Ask Alan: 4 July 2019

G’day everyone, welcome to this week’s Ask Alan, and yes, it’s me – Asking Alan, because I’m back from holidays where I’ve been in Scotland for a few weeks and it was great, thank you.  We had a lovely time, it was cold and rainy and terrible – it was colder in Scotland in Summer than it was in Melbourne in Winter, so I suppose that’s par for the course but it was great to be there, beautiful scenery, beautiful cities, plenty of whisky.  I went to a whisky festival in Edinburgh, had far too many ‘wee drams’, but that was good and I learnt a lot about whisky and we had a lovely look around, it was great!  And it was good to have a few weeks off, so here I am back, refreshed, ready to answer questions, write the weekend briefing for this week which will be on Saturday, and punching out interviews as usual as well as all the other stuff – Talking Finance, Money Café, this and helping to run the place. 

It’s great to be back, thanks for joining me – I’ve only got a few questions today so we’ll have to probably warm up as the weeks go on.  It won’t be a terribly long session today but good questions as always. 

First question – I don’t have names anymore, I think it’s because of the new system, there’s no place to put the names in, is that right Kiera?  We need to have names in, come on!  Anyway – first question, from anonymous, as they all are now.  Two years ago I reduced my super pension account to just under $1.6 million by moving some money back to a super accumulation account.  Despite no contributions and making the minimum 6% payout each year, the pension has grown and now stands at $1.8 million.  Is this tax free or is the balance above $1.6 million taxable?

No, it’s tax free because the way the $1.6 million cap works is, whatever the assets were when you retired, that’s counted as the cap, not the $1.6 million, it’s the actual assets that you bought that were, at retirement, worth $1.6 million.  But if they grow in value, it’s still tax free, so if you happen to – as you’ve done – if it grows to $1.8 million, that amount is still tax free.  The reverse applies that if it goes down in value, your account remains.  Say, it fell, say you invested in stuff that went down and it went down to $1.4 million, then your tax free amount would be $1.4 million, not $1.6 million any more.  The thing to focus on there is, it’s not the money, although it starts off as being money, it’s the assets you bought at the time.  If it’s grown to $1.8 million, there it is.

Next question – Hi, Alan, I bought some shares in Quintis and it went into liquidation.  There were two class actions raised, firstly by Excel Texel Class Action, and then DAVIS Class Action.  Given that these lawyers are supposedly getting paid if the class action is successful, is there any reason not to join the class action in one of both?  If one chooses to opt out of the class action, does it also mean that whatever the outcome, you’ll get nothing?  I guess my ultimate question is, what do I get to lose by joining the class action, if any?  

The answer is, you don’t lose anything.  The only people at risk are those who are funding the class actions, and in each case there are litigation funders behind the lawyers.  The lawyers are Gadens and someone else – I can’t remember who else.  I actually rang up one of the barristers involved in this and apparently you’re in the DAVIS Class Action whether you do anything or not, so you’re counted as being in the DAVIS Class Action unless you opt out, but you have to opt in to the Excel one.  There’s absolutely no reason not to join these class actions.  It is the case that it’s possible that even if you don’t join the class action you’ll get some money, that is possible, but it’s not for sure.  Apparently, most class actions, but not all of them, do result in orders that provide everybody who was a shareholder at the time with some share of the money.  But it is possible that the end, depending on what the orders are, that the money only goes to those who are actually signed up for the class action.  So, you might as well join it because you’re not at risk, there’s no downside and there is a risk that it’s possible at the end of the day you won’t get any money unless you’re in the class action, so you might as well be in.  I don’t think it takes much, you just have to go onto the website and sign up for it, and I reckon you might as well. 

It’s interesting – there usually isn’t two class actions allowed, but in this case they are allowed because they’re quite different.  Only the DAVIS Class Action includes Ernst & Young, the auditor.  Because, as you say, there’s probably not much money in anything else, unless they’ve got insurance which you don’t know about.  But Ernst & Young, the auditor, obviously does have money, so the DAVIS Class Action probably has a better chance of getting money for people than the other one.  Because it’s including Ernst & Young in it.  You might want to be sure of this, but apparently the DAVIS Class Action doesn’t have to be signed up to, you’re in it whether you like it or not, but you might want to just join up to make sure you are in it.  Because as I say, there’s no downside and you might as well join.  

Ros says – do you think Speedcast problems are temporary or more of a problem for them?

I think they’re more of a problem, to be honest.  I’m not an analyst, I haven’t been studying this company but my initial look at the business suggests that their big problem is too much debt.  Their gearing is over 200%, so I think that’s going to hamper them, that is a fundamental problem, that is not a temporary problem, they can’t really do anything about it.  They’ve certainly got too much debt.  That would be okay if the business was growing quickly.  The trouble is that it turns out that providing broadband internet to ships at sea is much more competitive than you might have thought.  I remember I interviewed these people a while ago and it seemed to me to be quite an interesting business to providing remote location broadband and in particular, ships at sea.

But if you think about it, the problem is that most ships are operated by big companies, the big cruise companies or the big freight businesses, and in that case the margins can’t be very good because these customers have a lot of clout, they have a lot of bargaining power.  Also, because of the amount of money involved, which is quite large – we’re talking about big cruise ships with everybody on the internet, so it’s quite a significant account.  If you get Carnival Cruise Ships, for example, or P&O, Orient, or whatever, that’s a big deal so there’s lots of companies trying to get involved.  It isn’t as if Speedcast has got some kind of monopoly.  It’s really in a competitive game. 

It’s got a lot of debt, it’s got a lot of competition, and so its margins are under pressure.  I don’t think there is any short-term answer here.  I’m not saying for a moment that they’re going to go broke or anything, but I would stay away from them to be honest.  I think that they’re not temporary issues.  That’s my view.

Jason says – any thoughts on Woolworths announcement on the exit of pubs and liquor?

Well, if I was a Woolworths shareholder, which I’m not, I’d be disappointed they were getting rid of Dan Murphy’s – I mean, Dan Murphy’s is a wonderful business, has always been a wonderful business, fantastic.  The best liquor merchant in the country by far.  What they’re doing is they’re roping that into the pubs and the pokies and separately listing it.  There’s a bit of confusion as to how they’re going to do it, but it looks like it’s going to be an in-specie distribution to existing shareholders.  If you’re a Woolworths shareholder, you’ll get shares in Dan Murphy’s as well as shares in Woolworths, so you’re not going to miss out.  I did see some talk about them raising cash from it which is a different proposition entirely and so there may be some possibility that they’ll sell the thing for cash, but basically I think what we’re talking about is a distribution and a demerger of the business to existing Woolworths shareholders.  I mean, there’s no doubt about it, Dan Murphy’s is a much better business than Big W, which they’re keeping. 

Big W is being murdered by K-Mart and may be able to turn around eventually, but it’s a tough slog for Big W.  You’d be inclined to get rid of Big W before you get rid of Dan Murphy’s, but I get that it does make sense to put Dan Murphy’s together with the pubs, of course.  They’re all in the business of booze and the pokies go with the pubs of course, so I think it makes sense.  Also, I guess it makes sense to allow Woolworths to concentrate on its supermarket, particularly with Kaufland coming.  Costco are on a roll, Aldi on a roll… Coles and Woolworths are in for a world of pain over the next few years because of the German retailers and Costco, I mean they’re going to get hammered.  They’re going to have to have their wits about them, they’re really going to have to concentrate on the game of supermarket.

What they don’t want – and I fully understand it and concur with it – what they don’t need is to be mucking around with pokies and dealing with objections and so on about that.  I think it all makes a fair bit of sense.  Whether it means that Woolworths is a buy – obviously the market quite liked it yesterday, the shares went up 2.5% or something, not a huge increase.  I suppose it’s good to have it off their back or will be at least when the thing goes through.  It might mean that they do better, but as I say, they’ve got some difficult times ahead of them.  

Jamie says – would it be possible to get Avita Medical on for an interview?  They’ve been working on a spray on skin for various medical repairs and they’ve gone up 500% in 12 months.  However, while it looks promising, there’s only limited research online about them.  Also, I guess there are some cross-over applications to what PolyNovo was doing, so it would be interesting to hear what they have to say.

Yes, it would indeed, Jamie, thank you for the suggestion, I will get on it right away.  Avita Medical, on the list – isn’t it, Greg?

Speaking of PolyNovo, Jamie says – I’ve had an amazing run with PolyNovo since your first interview with them, so I cannot thank you enough, just wish I purchased more at 40 cents.  Sales are up 300%, they announced their second million dollar month in a row and they are expanding production.  I also see they’re now in the ASX 300, so I presume they’ll get more exposure and continue to go up in price.  Does the team at InvestSMART now see PolyNovo emerging from a speculative stock to becoming the real deal?  In other words, is it time to move from a small TAB bet, to something more substantial?

Well, I don’t know about the team at InvestSMART, but I can ask them sometime when I see them.  I think PolyNovo has always been a real deal, really.  I mean, it is true that they have been small and are still fairly small, but just because a company is small it doesn’t make it a speculative stock.  I think we need to have a think about our definitions here.  But obviously, a small company, you can’t buy a lot of because you don’t want to be stuck because it might be illiquid.  But yes, I do think it is the real deal, PolyNovo.  I also wished I’d bought some, but I didn’t.  I can’t buy everything I interview, and look, we need to remember that not all of the companies I interview go up like that.  PolyNovo has been a great one, but I think I also interviewed Speedcast which has gone down.

Chris says – do you have any thoughts on the Genex share purchase plan?  After your interview with Simon Kidston, I bought a few shares.  The company seems to have had a lot on – capital raisings, Jemalong Solar Project and the Kidston Hydro Project.  The share price seems static.  Maybe time for a follow-up interview?

You’re absolutely right, Chris, and in fact, I’m interviewing Simon Kidston on Monday, so I expect it to be readable on the site and in the email on Tuesday morning, so check it out.

Jeff says – Hi, Alan, welcome back.  I’m fully invested in the share market.  Do you think it’s a good time to exit the market and put the proceeds into a house to live in?   

Well, I can’t give personal advice, and in fact, I should’ve given the disclaimer at the start and didn’t, that this livestream and my answers are general advice, not personal, so I can’t give you personal advice as to what you should do with your money, Jeff.  I would say that in general, the property market, the Australian real estate market appears to be bottoming.  It’s possible that house prices are not getting any lower particularly in Melbourne and Sydney.  They seem to be continuing to fall elsewhere in the country, but in Melbourne and Sydney we seem to be at or near the bottom. 

You won’t find, probably in general – obviously there’s lots of mini-markets around and each house has is its own market, really, but possibly overall the market has stopped falling and it’s not going to start to rise and the share market is at close to a record high.  Record high share market, bottoming property market, could be a good time to switch – without knowing anything about your own circumstances.  For those who are thinking about switching, this might be the moment. 

Remember, the livestream today was general advice, not personal.  And in fact, I just qualified yesterday for my – what’s called the RG146, which is the licencing qualification to allow me to give general advice, so there you are, I’m qualified.  Thanks for your company, I’ll be back next week, I’ll see you then, next Thursday.