2010 after his support among party members plumbed depths so low that he stood aside without a vote.

Ms. Gillard led Labor to a win in August 2010 federal elections that put her atop a minority government. Her job has been complicated by the need to engage support from Green Party and independent members of parliament. She’s endured a rocky tenure but has yet to gather significant momentum among the general electorate.

Her cause wasn’t helped by Mr. Rudd’s February 2012 resignation as Foreign Minister. At that time he outwardly challenged for his old job but was beaten soundly, by a vote of 71 Labor members to 31. He became a backbencher, noting that it was “time for these wounds to be healed.”

Supporters of Ms. Gillard still harbor ill will toward Mr. Rudd for his tepid support during the August 2010 election. And there lingers the suspicion that this latest move was all about salving his old wounds.

At any rate, whether this is a welcome clearing of the decks–still with more than sufficient time ahead of the long-off, in terms of Australia’s electoral history–ahead of the September vote is, obviously, still to be determined.

As of a March 18, 2013, Nielsen poll, however, Ms. Gillard is in dire straits. Labor’s support is at 31 percent, while the Abbott-led coalition remains steady on 47 percent.

The two-party preferred split has the government on 44 percent and the opposition at 56 percent, a 6 percent swing to the coalition from the 50-50 result in August 2010. If this lead holds up Mr. Abbott would enjoy a landslide victory.

Mr. Abbott is now preferred as prime minister by 49 percent of voters versus Ms. Gillard’s 43 percent. Ms. Gillard’s support has slipped by 2 percentage points since the last Nielsen survey. Voters also prefer the return of the old leader for the Labor Party, with 62 percent supporting Mr. Rudd against Ms. Gillard’s 31 per cent.

This political chaos, however, was subsumed by another sign of stability out of the Middle Kingdom, as the HSBC Flash China PMI for March showed accelerating activity, the 51.7 reading up from a final reading of 50.4 in February.

The aussie spiked from an intraday low of USD1.0364 to USD1.0446 after HSBC released the report.

A PMI reading above 50–for the overall index as well as for the sub-indexes that contribute to the whole–indicates an overall increase in that variable. Readings below 50 indicate an overall decrease.

The preliminary figure–which was compiled March 12 through March 19 from 85 percent to 90 percent of the approximately 420 purchasing executives for manufacturing companies that participate in the full survey–suggests steady momentum for the Chinese economy.

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, attributed the improved March reading to strong new orders and production growth. Mr. Qu noted that this “implies that the Chinese economy is still on track for gradual growth recovery.”

“Inflation remains well behaved,” he added, “leaving room for Beijing to keep policy relatively accommodative in a bid to sustain growth recovery.”

Digging into the various components of the survey, Output, New Orders, New Export Orders and Quantity of Purchases all accelerated at a faster pace than they did in February. Employment also increased but at a slower pace than it did last month. Backlogs of Work, meanwhile, broke above 50, as did Stocks of Finished Goods.

Output Prices and Input Prices both reversed course and showed decreases for March after coming in above 50 in February. Stocks of Purchases decreased at a slower rate. Suppliers’ Delivery Times lengthened in March after shortening in February.

The Roundup

New Hope Corp Ltd’s (ASX: NHC, OTC: NHPEF) acquisition of oil and gas producer Bridgeport Energy Ltd, originally envisioned as a means of reducing fuel costs at its core thermal coal operations, has now become the focus of the company’s plan to diversify its resource output in the face of continuing low prices for its primary product.

New Hope bought the remaining part of Bridgeport that it didn’t already own for AUD45 million in September 2012. New Hope’s coal mines require 40 million liters of diesel fuel per year to run. Management plans to counteract the fuel risk and the cost by expanding its oil and gas operations.

At the same time, Managing Director and CEO Rob Neale noted during the company’s fiscal 2013 first-half (ended Jan. 31, 2013) conference call that New Hope can enjoy higher margins from its oil and gas production than it can from its coal output.

But despite declines in revenue, pre- and post-tax profit and earnings per share (EPS), New Hope maintained its interim dividend level at AUD0.06 per share. And the share price on the Australian Securities Exchange (ASX) has actually bounced from a 12-month closing low of AUD3.82 on March 18, 2013, to AUD3.97 as of the end of the day March 20.

Management reported revenue for the first six months of fiscal 2013 of AUD322.9 million, a decline of 16.9 percent from the prior corresponding period. Net profit before tax was off by 8.4 percent to AUD93.2 million, while statutory net profit after tax (NPAT) was AUD68.8 million, down 31.9 percent from a year ago.

Management noted that the pre-tax profit was as strong as it was, despite the negative impact of weaker prices for exported coal, a strong Australian dollar and lower production volumes, because of a “strong focus on operational efficiencies.” New Hope reported an 11.7 percent reduction in production costs on a per-metric-ton basis.

The 2013 first-half NPAT figure suffered by comparison because due to a one-off tax benefit in the prior corresponding period that “largely offset” income tax expenses from recurring operations. Management also noted that New Hope “remains well-positioned to weather the current downturn in the broader coal sector with further cost reduction initiatives planned.”

EPS was AUD0.083, down from AUD0.122 a year ago. The payout ratio for the period was 72.3 percent.

Cash on hand at the end of the period was AUD13.3 million, down from AUD83.6 million a year ago due primarily to the Bridgeport acquisition. New Hope, however, remains debt free and in good position to fund its oil and gas as well as its coal-to-liquids endeavors.

Clean coal production totaled 3 million metric tons, while export sales were 2.7 million metric tons, declines of 5.2 percent and 13.4 percent, respectively. Management attributed lower clean coal production to a planned shutdown in December and January as well as the impact of unusually high rainfall during the period.

Export sales were lower than the record figure in the prior corresponding period due to deferrals in customer shipping schedules.

Average revenue per metric ton of coal sold was down 8.1 percent over the first half of 2013 compared to the first half of 2012. Management noted that spot pricing had improved “marginally” from November lows in the mid-USD80s to around US92 per metric ton at the Newcastle export terminal as of the time of its first-half report. Prices have weakened again this week, with the active Newcastle contract hitting USD87.55 on March 21.

The Acland mine continued to deliver exceptional productivity, with 2.4 million metric tons of coal produced. West Moreton operations produced 0.64 million metric ton of coal, a 2 percent year-over-year increase. The upgrade of the shiploader at the Queensland Bulk Handling facility was completed, and 4.2 million metric tons of coal was exported through the terminal.

Mr. Neale tipped during his presentation to at New Hope’s annual general meeting (AGM) in November 2012 that the company, in light of lower coal prices, would emphasize low-cost efficient production as price declines in Australian dollar terms “occurred sooner and to a greater magnitude than previously forecast.”

As Mr. Neale also forecast at the AGM, New Hope’s operating results for the first half of fiscal 2013 were lower than year-ago results due to lower export thermal coal prices, a stronger Australian dollar and increasing pressure on offsite transportation costs, including rail costs on a per-metric-ton basis.

Bridgeport will now play a central role as New Hope takes further steps to mitigate the ongoing impact of a prolonged coal slump. Since September 2012 Bridgeport has produced 16,833 barrels of oil attributable to New Hope.

The unit’s drilling and exploration program has also progressed, as following the conclusion of the half-year management reported intersection with oil in all six holes drilled at the Inland and Utopia fields. These wells were completed for production and will be brought online over the next quarter.

Management noted in its half-year results presentation that it plans to buy more drilling rights to oil and gas fields with existing or near-term production possibilities.

The company expects weak thermal coal markets and a strong aussie to negatively impact revenue and margins in the second half of the fiscal year. Management forecast coal production for the full year in the range of 5.8 million to 6 million metric tons.

In light of the coal downturn New Hope plans to cut costs even further; to seek out “attractive” acquisition opportunities; and to boost its oil and gas business through development and acquisitions.

Based on its solid balance sheet, its ability to effectively manage a difficult environment for its core output and its cohesive plan to diversify its operations, New Hope Corp remains a buy under USD5.

Spark Infrastructure Group (ASX: SKI, OTC: SFDPF), which we added to the AE Portfolio Aggressive Holdings in February 2013, reported a 12.8 percent increase in total regulated revenue to AUD1.63 billion, as aggregated earnings before interest, taxation, depreciation and amortization (EBITDA) grew by 10.4 percent to AUD1.299 billion. Underlying net profit after tax (NPAT) ticked up by 4.1 percent to AUD173.9 million. Operating cash flow inched up, also by 4.1 percent, to AU178.4 million.

Management declared a final distribution of AUD0.0525 per share, bringing the total distribution for 2012 to AUD0.105 per share, a 5 percent increase versus 2011 and in line with previous guidance. The payout ratio for the year, based on operating cash flow per share, was 78.1 percent.

Spark has guided for a 2013 total distribution of AUD0.11 per share, 4.8 percent higher than 2012.

Management noted that electricity volumes “again demonstrated resilience in a challenging environment” marked by “difficult economic conditions, price rises and changing consumer patterns.” Spark attributed its revenue growth to reliability and solid service as well as higher tariffs due to favorable regulatory decisions.

Revenue growth amid such circumstances is a good sign Spark and its operating entities will be able to support capital programs that ensure that that reliability and solid service persist for the long term.

Cash flow for the period supported CAPEX as well as reductions in leverage and distributions to shareholders, “without the need for any new equity before 2015,” according to management.

Spark paid down AUD30 million of fixed-term debt during the period.

Spark’s “asset companies”–SA Power Networks and Victoria Power Networks, the holding company for CitiPower and Powercor Australia–posted electricity distribution revenue growth of 13.9 percent to AUD1.51 billion. Net CAPEX was up 2.4 percent to AUD864.7 million.

The Regulatory Asset Base (RAB) expanded by 9.7 percent during 2012 to AUD8.08 billion, while net debt-to-RAB declined by 1.8 percent to 79.7 percent. Spark executed debt raisings and refinancings in the Australian corporate bond market and the US private placement market of approximately AUD1.2 billion during the year and now has no long-term senior debt refinancing until September 2014.

Management noted in that the asset companies “are in the middle of their respective five-year regulatory periods, with the businesses growing strongly through the delivery of the Australian Energy Regulator (AER) approved capital expenditure programs through to 2015.”

Spark reaffirmed previous guidance for distribution growth of 3 percent to 5 percent per year to 2015, with such distributions “fully covered” by operating cash flows. Management will continue to target a payout ratio of approximately 80 percent of standalone operating cash flow to 2015, when the current regulatory period ends.

Spark Infrastructure, which has generated a total return in US dollar terms of 4.3 percent since Feb. 15, 2013, and currently yields 6.3 percent, is a buy under USD1.80.

Here’s where to find discussion of earnings for AE Portfolio companies, most of which just reported fiscal 2013 first-half results. Some posted results for 2012, while others report on completely different schedules. We’ve included the next reporting dates for those companies. Please consult the Portfolio tables at www.AussieEdge.com for current advice.

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