Selector March 2009 Quarterly Newsletter

March2009 9SelectorFundQuarterlyNews sletter#23
Dear r Investor, s this ne ewsletter wh here we end ded our last t. In fact, if i we reprod duced the We start introd duction to th he December r 2008 quart terly newsletter word fo or word, it would w have as mu uch relevanc ce today as it t did then. T The rumbling g Mack truck k that we spo oke of has arrive ed. It is ful lly laden with w more li iquidity than n even the most optim mistic had expec cted. And th he jury is cer rtainly out on n what the unintended consequence es of this action n will have e on all of us. Suffice e it to say they are re eal and sign nificant in magn nitude. ndly, we not ted the move e by investor rs piling into o low yieldin ng US secur rities. And Secon by lo ow we mean nt zero. In sh harp contras st, equities remained r on n the nose despite d the histor rically cheap p valuations on offer. Inv vestor fear ru uled. e about the need n to loo ok rather tha an turn away y at a time when the Finally we spoke damentals ap ppear to hav ve become irrelevant i . The dilutive e capital rais sings, that fund were largely avoided, contin nued unabate ed from the likes of Fair rfax Media, Insurance ralia Group and a Westfiel ld Group to name just a few. In all, l listed compa anies have Austr raised d upwards of o $60 billi ion from ex xisting share eholders sin nce the finan ncial year began n, while the market has shed s close to o 53% since its peak in N November 20 007. t one thing has h remaine ed inescapab ble that of o an ever increasing i Yet throughout, numb ber of qualit ty businesses offered up p to investor rs, at knock-down prices. A view reaffi irmed time and again as compani ies reported d their finan ncial results s. No one doubt ted that thing gs would be e tough and i in many case es bad, but th he sell-off ha as been so extrem me that valu ue was almos st jumping o off the screen n and onto ou ur laps. e global equ uity markets have staged d a dramatic turnaround from lows reached r in While mid March M we will w leave th he macro ana alysis of wh here we stan nd today for r others to ponde er. Some cau ution the late est move as a bear mark ket rally whil le others hav ve jumped the ot ther way and d now see a clear bottom m in place. o part, we will w aim to do d three things; For our ly, we will continue c to carry c out an nalysis on as s many busin nesses as we e possibly Firstl can, at a a time when extreme value v is on hand. h ndly, we wil ll look to rep position the portfolio ho oldings to tak ke advantag ge of these Secon situat tions where circumstanc ces allow. y we will try to com mmunicate our o investm ment process as clearly y and as Lastly consi istently as we w can, so th hat our inve estors have the t confiden nce to stay the t course durin ng a historica ally difficult period.
SelectorFundsManagem mentLimited A ACN102756347AFSL225316 Level3,66 6HunterStreetSydney S NSW20 000,Australia Telephone612 280903610Web bwww.selector rfund.com.au
If we e can succeed d on all three e, then we w will have the makings of f delivering significant s inves stment gains over the ens suing years ahead. a ards Rega y Scenna Tony Victo or Gomes Corey y Vincent ctor Funds Managemen M nt Limited Selec
Table e of Conten nts
Page 1: Letter to investors ance March Quarter Q 2009 9 Page 4: Performa ect Business s Page 4: The Perfe wn memory lane Page 10: Trip dow ment | Bonds | Bills Page 10: Table 1. Seventies | GDP | CPI | Unemploym G | CPI | U Unemploym ment | Bonds | Bills Page 11: Table 2. Eighties | GDP G | CPI | U Unemploym ment | Bonds | Bills Page 11: Table 3. Nineties | GDP ury | GDP | C CPI | Unemp ployment | Bonds | Bills Page 12: Table 4. New Centu Parsons adde ed to the por rtfolio Page 13: WorleyP rsons financi ial snapshot Page 15: Table 5. WorleyPar ment Interve ention Page 16: Governm ny visit diary y Page 17: Compan o statistics Page18: Portfolio 3
Perfo ormance Ma arch Quarter 2009 w turned out to be a bumpy q quarter that required so ome nerve the Fund In what under rperformed falling f 3.6% %. The All Or rdinaries Ac ccumulation Index fell 1.7% while the All A Ordinaries Index decl lined 3.5%. t current financial year, y the F Fund has ou utperformed d the All Ordinaries O For the Accu umulation Ind dex by 4.5% %. Portfolio p performance e statistics pa age 18. P Business The Perfect a always looking l for the perfect business. One O that, as s if on tap, delivers a We are const tant stream of o rising prof fits and flow wing paymen nts of tax effi ficient divide ends. erfect business? To us its strong profits, fat marg gins, few com mpetitors, So what is the pe tablished rep putation and d unquestiona able brand lo oyalty. an est b or perh haps media stocks, stock k exchanges, toll roads, a home grow wn retailer The banks like Woolworths W s or a drug company l like CSL co ome quickly y to mind. Using U the param meters above e and the pas st decade as a guide, man ny seem to f fit the bill. ne ventured offshore, na ames like M Microsoft, Coca-Cola, G GE, McDona alds, J&J If on would d certainly push p their way w into cont tention. Wh hile the list s seems long, things are not al lways what they t seem. t companies s become great g compa anies because they cha art a course e without Great know wing their ultimate u des stination. In n some instances, the benefits flo ow to the pione eers, such as s Google. Ot thers, like H Harvey Norm man have become leader rs through mark ket dominanc ce and strong g operational execution. any instance es, the moats s that have p protected the ese business ses have bee en so deep In ma and wide w that the ey provided the shelter needed n to de eliver a grow wing stream of profits and dividends d wi ithout fear of f reprisal. y the moa ats that prote ected great businesses b in n the past no ow appear vulnerable. v And yet, The one o thing ab bout change is that it is c constant. Sta and still and the advanta age is lost. If the e events of 2008 have taught us a anything, it is that the notion of th he perfect busin ness is just that, a noti ion. Where an advantag ge enjoyed by one, is doggedly pursu ued and chipped away by y others. eart, one wo ould be hard pressed to o identify many m perfect t business With hand on he els. Monopoly positions, once enjoy yed by the te elecoms and media busin nesses are mode now vulnerable v to o governmen nt intervention and game e changing n new technolo ogies like
the in nternet. The fat margins s that have characterised c d such enter rprises are now n under attack k. And with h each attack k, more of th he enterprise e is exposed d. Managem ment teams that had h built ope erations on historical h co ost structures s and reliabl le profit mar rgins now fight a rear guar rd action. Once O great b brands and business ico ons like Len nd Lease, fax Media an nd Wesfarme ers, to name a few, have surely lost t their advanta age. Fairfa eat business is not just the t business itself but al lso the peop ple who run it. Today, A gre food retailer Woolworths is recognised as a truly ou utstanding b business, the e bluest of blue chip compan nies. And while w it has h had a remark kably strong track record d over the d its instructive i to o recall its co orporate hist tory. past decade, orths began in 1924, in Sydneys Im mperial Arca ade with an emphasis Life for Woolwo roviding goo od things at t cheap prices. With its s unproven business b off fering, the on pr comp pany listed with w only friends fr and p promoters in support. T The store became b an imme ediate succes ss. hought had been given to running a chain of stores s but an n opportunit ty to gain No th prem mises on extre emely attrac ctive terms changed all th hat. It seeme ed that the public p was in ne eed of the Woolworth hs offer and d despite th he Depressi ion years, the t group prosp pered. lworths wer re pioneers. . They und derstood the power of advertising, , utilising Wool newspapers and the relative ely unknown new med dia of radio, with great t success. re of overse eas trends, the t group c continued to o look outw ward, introdu ucing new Awar wareh house facilit ties in prepar ration for growing dema and. n marketi ing styles, in ncluding the e first Self Service var riety store They pioneered new in 19 955. Custom mers no longe er waited to o be served but b helped themselves t t product to befor re paying at a the chec ckout. At the rear of the store es, Woolwo orths also exper rimented wit th the conce ept of offerin ng a limited range of grocery items including fresh vegetables, delicatessen n items and f fresh packag ged meat. lworths it se eemed had co orrectly read d the pulse of o the consum mer. Rapid expansion e Wool and acquisitions a of existing competitors s soon follo owed, culmin nating in th he groups first supermarket opening in i 1960. Re egional expansion of d drive-in sup permarkets kly spread. This T was fol llowed by an n expansion n into the app parel marke et with the quick acqui isition of the e Rockmans group. 973, the com mpany introd duced the Wo oolworths Own O Brands product line e. In order In 19 to qu ualify for inc clusion, the 200 2 items ch hosen had to o be at least e equal in qua ality to the nation nal leader but be sold at a a cheaper price. By 19 974, with 50 0 years unde er its belt, the gr roup celebra ated with reta ail sales of $ $702 million n and net pro ofits of $9.9M M. 5
Two years later, , sales exceeded $1.0 b billion befor re doubling again by 1981. 1 The isition of the e Dick Smit th chain of s stores in 1981 was yet another exa ample of a acqui prepa aredness to move m early. lworths wer re early ad dopters of t technology. The group ps first sup permarket Wool scann ning operatio on was introduced in 198 82. In 1983, Woolworth hs had the wo orlds first electr ronic funds transfer system s at p point of sa ale. This w was followed d by the introd duction of computerised c d warehouse es. By its 60 6 th annivers sary Woolw worths was turnin ng over $3.2 2 billion wor rth of sales an nd enjoying net profits of o $57 millio on. nly it all sto opped. In 1986, for the e first time in 63 years s no final And then sudden dend was pai id. Sensing the groups weakness, corporate c ra aider Industrial Equity divid (IEL) ) pounced, snatching s a 19.9% inter rest before on o selling to o New Zeala and group Rainb bow Corpo oration, who o in turn was acquir red by IEL Ls parent, Brierley Inves stments in 19 987. s had risen to o $5.4 billio on by this po oint but net profits p had fallen f a dram matic 85% Sales to jus st $9.3 milli ion. The gro oup had lost t its way, tac ckling too m many fronts both here and abroad. The e decision to refocus was swift and include ed the retir rement of rman Sir Eri ic McClintock and appo ointment of previous p Dir rector Paul Simons S as Chair mana aging directo or. Disposal of unprofita able company y assets and store closur res as well as the e campaign launch of W Woolworths the Fresh Food F People in 1987 ar rrested the slide. . 988, with IE EL under inv vestigation for its part in gaining virtual cont trol of the In 19 group p, a takeove er offer of $3.65 $ per sh hare was ma ade for the o outstanding shares. In 1989 at a total co ost of $850 million, Wo oolworths be ecame a who olly owned subsidiary s ally delisted, , ending its 65 6 years listi ing on the sh hare market. of IEL and forma w in turn taken over by the Ads steam Group p, before it t too collapse ed leaving IEL was Wool lworths open n to return to t the public c arena, whi ich it did in n 1993, back ked by the largest public share offering g in history. All up 1.0 billion share es were offe ered at an 2.45 per shar re. By 1994 the group ps 70th anni iversary - th hings were issue price of $2 back on track wit th sales hittin ng $11.5 bill lion and net profits of $2 200 million. 996, petrol retailing was w introduc ced at Woo olworths sup permarket car c parks, In 19 follow wed by an alliance a with h Caltex petr rol outlets and a the 1998 8 acquisition n of liquor group p Dan Murph hy. lworths it se eems, contin nues to evolv ve as a busin ness. Management has come c from Wool within and has a preparednes ss to test new w concepts and a invest fo or the future e. This has i their wake e. left competitors in
Howe ever, all of th his is history y. Today Wo oolworths ha as a market c capitalisation n of $30.6 billio on and trade es on a pros spective PER R of 17. Th he group do ominates the e retailing lands scape with forecast f sale es of $50 bi illion for 20 009, underpinned by th he groups flagsh hip superma arket division n which cont tributes som me 88% of tot tal company y sales and 80% of earnings before intere est and tax. It is hard to imagine how w one can co ontinue to fy the price multiple m plac ced on them when they, essentially are a the marke et. justif m as we have h admire ed the Woolw worths busin ness, we hav ve struggled d to justify As much the markets m valu uation for so ome time. We W have chos sen to follow w from a dist tance with a con nviction to act given th he right circ cumstances. However, if i we were on board today y, our greate est fear woul ld not be on the business valuation n nor the busin ness itself but on n manageme ent. n one thinks s of the worl lds great in nvestors the name n Peter Lynch come es quickly When to mi ind. During his tenure as portfolio o manager of o the Mage ellan Fund at a Fidelity Inves stments from m 1977 to 19 990, he grew w the Fund from $18 m million to $1 14 billion, gener rating an average annua al return of 2 29%. Apart from his ste ellar investm ment track recor rd, Peter Lyn nch was grea atly admired d for his com mmon sense e approach made m most famous with his quote Go for f a busines ss that any idiot i can run n because sooner or oing to run it t. later, any idiot is probably go s much as we w would like e to back str rong busines sses that eve en idiots Unfortunately, as ur preference e is to find sound busin nesses run by b sensible managers. m cant destroy; ou f is that idiots ofte en unleash enormous damage, d som metimes term minal. Not Our fear even well establis shed busines ss franchises s are immune. And it is h here that we turn back e Woolworth hs story. to the lworths management ha as an enviab ble track rec cord that eve ery sharehold der would Wool be pr roud to be associated with. w One in n which the e pursuit of f sound, sen nsible and transp parent busin ness decision ns has catapu ulted the gro oup into one of our most respected comp panies. How wever, keepin ng investors onside is not n all beer a and skittles. Even for busin nesses like Woolworths s, that have e delivered in spades over the years, y the institu utional imperative to want w more and more is not only alive and well, w it is down nright dange erous. And unfortunatel ly our great test fear is that given sufficient pressure, manage ement will end e up doing g some really y dumb thin ngs just to ju ustify their t ratings, the eir bonuses and a ultimatel ly their mark ket status. credit h sufficie ent confiden nce that Woolworths CE EO Michael l Luscombe and CFO We have Tom Pocket will do what so many busin ness leaders have h so spec ctacularly fa ailed to do d that is to pr rotect the bu usiness franch hise for both h current and d future own ners. and his score, bu usiness leade ers at groups s including Fairfax Med dia, Suncorp p-Metway, On th Wesf farmers and Rio R Tinto - just j to name a few - have a lot to ans swer for. It is i not so
much h that their re espective sha are prices ar re wallowing g like so man ny others bu ut that they were forced to take rear-g guard action ns by issuin ng mountain ns of new shares at ficant discou unts to preva ailing marke et prices. In essence, e man ny of these businesses b signif and captains c of industries i be et the farm using other peoples m money, only to see the door slammed sh hut in their face. f The pr rocess of rep pairing repu utations in light of the age inflicted is of little consolation c to sharehold ders. They have h suffered d the twin dama fate of o a falling profit p line an nd an enlarge ed share bas se. Unfortuna ately such ac ctions can create e negative im mplications, including in n some cases s, permanent t loss of capi ital.. aps to illustr rate our thou ughts we can n reflect on Wesfarmers s 2007 acqu uisition of Perha retail conglomera ate Coles Gr roup. Wesfar rmers is a gr roup with a stunning track record, h has prided d itself on generating g a satisfactory y return for shareholders s over the which long term. The re esults have been b achieve ed by adheri ing to a core e discipline of buying g bus sinesses that t meet a retu urn on capit tal metric well above th he groups and growing own cost of capit tal. Prior to the Coles ac cquisition in n 2006, Wesf farmers repo orted a net t after tax of o $869 mil llion, had 37 78 million shares s on is ssue, carried d total net profit borro owings of $1 1.4 billion an nd generated d a return on n capital emp ployed of 28 8.4%. Fast forwa ard 3 years and a the situa ation is very different. e fair, the fin nancial crisi is has punch hed a hole in n many busin nesses, but the t impact To be on Wesfarmers W has h been two ofold. Firstly y, the group p embarked on o a massiv ve winner takes all acquisi ition that ha ad significan nt turnaround d risk. Secon ndly, and this is a big o, the acquis sition was la argely funde ed by debt. The T upshot is that mana agements no-no options for dealing with the crisis are li imited. The thing we fe ear most is not that a busin ness has fall len on hard times, as is the case here. h Rather r it is the extent e that mism management inflicts perm manent dam mage on the e share capit tal base and d investor return ns. hings stand, Wesfarmers s is forecast to earn net profits of $1.5b $ during g 2009, on As th sales revenue of f $50 billion n. The $19 billion acqu uisition tag for the Col les Group burde ened the com mpany with net debt of f $10 billion n. The two h highly dilutive capital raisin ngs undertak ken by mana agement hav ve since par red net debt to around $6 $ billion, while e shares on issue have ba allooned to m more than 1. .0 billion. Th his would su uggest that net pr rofits would d have to exc ceed $2.1 bil llion for sha areholders to o be no wors se off than 2006, a rather tal ll order when n you consid der that the groups g coal division - which w may st days - co ontributes a similar prof fit to that of f the combin ned Coles have seen its bes up. All up, th he return on n capital emp ployed is set t to tumble b below 10% as further Grou signif ficant chunk ks of capita al expenditu ure are requ uired annual lly to turn the Coles Grou up around. o part, av voiding such h situations has always s been a hig gh priority. We have For our spoke en in the pa ast of the Road Map check list that we ap pply to each h business consi idered for in nvestment. While W we hav vent escape ed the marke et carnage, with w many
of ou ur investmen nts severely battered and d bruised, we w largely av voided the is ssues now facing g the compa anies noted above. a e the likes of o Billabong g, Cochlear, ResMed, Primary P Healthcare, Flig ght Centre While and SEEK S have some s busine ess issues to sort through h, the surviv val of these businesses b is not t subject to paying p off ex xcessive lev vels of debt and a issuing l large chunks s of highly diluti ive new shar res. Thankfu ully these are e not the issu ues that have e kept us up at a night. m and more m investor rs have deci ided enough is enough, the check At a time when more t keep us gr rounded in o our thinking g and which we deem vital v to the list of things that ness revolve es around fou ur key areas. And when we find a long term health of any busin busin ness that can jump these hurdles, we invest with confidence. Firstl ly, we seek to measure the return on capital employed ( (ROCE) ove er a multiyear horizon. Th his ratio form ms the core of our proc cess for the simple reas son that it ates how we ell a compan ny is utilising g its capital to generate earnings. He ere we are indica focus sed on the un-geared u ret turn on tota al capital em mployed so th hat the use of debt is taken n into accoun nt. The ROC CE should be e higher than n a business s total cost of capital; other rwise any additional ca apital invest ted in the business b wil ll reduce sh hareholder return ns. The focu us is not the e share price e but whethe er a busines ss is earning g its keep. And if i it isnt, pil ling on more e debt will, i in time, bring g the structu ure undone. ndly, we ass sess the vari ious measures of earnin ngs quality of a busines ss such as Secon its ca ash flow qu uality. High reported ea arnings are not as impo ortant as hig gh-quality earnin ngs. High quality ea arnings are transparent t, repeatabl le, controlla able and, importantly, bank kable. Earnin ngs that are the t result of f large one of ff events ma ay not be atable and ar re of low qua ality. Import tantly, those businesses that t generate e earnings repea but not n cash may y not be sust tainable. Wh hen we inve est, we make e sure the co ompany is taking g its earning gs to the bank k. dly, we aim to measure e the financ cial leverage e of any giv ven busines ss. This is Third essen ntially a risk k manageme ent tool. Ou ur focus is debt. d Debt m may sit on or o off the balan nce sheet. Ex xamples of off balance sheet debt are the ope erating lease es that the busin ness is contr racted to. Th he main out tput is a coverage ratio o which mea asures the multi iple by whic ch earnings before inter rest, tax and d amortisatio on (EBITA) cover the total financing co osts of the bu usiness. The higher the level l of cove er, the more resilient a busin ness is to ope erational or economic e se etbacks. y, we pay pa articular atte ention to the capital man nagement of o a business s. This is a Lastly key measure m on management m t as proper stewards of f our capital . In this reg gard if we were to lose any sleep, it wo ould be to th he extent tha at managem ment was exp posing the busin ness to the pe ermanent los ss of earning gs power. Th his includes s share capital l issued or bough ht back by the t company y, capital req quired to ma aintain the operating bus siness and any new n capital required r to grow. g Done p poorly, the flow fl on consequences to the owne ers of the bus siness will most m likely prove disastro ous.
Busin nesses will go g through so ome lean tim mes. But to avoid a them w when valuati ions are as attrac ctive as they y are today, makes m little sense even though the h holding peri iod can be an em motionally scarring proc cess. As Pete er Lynch no oted, When n stocks are attractive, you buy b them. Su ure, they can n go lower. I Ive bought stocks at $12 that went to $2, but then they t later we ent to $30. You Y just don nt know whe en you can find fi the botto om. ing decent businesses, run by go ood managers, selling at sensible prices is Findi ultim mately what it is all ab bout. No bu usiness can n fully prote ect itself ag gainst the econo omic perils of tough tim mes but good managers can chart a course that t gets you safely y to the othe er side. And d, frankly, w when all is sa aid and done e, those that t have run agrou und will be more than offset o by tho ose emerging g stronger a and more do ominant in their chosen busi iness field. On O this score e, we remain n steadfast in n our belief f that great busin nesses, sellin ng at attractiv ve values are e now on off fer. mory lane Trip down mem etimes exper rience can be e a hindrance. On other occasions it helps to kee ep you out Some of tro ouble. Durin ng the past qu uarter we pr resented to a number of financial inv vestors on the economic e sta ate of play. . We dont profess to be experts in this field d but our perso onal involvem ment in the markets m date es back a few w decades so o we were pr repared to offer an opinion n. The info ormation com mpiled and reproduced d below ser rves as a ome discussi ion point as we contemp plate the challenges ahea ad. welco e 1: The Sev venties Table Annua al GDP Grow wth % Jun-70 Jun-71 Jun-72 Jun-73 Jun-74 Jun-75 Jun-76 Jun-77 Jun-78 Jun-79 8.4 40 2.2 20 3.89 50 3.5 0.7 76 5.16 24 2.2 2.4 46 0.0 09 3.4 41 An nnual CPI % 3.55 5.14 6.52 8.16 14.62 16.87 11.97 13.52 8.03 8.72 Unemploy yment rate % 4.9 5.9 5.6 4.9 5.6 8.5 7.7 7.0 6.3 6.2 10 year bon nd yield 6.86 6.83 5.85 6.72 9.52 9.50 9.99 10.41 9.10 10.00 90 day bank bill b 8.70 8.15 5.75 6.40 18.80 8.80 9.31 10.95 10.83 10.26
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Table e 2: The Eig ghties Annua al GDP Grow wth % Jun-80 Jun-81 Jun-82 Jun-83 Jun-84 Jun-85 Jun-86 Jun-87 Jun-88 Jun-89 10.40 55 4.5 1.2 29 -3.37 7.85 29 6.2 1.2 28 4.3 34 4.3 39 5.17 An nnual CPI % 10.85 8.72 10.76 11.13 3.97 6.57 8.46 9.26 7.14 7.57 Unemploy yment rate % 6.3 5.4 6.8 10.2 9.1 8.6 7.5 7.8 7.2 5.9 10 year bon nd yield 11.76 13.10 16.40 14.70 14.10 13.80 12.95 12.80 11.95 13.50 90 day b bank bill 13.83 15.58 18.57 14.24 13.77 15.29 14.68 13.68 13.10 18.37
e 3: The Nin neties Table Annua al GDP Grow wth % Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 1.9 93 -1.58 30 1.3 4.4 44 4.9 96 3.3 31 4.12 4.84 3.88 20 5.2 An nnual CPI % 7.67 3.41 1.23 1.86 1.74 4.50 3.10 0.03 0.67 1.07 Unemploy yment rate % 6.5 9.0 10.7 10.7 9.7 8.1 8.0 8.2 7.9 6.7 10 year bon nd yield 13.40 11.17 8.90 7.37 9.63 9.21 8.88 7.05 5.58 6.27 90 day bank bill b 15.02 10.39 6.42 5.22 5.12 7.55 7.57 5.35 5.32 4.93 11
Table e 4: New Ce entury Annua al GDP Grow wth % Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 4.11 00 1.0 4.81 99 1.9 4.7 78 2.7 78 2.5 59 3.9 92 2.9 93 1.0? An nnual CPI % 3.19 6.02 2.84 2.69 2.48 2.49 3.98 2.07 4.51 3.0? Unemploy yment rate % 6.2 6.9 6.5 6.1 5.5 5.0 4.8 4.3 4.3 6.0? 10 year bon nd yield 6.16 6.04 5.99 5.01 5.87 5.11 5.79 6.26 6.45 3 3.00? 90 day b bank bill 6.23 4.97 5.07 4.67 5.49 5.66 5.96 6.42 7.81 2.50?
he tables hig ghlight, the past four de ecades prov vide some us seful referen nce points As th worth hy of discus ssion. Those with longer r memories will recall both b the mar rket highs and lows that at the time ma ade little or n no apparent sense. For our part, the e numbers nder that rel lying on eco onomic fore ecasts for in nvestment gu uidance is are a stark remin fraug ght with dang ger. ou look thro ough the decades and d down the co olumn headin ngs, ask you urself this As yo quest tion: Would d I have inve ested knowin ng these fact ts beforehand d? ously The Seventies continues c to o haunt those e in Governm ment and an nyone that Obvio under rstands what t happens wh hen you mix x high inflati ion, high un nemployment t and high intere est rates. For F almost a decade, t the country y suffered u under the weight w of debili itating cond ditions and yet annual growth me easured by GDP remai ined solid throu ughout. y in The Eig ghties a slo owdown, foll lowed by rob bust growth accompanie ed by high Early inflat tion, high un nemploymen nt and high d double digit interest rates s again featu ured. How anyon ne made mo oney out of the t share ma arket during this period is anyones guess but they did. d eels to go through t a The Nineties still serves as a cold reminder of how it fe aid to rest, high h levels of o unemploy yment and recession. While inflation was largely la he decade, te ested the ner rve of many who saw va alue in the high interest rates early in th kets. mark
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Finally The New w Century brought bett ter news on the econom mic front. Sol lid growth bers, accomp panied by lo ow inflation n, low unem mployment an nd a low int terest rate numb envir ronment prov vided a chee ery investmen nt backgroun nd. w can we say going in nto the next t decade? Many M now tal lk of a long and deep So what recession while others o point to the death of the consu umer and th he likely re-e emergence flation - this s time thing gs must be different. d No o doubt, the many mark ket experts of inf from the Internat tional Mone etary Fund (I IMF), The World W Bank, the Organi isation for nomic Corpo oration and Development (OECD) and our ow wn think tan nk The Econ Reser rve Bank - will w keep us duly d informe ed of the state of play. ng already spent s more than enough h time on th his subject w we will leav ve the last Havin word ds to Peter Lynch L "If yo ou spend mo ore than 13 minutes ana alysing econ nomic and mark ket forecasts, , you've was sted 10 minu utes." At Sel lector, we ar re in a simila ar mind to that of o Lynch, preferring p to o focus our attention on o things wi ithin our co ontrol and under rstanding. leyParsons (WOR) add ded to the portfolio Worl In th his quarterly ys introduc ctory comments, we sp poke about how the in nvestment lands scape was no ow producin ng attractive business op pportunities a at knock dow wn prices. It is our o view that t some time down the track, investor rs will look back on this s period as havin ng provided some outsta anding investment oppor rtunities to buy b top shelf f products sellin ng at barga ain basemen nt prices. Into this basket b we would now w include WorleyParsons - a business that t was add ded to the po ortfolio with h a 5% weig ghting and verage entry price of $14 4.87 per shar re. an av s a business that we mis ssed when it t floated bac ck in Novem mber 2002 WorleyParsons is e then issue price of $2. .00 per share e. That we missed m it wa as perhaps more m to do at the with the t fact that we were in the midst of f establishing g the Selecto or business it tself. e important, however, is the fact that t the compan ny chose to f float at a tim me of weak More share e market con nditions. No boom time valuations to underwrit te big payof ffs for the found ders but an internal i desir re to bring to the public arena a bus siness with aspirations a to gro ow. his point we e introduce the t groups founder and d current ch hief executiv ve officer, At th John Grill. The business b was s founded by y Grill in 1971, operatin ng a small en ngineering ulting practi ice called Wholahan W Gr rill and Part tners. Grow wing steadily y over the consu ensui ing years, th he big mov ve came in 1986 when it acquired the local and a Asian intere est of Worle ey, an Amer rican based engineering g firm with a strong rep putation in the of ffshore oil and gas indus stry.
13
While e a name change to Wor rley followed d soon there eafter, the ba asis on which h business was conducted c ha ad stood the e test of time e and remain ned unchang ged. Specific cally, Grill and his h team were and rema ain firm beli ievers in the e principles of partnerin ng both in respe ect to individ dual custom mers and reg gions in whi ich operation ns are undertaken. In short, the value of building g alliances b based on mu utual respec ct for each party has wed the grou up to enjoy long l standin ng relationsh hips stretchin ng over dec cades with allow comp panies like Woodside W Pe etroleum (20 0 years) and Shell (14 ye ears). As the eir success and demand d for new n oil and d gas project ts has grown n, so too has s the need fo or reliable techn nical expertis se from their r suppliers. 004, Worley y acquired the t business s of US bas sed Parsons E&C, a bu usiness of In 20 simila ar pedigree to its own. . With a history dating g back to 19 944, Parson ns has an excel llent reputat tion in designing, cons structing and d managing g major infr rastructure projects. These in nclude powe er plants, ch hemical facilities and gas s processing g plants. It ided an ex xcellent fit for Worle ey, symbolised with a name change c to provi WorleyParsons. her bolt on acquisitions a followed, f including the 2007 buy-ou ut of Canada as largest Furth engin neering group p, the privat tely held Col lt Companie es, for more $A1.1 $ billion n. ay WorleyPa arsons opera ations span 3 34 countries and 118 off fices with ov ver 31,000 Toda emplo oyees. The groups g service offering encompasse es the entire project lifec cycle from identi ification to actual a operat tion of large scale infrastructure proj jects. e the Hydroc carbons divi ision (oil & gas) g still dom minates, pro oviding the group g with While over 70% of tota al revenue an nd earnings contribution ns, WorleyP Parsons evolution has ment grow in i the areas of Minerals s & Metals (base metal ls), Power seen its involvem uding nuclea ar plants) an nd Infrastruc cture & Env vironment (i including de esalination (inclu plants). e listing the group has maintained m a an impressive earnings tr rack record combined Since with an equally impressive share price e performan nce. With th he assistance e of CFO d Housego since s 1999, CEO Grill has diligent tly and cons servatively guided g the David group p forward. While W net de ebt has risen n on the back of the tw wo major ac cquisitions under rtaken durin ng the past fiv ve years, gearing remain ns conservat tively set, wi ith current intere est cover of f 12.7x and a gearing c coverage rat tio, that includes opera ating lease expen nses, of 6.4x x. Just as im mportant, is ssued capital l has remain ned tight, ri ising only 62% at a time when net earnings e hav ve jumped thirteen-fold. Return on o capital oyed remain ns impressive e, hovering a above 20%. emplo
14
Table e 5: Worley yParsons Fin nancial Sna apshot $M

Reven nue Operating Margin % EBITD DA EBITA A NPAT T Net De ebt / (net cash) ) Marke et Capitalisation Enterp prise Value Earnin ngs Yield % ROCE E% Cover r ratio GOCF F / EBITDA % Earnin ngs per share Divide ends per share PER Divide end Yield % Share Price 30 June $ Issued d Capital
2003 377 11.0 41.4 35.6 25.9 (30.9) ) 303 272 11.8 34.9 5.0 87 17.3 5.0 11.7 2.5 2.03 149.3
2004 374 13.1 49.0 43.8 30.7 (13.0) 430 417 9.7 30.3 6.6 38 20.6 12.0 13.9 4.2 2.88 149.3
2005 1249 9.7 117.0 107.6 66.5 6.0 1604 1610 6.7 23.0 28.5 99 32.4 20.0 24.2 2.6 7.83 204.9
20 006 2417 2 9.1 219.9 2 201.4 2 139.1 1 53.7 4090 4 4 4144 5.0 38.0 5.2 80 67.9 41.0 4 29.4 2 2.1 19.96 1 204.9 2
200 07 3513 10 0.2 353 3.4 336 6.4 224 4.8 398 8.2 8177 8575 3. .8 17 7.8 5. .4 73 93 3.6 60 0.5 36 6.3 1. .8 34. .00 240 0.5
2008 4652 12.7 587.0 0 544.5 5 343.9 9 629.2 2 9154 9783 3.5 23.6 6.1 56 142.1 85.5 26.7 2.3 37.86 6 242.1
2009 (e) 6000 11.6 694.0 647.0 396.4 615.0 4370 4985 13.0 24 6.4 90 163.3 76.0 11.0 4.2 18.00* 242.8
Quant Screen
15
* Price e at time of wr riting Apr 2009 9
n all, while we acknow wledge the dangers d of management m that looks to t acquire All in grow wth, to date, they have done so on nly where th he price, cul lture and op pportunity justif fied the move. he end of the e day it is al lso reassurin ng to know that t the majo ority of the board b and At th mana agement hav ve significan nt stakes in the busines ss. Grill him mself retains s a 13.6% share e interest in the t group, va alued at $627 7 million. ng missed th he opportuni ity to invest in WorleyPa arsons the fir rst time arou und, along Havin with a share pric ce that hit a record hig gh of $54.19 in Decem mber 2007, the t global ts since ha ave allowed d investors to re-exam mine a whole host of excellent event busin nesses at mo ore realistic valuations. v W While the bu usiness is no ot immune to o contract cance ellations and d earnings im mpacts, the 2009 interi im result hig ghlighted th he groups
defen nsive earnin ngs qualities s and mana agements confidence in sustaining g growth, culmi inating in a number n of si ignificant co ontract allian nce wins. e buying into WorleyPar rsons when v valuations were w stretche ed was not a recipe for While succe ess, we susp pect that on a current earnings e yiel ld of 13.0% %, investors are being more than compe ensated for th he inherent r risk that now w exists. e importantly y, managem ment as stew wards of cap pital, have ch harted an ap ppropriate More and commendab c le course. When W comb bined with other o import tant financia al metrics discu ussed in our earlier e piece e, the decisio on to invest was w a much easier call and a makes far more m sense, than t the con nsiderable en nergy investors expend on trying to o predict a mark ket bottom. Gove ernment Int tervention ernments of all persuasio ons are feeli ing the finan ncial pressur re as they sc crabble to Gove deal with a host of econom mic issues. One cant argue that some interv vention is ssary but it is ironic how many of todays issue es stem from m actions ta aken years neces earlie er. e the e stock mark kets in the U US have ope erated on th he uptick rul le when it For example, came e to investors selling sto ocks short selling a sto ock that the seller doesn nt own in antici ipation of lower share price. This rule was introduced i d during the last l major down nturn in 193 34 and requ uired every short sale transaction t b be entered at a a price highe er than the pr rice of the previous p trad de. The rule prevents p sho ort sellers fro om adding to the e downward momentum when the sh hare price is already decl lining. coincided fo 73 years and a was lifte ed in July 20 007, which incidentally i That rule stood for e US share market. Fas st forward today t and G Governments s are now with a top in the mbling to rei introduce th his rule as well w as new ones o surroun nding mark to market scram accou unting. We only o hope th hat whatever legislation is i introduced d, the implic cations are thoug ght out and progressive p i nature. in New website w is ne ew and impro oved and is now internally controlle ed. Our website w.selectorfun nd.com.au www
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COM MPANIES VISITED V DU URING TH HE 3rd QUA ARTER 2008-2009

January DO OW OS SH PX XS February MQ QG RM MD PR RY PR RY CO OH CB BA CP PU BX XB WES RX SR AS SX CS SL FX XL CA AB BB BG ST TW FX XJ IR RE AL LL FL LT NH HF WOR EK SE TL LS TT TS DO OW QB BE RO OC WOW March h SE TS ET TC FL LT AS SX LY YL NH HF CN NX AC CG IR RE SIP P SE EK Transfie eld Services int terim results pr resentation Entertai inment Media & Telecoms Corporation Flight Centre C managem ment meeting ASX ma anagement me eeting Lycopodium managem ment conferenc ce call NIB Ho oldings manage ement meeting Carbon Energy manag gement meeting g AtCor Medical M manag gement meeting g Iress Ma arket Technolo ogies managem ment meeting Sigma Pharmaceutical P ls full year resu ults presentatio on SEEK conference c call l 02 2/03/09 03/03/09 4/03/09 04 05 5/03/09 09 9/03/09 10 0/03/09 12 2/03/09 13 3/03/09 17 7/03/09 23 3/03/09 24 4/03/09 Macqua arie Group inve estor update da ay ResMed d second quarte er conference call c Primary y Healthcare in nterim results presentation p Primary y Healthcare sit te visit Cochlea ar interim resul lts presentation n Commo onwealth Bank of Australia in nterim results Comput tershare interim m results presen ntation Bramble es interim resu ults presentation n Wesfarm mers interim re esults presentat tion Sirtex management m visit ASX int terim results pr resentation CSL int terim results pr resentation Flexigro oup interim res sults presentation Cabchar rge interim results presentatio on Billabon ng interim resu ults presentatio on STW Co ommunication ns Group full ye ear results Fairfax Media interim m results presen ntation Iress Ma arket Technolo ogies full year results briefing g Aristocr rat Leisure full l year results pr resentation Flight Centre C interim r results presenta ation NIB Ho oldings interim results present tation WorleyP Parsons interim m results presen ntation SEEK in nterim results presentation p Telstra interim i results presentation Tatts Gr roup interim re esults presentat tion Downer r EDI interim r results presenta ation QBE Insurance full ye ear results presentation ROC Oi il full year resu ults presentatio on Woolwo orths interim re esults presenta ation 05 5/02/09 06 6/02/09 09 9/02/09 10 0/02/09 10 0/02/09 11/02/09 11/02/09 16 6/02/09 16 6/02/09 16 6/02/09 17 7/02/09 18 8/02/09 18 8/02/09 19 9/02/09 19 9/02/09 19 9/02/09 23 3/02/09 23 3/02/09 24 4/02/09 24 4/02/09 25 5/02/09 25 5/02/09 25 5/02/09 26 6/02/09 26 6/02/09 27 7/02/09 27 7/02/09 27/02/09 7/02/09 27 Downer r EDI managem ment meeting Oil Sear rch investor rel lations meeting g Pharmax xis site visit 13 3/01/09 19 9/01/09 09 9/01/09
17

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March2009 9SelectorFundQuarterlyNews sletter#23

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March2009 9SelectorFundQuarterlyNews sletter#23

Table e of Conten nts

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

Table e 5: Worley yParsons Fin nancial Sna apshot $M

* Price e at time of wr riting Apr 2009 9

March2009 9SelectorFundQuarterlyNews sletter#23

March2009 9SelectorFundQuarterlyNews sletter#23

COM MPANIES VISITED V DU URING TH HE 3rd QUA ARTER 2008-2009

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