Category: Business

The separation of InfraCo Fixed has the potential to create a business worth at least $30 billion, given it is seven times the size of InfraCo Towers. Chanticleer’s $30 billion estimate assumes a conservative 20 times EBITDA valuation.

Those who want to judge Penn on the share price plunge since his appointment in May 2015 should not ignore the brutal external environment in the telco sector over that period.

Fight over mobile market share

In the past decade, the economics of the industry have been awful. Capital investment in fixed line and mobile infrastructure has doubled, but revenue has remained the same.

Some observers will blame this on Penn and his peers, who engaged in a fight over mobile market share. Penn made a conscious decision to hold on to Telstra’s mobile share and this helps explain why average revenue per user plunged in the four years leading up to 2020.

It is only in the past 18 months to two years that industry dynamics have improved. ARPU has been increasing at Telstra and at its rivals. The entire mobile industry is now in an upward pricing cycle.

Penn admits in a valedictory interview ahead of the release of the 2022 financial results next week that Telstra severely underestimated the impact of the roll-out of the government-owned wholesale broadband provider, NBN Co.

He says there was a period leading up to his T22 strategy in 2018 when the company’s response to the looming loss of profits caused by NBN Co was to seek growth in areas outside the company’s core capability.

“We knew NBN was going to have an economic and operational impact, but we were looking too much to external sources of growth to offset it,” he says.

Penn lists a number of investments that failed to deliver, including the purchase of video streaming analytics company Ooyala. It cost about $500 million and was later written down to zero.

Other forays into so-called growth assets were investments in software companies and in health.

Penn says that while Telstra Health is “in a great place now”, it and other investments “distracted the company from really tackling the core issue, which was we had to fundamentally transform the core telco business”.

His wake-up call about the importance of the core telco business came with a succession of outages in fixed-line and mobile services culminating in the May 2016 outage.

The outages prompted Penn to invest $3 billion in the network.

His T22 strategy fundamentally changed the way in which Telstra approached technology investment. Also, as shown by the creation of InfraCo Towers and InfraCo Fixed, Penn recognized the need to unlock value.

More efficient structure

His tenure was accompanied by a cost-cutting program that slashed the number of employees. In 2015, there were 36,000 full-time employees and 38,000 contractors. Now, there are 26,000 full-time employees and 19,000 contractors.

The move to a more efficient corporate structure was essential, given that NBN Co’s arrival wiped out $3.6 billion from Telstra’s EBITDA.

Penn says the magnitude of the hit to Telstra’s profits was even greater when seen through the lens of net profit. This halved because Telstra retained the capital-intensive assets which required depreciation and amortization.

Penn joined Telstra as chief financial officer in March 2012 and in May 2014 he added the role of group executive international.

One of his lesser-known achievements was renegotiating Telstra’s commercial relationship with the Murdoch-owned Foxtel. This was a masterclass in deal-making.

Telstra owned half of Foxtel, a business with lots of debt and little earnings, while Murdoch enjoyed the profits from Fox Sports. He swapped that for 35 per cent of the combined Foxtel and Fox Sports while forcing Murdoch to take on the debt.

Penn will maintain his role as chairman of the federal government’s Cybersecurity Advisory Committee.

His tenure at Telstra includes one of the most significant moves by Australian business into diplomacy and government policy, through the purchase of Digicel, a mobile provider in the Pacific.

Telstra contributed $US270 million ($385 million) of equity to the $US1.6 billion purchase price.

Emirates’ all-new premium economy is now available on selected A380 flights between Sydney, London and Paris and the airline’s Dubai hub.

And the Gulf carrier has high hopes for this ‘in-between’ class which improves on economy in every respect, from comfort to meals and drinks: more cities will join the A380 premium economy network, starting with Christchurch in December, while the stylish cream-coloured sleeperette premium economy seats will also find their way onto the Boeing 777s.

For now, Emirates premium economy appears to be limited to the following A380 flights and routes to and from Dubai:

• Sydney: EK412/EK413
• London: EK1/EK2 and EK3/EK4
• Paris: EK75/EK76

Each of the four-class Emirates A380s features 56 premium economy seats arranged in a 2-4-2 layout across seven rows, nestled in their own private cabin at the front of the lower deck.

Interested in the upgraded Emirates premium economy experience? here‘s what you need to know.

Emirates premium economy: what is it like?

The Dubai carrier’s new premium economy class is a bold and strategic move for the Gulf airline, which across its 35-year history has only ever offered first class, business class and economy.

Like other airlines offering similar seats, Emirates is targeting economy passengers who may be tempted to part with a little more of their money in exchange for an improved long-range travel experience.

“[Premium economy is] probably where business class used to be, and in some cases where first used to be in the old days, 30 years ago,” Emirates President Sir Tim Clark has previously told executive traveler, describing the seat as akin to a railway-style ‘sleeperette’.

Emirates premium economy: how is it different to economy?

Passengers looking to upgrade from economy will find themselves cradled in this more spacious seat with a pitch of “up to 40 inches” compared to the 32-34 inches of economy.

Seats are a little wider than their economy counterparts – 19.5 inches compared to 18 inches – and arranged in a 2-4-2 layout rather than the more crowded 3-4-3 of economy.

Seat pitch – a reliable if not perfect stand-in for legroom – is around 38 inches for most rows (about standard for premium economy on most airlines) with an extra two inches for the front row, so there’s definitely less squeeze around the knees compared to economy class.

Emirates premium economy: the seat

Emirates premium economy seat has been calibrated to be a noticeable improvement on economy without cannibalizing the appeal of business class. In other words, it’s for upgraders rather than downgraders.

The cabin adopts a similar color scheme to Emirates’ latest business class design, with clad seats in cream-coloured anti-stain leather with stitching details and a wood panel finishing. “The seats look like in a Mercedes, with striking colors also on the walls,” Clark says.

While flatbeds remain the domain of business class, the extra eight or so inches of recline and a generous leg-rest which swings up at the front helps travelers get from A to B with plenty of Zzz.

This is complemented by a padded six-way adjustable headrest and a nifty platform for your feet to set a comfortable stage which will help you gently doze off.

You’ll find USB-A and USB-C ports nestled below the 13.3″ seatback video screen, with one universal AC power socket shared between every two seats.

Meals from the premium economy menu are served on a polished woodgrain dining table which folds up from the side, with a separate side table able to handle your drink or a snack.

The airline’s Airbus A380 superjumbos sport 56 premium economy seats at the front of the lower deck, in a dedicated cabin with two exclusive lavatories.

(On those relatively few A380s which lack first class, premium economy will be added to the upper deck, with three toilets where the two first class shower suites would otherwise be.)

At the time of writing, only six of Emirates’ A380s feature the new premium economy seating, but 61 more are on the way.

The airline’s fourth class will also be installed on 53 of its 124 Boeing 777 jets as part of a US$1.5 billion, 18-month retrofit program due to commence at the end of 2022.

The single-level Boeing 777 will feature up to 24 premium economy seats in a dedicated cabin nestled between business and economy class.

Emirates premium economy: meals and service

in Emirates’ premium economy can select from a rotating menu of Guests dishes served on Royal Doulton china with stainless steel cutlery.

With mealsinspired by business class” you can expect inflight dining to be seriously elevated beyond economy, along with a number of wines not available further back.

Prior to take-off, guests will be welcomed onboard with a drink served in fine glassware.

There’s a self-service snack bar if you get peckish, although premium economy passengers aren’t admitted to Emirates’ iconic onboard lounge at the back of the upper deck, which remains the exclusive domain of business and first class flyers.

Emirates premium economy: how much does it cost?

At the time of writing, Emirates appears to be able to pricing premium economy almost halfway between economy and business class.

Pricing in the middle of October 2022 on the busy London-Dubai route shows economy fares at £520 and £867, depending on how flexible the fare is with regards to changes – that represents an ‘average’ economy fare of £693.

Emirates’ premium economy lists at £1,326 (this is a fully flexible fare, equivalent to the more expensive economy option), while business class is pegged at £2,648.

Emirates premium economy: lounge access

Lounge access is not included with Emirates premium economy fares, however travelers can always pay extra to use these facilities.

The airline currently sells access to its flagship Dubai business class lounge, and others like it around the world for US$130 per person, discounted to US$100 for Emirates Skywards members.

Retail sales are 12 per cent higher over the year to June. Data due on Wednesday will show how much of the recent strength owes to higher prices rather than consumers buying more goods.

“There are some people who through COVID lost their job, lost their car, and ended up in a worse financial position,” Ms Timbrell said.

‘Helping spending stay a lot stronger’

“But there were also a lot of people who stayed home, got essentially a discount on their mortgages through low cash rates and ended up with more money than they would have had if COVID had never happened.

“That second group is helping spending stay a lot stronger than it would be under these cost of living pressures.”

Ms Timbrell said a pullback in spending was likely later in the year, at which point households would cut back on discretionary purchases such as cars and furniture.

“One thing we saw through COVID was lots of people purchasing cars and renovating their homes – those big things tend to be the first things to go,” she said.

“We’ve also seen a real increase in dining and takeaway spending. We’re seeing some real increases in clothing and fashion spending. These kinds of discretionary items also may have not as good of a time under a pullback in total spending.”

Lower economic growth

The slowdown in consumer spending will feed into lower economic growth, which the RBA is forecasting to average just 1.75 per cent over next year and 2024.

Surveyor Daniel Jung and solicitor Dominique Salvestrin are among the Australian families concerned about the effects of high inflation and rising interest rates.

“We’re making a conscious effort to cut back on dining out,” Ms Salvestrin said. “We’re eating more meals at home and doing extra food preparation.”

The couple just settled on their first home in Orange, NSW, and are worried prices will start to fall as interest rates rise.

The RBA raised rates multiple times during their settlement period and attempts to fix their home loan rate have faced delays.

“Because of interest rate rises, we are certainly more aware that any potential savings we would have at the end of the year will be significantly decreased than what we would have had otherwise,” Ms Salvestrin said.

“The effect of that on our budget is that we have less long-term financial security.”

The couple are “scrupulous” with how they manage their money. But they are also dealing with the extra costs associated with having a newborn child, Giustina.

“With a newborn, it’s quite important to keep the house warm, so with the increased costs of electricity and gas that will affect the budget as well,” Mr Jung said.

JPMorgan’s Bryan Raymond said there was not much evidence that higher interest rates and cost of living pressures had caused a slowdown in consumer spending. But the retail analyst expects households to start pulling back by the end of the year.

“If your view was the consumer is doing it really tough, you’d expect people to trade down into lower price, lower quality items, or buy less, but we aren’t seeing that yet,” he said.

Mr Raymond also expects a slowdown from the end of this year, with a through somewhere around March next year.

He expects the largest falls to be in housing-related categories such as furniture, electronics, hardware and clothes.

FCAI chief executive Tony Weber said while a small rise in total sales to 84,461 vehicles was positive, the logjams in the global vehicle manufacturing sector still meant lengthy waiting times.

“Once again Australia is following the global trend of demand for new vehicles exceeding supply,” he said.

The NSW market was up 10.9 per cent in July compared with a year earlier, while South Australian sales were up 13.3 per cent. But all other states and territories suffered a decline in sales.

Victoria was down 5.8 per cent, Western Australia 9 per cent, Queensland recorded a decline of 1.1 per cent, and Tasmania 13.2 per cent.

Sydney and Melbourne were headed into extended COVID-19 lockdowns in July last year.

The Toyota HiLux ute was again the biggest selling vehicle in Australia in July, with 6441 vehicles bought. This was more than double the next model, the Ford Ranger ute, which recorded 2934 sales.

Toyota’s RAV4 was in third spot, with 2437, followed by the Mazda CX-5 SUV at 2346, and Hyundai’s Tucson SUV at 2186.

Toyota was the clear market leader, with 23.2 per cent in July, with Mazda a distant second with 9.3 per cent.

Mr Politis holds a 27.3 per cent stake in Eagers Automotive and was ranked No. 51 on The Australian Financial Review Rich List in 2022 with an estimated wealth of $2.23 billion.

He also has extensive private interests in the vehicle industry.

Eagers Automotive last month acquired his privately owned dealerships in the ACT for $193 million.

The ACT dealerships and 10 properties being acquired make up more than 30 per cent of the total number of new vehicles sold in the ACT each year, and generate $450 million in sales annually.

In February, Eagers Automotive signed a five-year agreement to be the exclusive retailer in Australia for fast-growing Chinese electric vehicle maker BYD.

Last month, BYD overtook industry pioneer Tesla as the world’s biggest electric vehicle producer by sales. BYD is backed by Warren Buffett’s Berkshire Hathaway.

WAM Leaders also moved early into energy stocks and resources, although exposure to the latter was trimmed a few months ago on expectations that commodity prices had probably peaked. Haupt is now buying the mining sector after the recent commodity price fall.

The way WAM Leaders has adjusted its exposure to commodity prices – first up, then down, now up again – is a good example of what Geoff Wilson calls the “dynamic investing” style of the LIC, which on average was 96.4 per cent invested in equities during the 2022 financial year.

far from pick and stick

Haupt rejects suggestions this is more like trading than investing, arguing that at its essence, investing is about gathering data points and adjusting your view on companies, sectors and markets accordingly. He describes WAM Leaders as investing “in the tails” of markets, where sentiment is swinging from bullish to bearish much quicker than it usually does; as such, the LIC wants to be able to shift from being defensive to aggressive as quickly as appropriate.

“There’s such a wide dispersion of potential outcomes at the moment. So we’re having to be increasingly nimble,” Haupt says. “We’re getting data points daily, which change the probability of those events happening, so we’re responding. Our job is to respond to the environment.”

This approach is obviously different to the pick-and-stick style that many of the country’s LIC managers take. But given the frequency with which fund managers miss their benchmark – and the research that suggests this is in large part because of their inability to change their investment strategy as market trends shift – Haupt’s willingness to be flexible will rightly find admirers.

And he also points out that WAM Leaders has several long-term bets in its portfolio too, including insurer IAG (which Haupt expects will re-rate over time), Treasury Wine Estates (Haupt is a big fan of how CEO Tim Ford is navigating the shift away from China) and Telstra.

The latest data point for Haupt to digest is the Reserve Bank’s 0.5 percentage point interest rise on Tuesday, and the slightly more dovish tone to Governor Philip Lowe’s statement.

How the banking sector responds to this is important to Haupt’s holdings in NAB and Commonwealth Bank. WAM Leaders is tactically overweight on the banks at present, and Haupt expects CBA to post an impressive full-year profit result with improving margins next week. But he is wary of how hard the RBA, and indeed other central banks, will raise rates in a slowing economy.

“Policymakers are on a collision course with economic growth to fight inflation,” he says. “If they keep going the way they’re going, they’re going to cause carnage across risk assets.”

Not surprisingly then, WAM Leaders’ portfolio has a defensive stance at present, although cash accounted for just 2.9 per cent of it. Haupt says this is pretty typical; WAM Leaders moves heavily to cash only when it can see a big credit shock on the environment.

Haupt isn’t seeing one yet, but he’s watchful, given what he describes as glimpses of credit market stress, including inverted bond yields, the strong US dollar, and poor conditions in the European repo market. Add depressed bond market liquidity to this list, too.

“The problem is if people don’t trust other people’s collateral, then you get a liquidity crunch and that’s what happened during the GFC. So there is a possibility, and the odds are increasing every day, but they’re still fairly low at this point.”