09/01/2007 - 22:00

Boom passes some locals by

09/01/2007 - 22:00

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If there really is a boom in Western Australia, someone forgot to tell the top Perth-based industrial companies.

If there really is a boom in Western Australia, someone forgot to tell the top Perth-based industrial companies.

The past 12 months, especially for some of the bigger names in town, have been ordinary, to say the least. Rather than rising with the commodities-price boom, the share prices of some have fallen.

For investment advisers who recommend the construction of WA-focused portfolios, or for domestic media trying to pump up home-town heroes, the performance of companies such as Wesfarmers, Alinta, Fleetwood, Clough and Coventry is a loud wake-up call.

Wesfarmers rose all the way from $37 at the start of 2006 to close the year at $37.84, a gain of 84 cents, or 2.27 per cent. Alinta rose from $11.15 to $11.82, up 67 cents (6 per cent). Fleetwood rose from $7.51 to $8.10, up 59 cents (7.8 per cent), Clough was up five cents from 37 cents to 42 cents (13.5 per cent), and Coventry fell from $5.94 to $4.40, down 25.9 per cent.

Miners, naturally, did better. Perilya, Paladin, Kagara, Jubilee, Fortescue, Sally Malay, Western Areas and Independence were all double-your-money bets, or better, and direct reflections of prices soaring for iron ore, nickel, zinc and uranium.

But the point of looking at the local industrials is that they are supposed to be feeding off the business being generated in the mining sector. If that’s the case, however, it is not being reflected in the stock market.

For investment theorists, the condition of the WA industrial market is fascinating, producing three possible explanations – and one extrapolation.

1. It is possible that some of the locals did their best work on the market in 2005, ahead of the boom. Fleetwood might be a good example of that.

2. It is also possible that some of the locals actually represent excellent buying opportunities because of their poor 2006 in a booming economy.

3. It is possible that the locals have simply missed the boom through bad luck, bad timing, or bad management – in the same way that some parts of the local hospitality industry is missing the boom because it can’t find enough staff to keep the doors open.

And now for the extrapolation; it is also possible that the wider investment community is signalling the end of the boom because the market, as a general rule, anticipates future trends rather than reflects past events.

If that’s the case, and Briefcase subscribes to the theory of a predictive market, then 2007 might be a lot flatter than some enthusiasts imagine.

Rising interest rates, and a rising foreign exchange rate, are clear warning signs of what lies ahead in terms of earnings.

•••

Having rung the warning bell, it is also worth noting that companies such as Wesfarmers actually come into their own when the going gets a little tougher and asset values start to slide. The company has a history of knowing how to play the investment cycle, buying in down times and selling when the market is high.

Of the other four examples chosen for this New Year’s sobriety check, there is not a lot to be said. Fleetwood is probably a case of running hard early; Alinta is a business that has put too many balls in the air at the same time and let a few crash to the ground; Clough is in some sort of recovery mode (fingers crossed), but it had better hurry or the boom will be over before it cashes in; and Coventry is simply a business that went to sleep 30 years ago and forgot to wake up.

•••

Picking five stocks, critics might say, is a little harsh. Perhaps another five would produce a different result.

The problem with that defensive reflex is twofold. First, the five chosen represent a cross section of industry – retail, engineering, energy and, with Wesfarmers, a smorgasbord of industries.

Perhaps another way of looking at the performance of WA stocks is to pick the industrials that have a spot in the top 300 of the Australian Stock Exchange.

If you do that, you get up a couple of strong performers, such as WA Newspapers, Austal, and Multiplex.

WA News did well, rising by $4.13 (49.9 per cent) from $8.27 to $12.40 but, as a knowledgeable investors would quickly say, WA News is being driven by takeover speculation rather than underlying financial performance.

Austal outperformed WA News, rising by $1.17 (51.5 per cent) to $3.44, while Multiplex’s rise of 72 cents (23 per cent) to $3.85 was largely a rebound from a horrible 12 months the year before.

•••

The problem with picking local industrial stocks in the top 300 is that you also have to acknowledge a few dogs.

pSivida, the curious biotechnology business, crashed from 71 cents to 24 cents (down 66 per cent), iiNet wasn’t far behind with a 51.6 per cent slide from $1.82 to 88 cents, and Great Southern Plantations was a surprise loser, falling from $3.26 to $2.81 (down 13.8 per cent).

Much can learned from the 2006 snapshot of WA’s top listed industrial stocks, but the picture Briefcase takes away is that it was a poor year, and that the gene pool is awfully thin (perhaps endangered, even?).

•••

On an equally curious thought to start 2007, Briefcase was fascinated by a series of stories over the Christmas holidays about the inability of hospitality providers, especially in the South West, to find staff.

In Dunsborough and Margaret River there were even restaurants that could not open in the evening because of the staff shortage.

Missing from this tale of woe from the business owners was the other side of the equation.

How is it possible for a restaurant to be unable to find someone to wait on tables that unemployment benefits are still being paid to anyone in the South West?

In terms of the skill requirement, writing down an order for two flat whites and a muffin, and successfully delivering that piece of paper to the man behind the counter, has to be about as easy as it comes.

It’s a bit of a stretch, but is it possible that, in the South West, and around the Fremantle area, we really are looking at some of the laziest people in Australia?

•••

As a final thought to kick the year into action, did anybody else burst out laughing when Planning Minister Alannah MacTiernan displayed her profound ignorance of business when announcing plans for the redevelopment of Northbridge.

Unless Briefcase is going deaf, the amazing Alannah told the ABC that she was sure that Kerry Stokes would want to participate because, ‘what land owner wouldn’t want to see their land earn money?’ – or words awfully close to that.

Well, Alannah dearest, in a property boom the best gains generally come from what is called capital appreciation – and in those times the worst thing you can do is to actually do something.

Call it inertia, call it what you like, but a capital gain from sitting on your hands is a lot easier than actually doing something; like trying to develop a project at a time when construction costs are soaring, and when unions can hold you to ransom.

Or has Alannah forgotten about her pet railway project already?

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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