Oct 6, 2016 - ACOMPANY'S stock price is nothing more than a numerical representation of a set of future expectations imp
BUSINESS 51
HERALDSUN.COM.AU THURSDAY, OCTOBER 6, 2016
VALE AIMS TO TRUMP AUSSIES IN CHINA RESOURCES BRAZILIAN mining titan Vale is negotiating partnerships to sell more iron ore to smaller Chinese customers in the country’s interior as part of its efforts to wrench market share from its Australian rivals. The miner is completing deals with companies capable of helping it lift distribution throughout China, the largest consumer of the steelmaking ingredient, Logistics and Mineral Exploration executive director Humberto Freitas said this week. Vale created a distribution company to spearhead these new relationships. “We have already reached the biggest clients, now we need to reach the smaller ones,” Mr Freitas said. With iron ore prices down about 70 per cent from a 2011 peak amid slowing demand, competition is growing among producers including BHP Billiton and Rio Tinto. Vale already ships as much as 400,000 metric tonnes at a time to its largest clients, and is developing a system of selling ore to consumers wishing to pay in Chinese yuan from stockpiles at coastal distribution centres. In April, Vale chief executive Murilo Ferreira said he intended to boost sales in China by 40 per cent and become the country’s leading provider. While Vale ships 180 million tonnes a year to China, it still trails Rio and BHP, the company said. Vale said a new $18.3 billion mining complex in northern Brazil and the ability to store material in China and Malaysia would move it closer to its Australian rivals. The Malaysian distribution centre can handle 30 million tonnes a year. BLOOMBERG
Headwinds ease Services sector contraction slows
MARTY SILK SERVICES ACTIVITY in Australia’s service sector has contracted for a second consecutive month but at a slower rate. The Australian Industry Group’s Performance of Services Index rose 3.9 points to 48.9 in September, remaining below the 50-point level that divides contraction from expansion. “The services sector looks to have made a partial
recovery from the problems of August, with the decline in activity easing off considerably in September,” Ai Group chief executive Innes Willox said. “Cautious and selective consumer spending remains a worry for many retail, hospitality and other businesses, with the usual winter hump in retail sales seeming to last a little longer this year.”
Two of the five activity subindexes expanded during the month, with sales up 9.6 points to 53.3 and new orders up 6.2 points to 53.7 — the latter a sign of better activity for the rest of the year. On the flip side, retail trade slid firmly into contraction, down 12.9 points to 42.1, while hospitality chalked up a sixth straight month of decline, off
1.8 points to 41.4. The transport subsector remained a stark outlier, climbing just 0.1 points to 33. Mr Willox said a positive was the rise in government spending and infrastructure investment over the past few months. Those factors, he said, had helped to boost demand in states more exposed to busi-
ness-oriented services, such as New South and Victoria. “Businesses are becoming more confident about ordering goods and services from each other, but conditions remain fragile and patchy across sectors and geographies,” he said. “Stronger business confidence and activity levels will require more active leadership from government, including meaningful improvements to business taxation rates and the regulatory burden.” AAP
Approval boon for Universal PAUL GILDER HEALTH
Universal Biosensors managing director Paul Wright at the company’s Rowville research facility.
SHARES in a Melbournebased medical diagnostics group have surged after a handheld blood sample analyser that uses test strips developed by the company was cleared by regulators for sale in the US. Locally listed shares in the company, Universal Biosensors, shot up 15 per cent to a six-month high after the US Food and Drug Administration approved the device which tests a patient’s blood coagulation. Known as an Xprecia Stride Analyser and produced by German manufacturing giant Siemens’ healthcare division, the device allows doctors to quickly determine whether a patient requires further anticoagulants, such as warfarin. Universal, led by managing director Paul Wright, produces the test strips at its nine-yearold research facility in Rowville. The company said the device was only launched in May 2015 but had already won a number of international design awards. Universal shares closed up 4.5c at 34c yesterday.
How to profit from sharing a business with Mr Market
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COMPANY’S stock price is nothing more than a numerical representation of a set of future expectations implied by the share market. These are expectations around future revenues, profit margins, capital requirements and so on. Ben Graham, of Columbia Business School, developed the allegory of Mr Market, a concept made popular by US investment guru Warren Buffett. The idea is simple: imagine you have a partner in each business you own called Mr Market. He frequently offers to sell you his share of the business, or buy your share. A manic depressive, Mr Market frequently revises his V1 - MHSE01Z01MA
THE SHORT CUT with ANDREW MACKEN offer up and down and you are free to take up or decline his offer every day — knowing full well he will be back tomorrow with a new offer. This is the idea of the stock market to “value investors” who believe that the “price” of a business (reflected by its stock price on any particular day) is different from the “intrinsic value” of the business. Sometimes price and value are the same, sometimes they are not. The idea is to sell your shares to Mr Market when he
is likely overpaying and buy his shares when he is likely selling at too low a price. Calling Mr Market a manic depressive is a little harsh. It is not so much that he suffers wild mood swings, it is more that his expectations about what is going to happen in the future are not always correct. And who can blame him? It is hard to accurately predict the future on a sustainable basis. So when a stock price increases, all that has really happened is that Mr Market’s expectations about the future
revenues, earnings and cash flows of the underlying business have increased. And when a stock price falls, Mr Market has simply downgraded his expectations about the future economics of the underlying business. One pocket of the Australian stock market that has done very well this year is the iron ore sector. Producers of iron ore have enjoyed an increase in the global price of more than 30 per cent, from around $US40 per dry metric tonne to more than $US55. This increase in price has flowed straight to the bottom lines of Australian producers and their stock prices have soared. Take Fortescue Metals, for example. Its stock price has
increased by more than 2.5 times since the beginning of the year. That’s a truly phenomenal rally. But what does this increase in price actually mean? It means that Mr Market has significantly upgraded his expectations about Fortescue’s future revenues and earnings. For a mining company like Fortescue that has largely completed its major capacity expansions, this upgrade in expectations relates almost entirely to the iron ore price. Indeed, Mr Market has basically upgraded his longrun iron ore price expectation to an estimated $US48 per dry metric tonne. Forever. In other words, if you buy Mr Market’s share of the
Fortescue business today, you do well if the iron ore price remains above $US48 and probably not so well if it comes in less than $US48 on a sustained basis. Investors need to make up their own minds if they believe Mr Market is being reasonable or not with his iron ore price forecast. Sometimes he gets it right and sometimes he is wrong. But investors should always at least ask him what he is expecting for the business you jointly own. Only then can you make an informed decision whether or not to buy or sell. ANDREW MACKEN IS PORTFOLIO MANAGER AT MONTGOMERY GLOBAL INVESTMENT MANAGEMENT
