PWK to go ahead with project runway

Whilst it hasn't been formally announced today's request from Pipe Networks for a trading halt due to a capital raising can only mean one thing - that they are proceeding with 'Operation Runway'. This is no surprise as previous announcements had indicated that the company had significant support from both domestic and international carriers. PWK is aiming to transform the economics of the Australian internet and telecommunications market by building a new submarine cable linking Sydney to the key international telecommunications interconnection hub at Guam.

PWK have etimated the price tag at somewhere between $180 - $200m - more than their current market cap of around $140m. Last week the company announced a new $20m debt facility had been established with ANZ so the capital raising is expected to be significant, much bigger than their intial IPO offering. Management have consistently said they will not proceed with the project if they cannot produce the high returns on capital they currently earn. Considering the size of the project, estimated to be complete by calendar 4Q08, the project runway undertaking will significantly transform the company into a major telecommunications infrastructure provider domesticly and to a lesser extent abroad.

I expect a healthy appetite for PWK scrip from institutional investors and hope that management give current shareholders the opportunity to top up their existing holdings and take part in the next growth phase of the company.

Buybacks prop up US earnings

1Q07 earnings season has surprised to the upside and looks set to continue the trend of double digit earnings growth. According to Zacks latest report with more than three-quarters of S&P companies having reported median year over year earnings growth is tracking at 9.8%. Healthcare (+15%) and Materials (+14.3%) are the star performers whilst Telecoms (-6.7%) Utilities (2.5%) and Techs (3.1%) the laggards. Zacks revisions ratio stands at 1.59 for FY07 which means analysts are making many more upward earnings revisions than downwards and across all sectors. The ratio is even higher for FY08.

On a total earnings basis even despite recent upgrades earnings growth for S&P 500 stocks is expected to be around 8% for 2007, half that of 2006 levels. Interestingly Zacks draws attention to the effect buybacks are having on earnings growth. In 2006 $432 billion was spent on buybacks by S&P 500 companies contributing an estimated 3.5% to earnings growth with a similar contribution expected for 2007. That would place underlying earnings growth by S&P 500 companies at around 4.5%. Hardly inspiring numbers.

My Portfolio: 6 month return

It hasn't been the best of months for my portfolio falling 16% from a month ago and sending the total return over six months into negative territory whilst the All Ordinaries rose another 4% over the same period. PBP's share price continues to suffer as uncertainty remains with respect to the legal claims being made against the company. PWK has drifted as the market awaits news on the fate of project runway.


I keep rambling on each month about the pointlessness of measuring performance over short times frames with a long term investment philosophy. At least that's my excuse for now, however in 6 months time I'll have to come up with a different one as it won't be valid. Thus in keeping with my philosophy I'll only publish these numbers every quarter from now on. However the performance of my portfolio can always be checked by clicking the My Portfolio link at the top right of the page.

QAN deal fails

The buyout consortium, Airline Partners Australia (APA), failed to keep the Qantas deal alive as they were unable to get 50% acceptances from shareholders by last Friday. Now remember the bid was for $5.45 per share an approximately 35% premium to the pre-bid price of around $4.00. Yes the company is experiencing excellent trading conditions and is on track to post record earnings this year and next. However even bearing that in mind I struggle to justify the pre-bid price of $4.00 with fair value at around $3.77 per share.

The valuation below assumes QAN can continue to provide a ROE at the historically high 16.7% rate forecast in FY08 - a big assumption given their fairly average returns of around 13-14% over the past 5 years. If you're wondering why ROE doesn't show more improvement over the forecast period that's because on average over the last 4 years QAN has raised $200m of new capital each year. A discount rate of 16% reflects QAN's high debt levels. Taking debt into account return on funds employed is a mediocre 12.7%.


This is a low return, highly geared, highly capital intensive business operating in an industry with poor economics. Despite favorable market conditions QAN does not present an attractive investment opportunity at pre-bid prices of $4.00. Even if you don't agree with the above valuation would you reject a 35% return on your money today as opposed to the chance of a 35%+ return in the future in such a poor returning business? Richard Branson was once asked, "How do you become a millionaire?" He replied:

"Start off as a billionaire and then buy an airline"

Updates, follow-ups and other stuff 4

Weak Jobs data fails to dent momentum - The slowdown in the U.S economy finally showed up in the payroll data with non-farm payrolls increasing just 88,000 in April ( Economists had estimated a figure of 100,000) and the unemployment rate rising slightly to 4.5%. A closer look at the detail of the report reveals an even greater underlying weakness than the headline number suggests.

* The April number is the weakest in 29 months and has averaged 129,000 this year opposed to 225,000 at the same time last year.
* In the separate household survey, employment plunged by 468,000, the most since November 2002.
* The unemployment rate rose to 4.5% from 4.4%, but the increase would have been larger except 392,000 potential workers dropped out of the labor force altogether, the biggest decline in the labor force in nearly four years.
* The average workweek declined, and total hours worked in the economy dropped by 0.4%.
* Average wage growth was tepid, rising just 4 cents to $17.21, a 0.2% gain. Wages are up 3.7% in the past year, well off of the peak of 4.3%.

But that was not enough to stifle the market's enthusiasm rising for the 23rd time out of the last 26 sessions (I read somewhere this hasn't happened since 1929) on the back rumored M&A activity between Microsoft and Yahoo, a suspected bid for Reuters and talk of a private equity bid for BHP Billiton. A question no-one seems to ask is, what does is all this activity or at least the rumor of activity actually create? Sorry silly question to ask in a bullmarket.

US 1Q07 Earnings- Despite some weak economic numbers in April it must be acknowledged that 1Q07 earnings have been surprisingly robust. With three-quarters of S&P500 stocks having reported the median growth rate is 10.1% whilst for the broader S&P 1500 (S&P 500, S&P Midcap 400 and S&P Smallcap 600), median growth is running at a 9.5%. If the current trend continues we may yet get another quarter of double digit growth. Analysts had predicted growth of 3-4% which always seemed overly pessimistic however it might just be that they were a quarter too early. With retailers yet to report it will be interesting to see their numbers and commentary on the effect that higher oil prices have had.

RBA on hold indefinitely, go the yen! - The RBA kept interest rates on hold and considering the relatively benign economic data over the last two weeks they didn't have much choice. They also revised down inflation expectations for 2007 smack bang in the middle of their preferred range of 2-3% at 2.5%. However looking to 2008 & 2009 the RBA expects inflation to pick-up again closer to 3%. I don't share the RBA's optimism, a US led slowdown is only just beginning and will filter through to the Australian economy and financial markets in 2008, but hey, what do I know?

Quote of the week - undoubtedly goes to Mike Whitney of counterpunch for this gem on the state of the US stockmarket:

The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed's cheap "low-interest" liquor. One wrong step and he'll plunge headlong into the ether.

You can read the full, very informative article here

All important Jobs

Positive news outshone the negative again yesterday in the US on the back of news that factory orders were up 3.1% in March against an expectation of 2.2%. The negative, private-sector jobs rose by only 64,000 in April, the weakest monthly growth in four years.

A couple of months back I listed a number of major US firms laying off workers. According to outplacement firm Challenger Gray & Christmas job reduction announcements by major U.S. corporations soared by 44% to 70,672 in April representing an 18% increase from April 2006 and the first time since September 2006 that layoffs rose on a year-over-year comparison. The Challenger figures only cover a drop in the ocean of those that lose their jobs each month. The latest figures from the labor department show that a total of 1.2 million workers were discharged from their jobs involuntarily in February

On Friday the Labor Department will release the all important non-farm payrolls report. Expectations are for a modest 100,000 gain in employment. Housing and employment are two of the best indicators of the health of the economy. With housing looking pretty sick, poorer than expected employment figures will not bode well and it may be to much of a negative for the market to ignore.

Accentuate the positive

At least that seems to be the attitude of the market at the moment. After a raft of lacklustre economic data April ended as the best month for the Dow Jones Industrial Average since December 2003 stacking on 5.7%.

On Monday the Dow closed on another record high after the ISM factory index rose to a yearly high of 54.7%. The ISM is considered one of the best real-time indicators of the health of the economy. A measure above 50% means business is getting better, a number below 50% indicates things are getting worse. Out of 18 industries 11 reported expansion prompting Ian Shepherdson of High Frequency Economics to say:

"If sustained, this would cast serious doubt on our view that the economy will slow further,"..."The next ISM is now of critical importance to the bear story."

Meanwhile the National Association of Realtors reported that its pending home sales index fell 4.9% in March, more than 10% lower than a year ago and to its lowest level since March 2003. Not exactly positive news but as seems to be the trend of late the market soldiers on unfazed.