Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.
Speaker 2: I'm James Kirkby. Welcome aboard everybody.
Speaker 1: As a private investor in shares, you're probably already realized
Speaker 1: that you're at the back of the queue when things
Speaker 1: go wrong, and I think we almost expect to be
Speaker 1: dotted out of the best deals.
Speaker 2: In some ways. It's often been like that.
Speaker 1: It's infuriating as well to watch really good stocks being
Speaker 1: cherry picked, you know, by overseas takeover merchants as time
Speaker 1: goes by. But something on a whole other level has
Speaker 1: been happening on the share market this year. It's what
Speaker 1: I would call the plundering of the ASX by private
Speaker 1: equity groups and it's come to a head with this week.
Speaker 2: There was a.
Speaker 1: Stock folks called health Scope, which was an extraordinary story,
Speaker 1: a small company that literally became a five million dollar
Speaker 1: company and then it was taken over by private equity
Speaker 1: and this week it went into receivership. But thirty seven
Speaker 1: hospitals might I add attached to that. Joining me on
Speaker 1: the show today is Eric Johnson. He's Associate editor Business
Speaker 1: on The Australian. He's been on the show before and
Speaker 1: he's been following this from the very beginning.
Speaker 3: Hawai, Eric, gooday, James, thanks for having me on.
Speaker 2: Good to have you on.
Speaker 1: We might briefly explain the importance of this story to
Speaker 1: all our listeners because it's the backdrop here is about
Speaker 1: the share market we know in which we expect to
Speaker 1: invest getting hollowed out right, and we mentioned a few
Speaker 1: things there. Takeovers is one and great company has been
Speaker 1: taken over. But could you explain to everyone just briefly
Speaker 1: about health Scope, what's happened, where are we at there?
Speaker 3: So the name Healthscope is probably not that widely known,
Speaker 3: but people would know the local hospitals like a Knox
Speaker 3: private hospital. There's a Sydney clinic and people would know that.
Speaker 3: So it's a pretty important part of the health sector
Speaker 3: in terms of it's the second largest private hospital operator
Speaker 3: and it also operates the Northern Beaches Hospital that's relatively
Speaker 3: new one up in Sydney as well. And it's a
Speaker 3: really important part because it's a lot of the well
Speaker 3: the elective surgery, so non critical stuff but still really important.
Speaker 3: So James, you'll get your hip operation done there or
Speaker 3: your knee operation done there and other things that non
Speaker 3: life you know, threatening but still pretty important for your
Speaker 3: lifestyle now that it was listed on the AX. Previously
Speaker 3: listed back in twenty nineteen, it was subject of a
Speaker 3: pretty aggressive takeover battle. Initially, Australian Super was part of
Speaker 3: a consortium looking to buy it out. So Ossie Super
Speaker 3: wanted to buy it and park it just seeing the
Speaker 3: long term potential of this operator. However, they were edged
Speaker 3: out by a Canadian company and we've heard of this
Speaker 3: company before, called Brookfield, a huge asset manager in terms
Speaker 3: of funds under management. Yes, so yes under management. Brookfield
Speaker 3: were the ones making the chase for Origin Energy about
Speaker 3: two or three years ago ago to and that was
Speaker 3: ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that
Speaker 3: deal from going out here.
Speaker 2: They blocked them. Yeah, so they often work in tandem.
Speaker 2: But so this company, like.
Speaker 1: Health Scope, it was a big six billion dollar company.
Speaker 1: It owned hospitals and obviously these guys bolted because they
Speaker 1: thought they could make more money out of it. Listeners
Speaker 1: would know, like listed on the stock market still something
Speaker 1: like Ramsey Health, nothing like the company it was a
Speaker 1: few years ago, but still a big company, multi billion
Speaker 1: dollar company making you know, half a billion dollar profits.
Speaker 1: Those profits are arising, it can be done. So you
Speaker 1: were onto this fairly early, and I remember reading, I
Speaker 1: don't know, maybe ten days ago you did a piece
Speaker 1: and you called the Brookfield people barbarians, and then you
Speaker 1: said there was two sort of scenarios that were possible,
Speaker 1: and then you know one was receivership, and you said
Speaker 1: that was the most likely, and I remember thinking.
Speaker 2: That's a bit strong, But it's come to passer.
Speaker 1: First of all, when you say barbarians, would you explain
Speaker 1: for people who aren't familiar, what is the's the game
Speaker 1: of these people in Brookfield?
Speaker 2: What do they do?
Speaker 1: Why do they buy the companies in the first place.
Speaker 1: If it's ended up in receivership, something's gone terribly wrong.
Speaker 1: What was their plan and what went wrong?
Speaker 3: To be fair to the barbarians, they didn't plan for
Speaker 3: it to blow up to the extent it did. But
Speaker 3: remember these are meant to be the smartest people in
Speaker 3: the room, and they enjoy telling everybody that they are.
Speaker 3: They badly misread what was happening, but also they undermined
Speaker 3: their own business models. So they came in twenty nineteen,
Speaker 3: overpaid for it, borrowed heavily, so leveraged up the business
Speaker 3: borrowed heavily. Initially, they broke their business, the operating business
Speaker 3: up from all the hospitals they're actually operated, So they
Speaker 3: sold off the physical hospitals, so the building. So what
Speaker 3: was left was a fairly asset like business with a
Speaker 3: lot of debt. So that sale or the hospital was
Speaker 3: partly used to fund the acquisition, so some of that
Speaker 3: distribution went well, that went back to shareholders that previously
Speaker 3: owned it. However, as you know, it's always good to
Speaker 3: have a strong balance sheet for unexpected and in health care.
Speaker 3: Health care is a really complicated industry, and any happened
Speaker 3: what happened a couple of months later, COVID hit and
Speaker 3: all the private hospital sector shut down. Elective surgery effectively
Speaker 3: stopped that starved off the funding the revenue stream, so
Speaker 3: that was a crisis. Yet these hospitals still had to
Speaker 3: pay rent for their overheads and so on.
Speaker 1: Because these guys had leveraged it up right before the
Speaker 1: sort of calamity of COVID, they had no balance sheet
Speaker 1: strength when things went wrong.
Speaker 3: Well, look and just to sort of finish that thought
Speaker 3: as well, so they're also paying off debt, but then
Speaker 3: coming out of COVID was another crist It says, we
Speaker 3: all know for the health sectors, so staff shortages, wage inflation,
Speaker 3: and then also input costs, so spiraling costs for that. Sorry,
Speaker 3: you know, there were people falling out of the system,
Speaker 3: so you know, people paying more for wages. So there
Speaker 3: was just huge pressure on their cost side. Yet the
Speaker 3: revenue about getting from like if surgeries just wasn't covering
Speaker 3: this new sort of real world.
Speaker 1: So everything went wrong and it's now in receivership. And
Speaker 1: I suppose to the people on the street are people
Speaker 1: who use the hospitals. It's pretty scary. So there's thirty
Speaker 1: seven hospitals and anyone listening to the show will know
Speaker 1: one of them for sure. When I looked at the
Speaker 1: listener and I had been in two of them, and
Speaker 1: they're major hospitals in the cities. But the question it begs,
Speaker 1: I suppose, is to one extent, the wider market is
Speaker 1: vulnerable to this sort of thing. You mentioned how Brookfields
Speaker 1: when they came in, they geared up. They leveraged up
Speaker 1: the balance sheet pretty fast. In some ways they used
Speaker 1: the asset they bought to finance the purchase that they did,
Speaker 1: and that rings a bell for me, that reminds me
Speaker 1: of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's
Speaker 1: not exactly the same, but there's parallels, is there.
Speaker 3: And we spoke about it at the top about the barbarians.
Speaker 3: So that's not my term. It's not our term. It's
Speaker 3: made famous by a book. A couple of former Wall
Speaker 3: Street Journal reporters wrote the book about Barbarians of the Gate.
Speaker 3: That was the US company KKR acquiring it's been to
Speaker 3: acquire US food company conglomerate at a time called an
Speaker 3: Abisco and tracking that coming in, stripping the assets, selling
Speaker 3: it off and leaving a very capital light business.
Speaker 2: Yeah.
Speaker 1: So this was the benchmark if you like this, when
Speaker 1: everyone's realized what the game was.
Speaker 2: And KKR they're still around.
Speaker 1: In fact, they have funds listed on our share market,
Speaker 1: and that might be listeners on the show that even
Speaker 1: have investments in them. So it's a two sided thing.
Speaker 1: But I don't want to go to that just now.
Speaker 1: I just want to capture a few other things about this.
Speaker 1: So for most people when they look at the share market,
Speaker 1: most of the intention and most of the action is
Speaker 1: in a small number of companies. The top fifty and
Speaker 1: one of the things we've seen is how private acuity
Speaker 1: will come in. I think in our country or in
Speaker 1: our market, the benchmark, the NJO and the.
Speaker 2: BISCO of our area was Meyer.
Speaker 1: Once upon a time, I think it was TPG if
Speaker 1: I've got that right, who came in and did an
Speaker 1: amazing deal for themselves, and there was all sorts of
Speaker 1: controversy later as to what they did and how they
Speaker 1: did it. More recently, had Sydney Airport a beautiful stock,
Speaker 1: a fabulous asset that investors loved, long term infrastructure play
Speaker 1: again that was shipped off the market and that was
Speaker 1: big super funds playing with private equity again, correct me
Speaker 1: if I'm wrong on this.
Speaker 2: And then this most recent one, this.
Speaker 1: Health scope, which is when everything went wrong, is private
Speaker 1: equity getting it wrong themselves, But it seems to be
Speaker 1: a process that's accelerating now. Is the ASEX particularly vulnerable
Speaker 1: to this? And as ordinary shareholders, how do we deal
Speaker 1: with this fact that these marauding you know, global companies
Speaker 1: just cherry pick like this.
Speaker 3: Well, I was just thinking, well, look there's phrase my
Speaker 3: old economics teachers to drum into me. He said that
Speaker 3: in order for someone to buy something. Someone has to
Speaker 3: sell something. So if somebody is paying over the odds
Speaker 3: for an asset, well you know that's they've got to
Speaker 3: wear the risk. But it does come back to some
Speaker 3: of the issues. I mean, can you know this is
Speaker 3: a broader question. Can someone come in by a hospital
Speaker 3: and sell off all the furniture and cut all the
Speaker 3: stuff and then there's a lot of consequences around that too,
Speaker 3: because that ultimately puts pressure back onto the public system.
Speaker 3: And we don't have time to talk about all that
Speaker 3: what's going on in there. But your earlier point about
Speaker 3: these quality companies, I was just checking out a list,
Speaker 3: so you're right. Sydney Airport Minerals. These are companies that
Speaker 3: have left the AX in the last few years. City Airport,
Speaker 3: Odds Minerals. There were Spark Infrastructure, so that was a
Speaker 3: pretty boring company that no one had ever heard about.
Speaker 3: Boring but nice, nice sort of yield stock. We've seen
Speaker 3: a whole bunch of holding out of industrials and through
Speaker 3: other companies. This is not all private equity acquisitions. Borrel
Speaker 3: CSR James Hardy. There's a drama about it.
Speaker 1: Relocated builders, isn't it, Eric, That's the entire building materials sector.
Speaker 2: Yeah, and of what was the a SX, which were.
Speaker 1: All Greek companies and popular with private investors up to
Speaker 1: the time they were taken US.
Speaker 3: So look, you know that happens, and as long as
Speaker 3: there's stock markets, there's always acquisitions. Nothing wrong with acquisitions.
Speaker 3: But what's the structural sort of issue that's been happening
Speaker 3: is that Australia or the ASEX hasn't been able to
Speaker 3: replenish the companies that are leaving the AX and that's
Speaker 3: starting to become an issue. And that's why you're started
Speaker 3: to see companies like CBA, you know, you know trading
Speaker 3: at your that are wise sky high because it's just
Speaker 3: not the man is just not the avenues to pack
Speaker 3: your money.
Speaker 1: Really interesting, Yes, that is an interesting explanation of what's
Speaker 1: going on. Look, take a short break because I want
Speaker 1: to come back, and what I want to do is
Speaker 1: try and guide our listeners to how to deal with
Speaker 1: this and particularly what's going to happen next in terms
Speaker 1: of private equity and takeover merchants on the ASEX and
Speaker 1: how you play this. Hello, welcome back to The Australian's
Speaker 1: Money Puzzle podcast. I'm James Kirby talking to Eric Johnson,
Speaker 1: my colleague on The Australian.
Speaker 2: He's been on the show before.
Speaker 1: He's been covering this really interesting area of large Australian,
Speaker 1: famous Australian shares basically disappearing.
Speaker 2: Off the market for one reason or another.
Speaker 1: And this share markt is actually shrinking, that is, the
Speaker 1: asex is shrinking. Now, if you are an investor to
Speaker 1: some extent your interest here, as Eric said, do you
Speaker 1: take the money and run? Why wouldn't you if someone
Speaker 1: offers you, you know, forty percent more than they did
Speaker 1: the day before for a stock and why wouldn't you
Speaker 1: take that cash? Each deal in and of itself is
Speaker 1: logical at the time. I just wonder, Eric, particularly about
Speaker 1: health Scope. You wonder, without getting into social or cultural conversation,
Speaker 1: just strictly as an investment question, whether the troubles you know,
Speaker 1: in age care stocks which have been severe, health care
Speaker 1: stocks which are exceptionally severe now with the receivership of
Speaker 1: a company that was once worth six billion dollars, You wonder,
Speaker 1: as an investor, is this area just too much trouble
Speaker 1: as long term investment.
Speaker 3: It's a really difficult one because one of the big
Speaker 3: themes that you speak to the likes of, you know,
Speaker 3: the global asset managers, you know, your black Rocks, your
Speaker 3: black styles, saving macquaries and so on. The big several themes.
Speaker 3: They talk about digitization, they talk about technology and AI.
Speaker 3: Health and aging always comes up as a big theme
Speaker 3: as an area to invest in. Yet the names that
Speaker 3: you've sort of pointed out, and the sectors you pointed out,
Speaker 3: they're really difficult. They're really difficult. They like it as
Speaker 3: a theme because we're all getting older.
Speaker 1: Yeah, it's top down, a top down thematic sounds good
Speaker 1: right bottom.
Speaker 3: Up, it sounds really good. But we are getting older
Speaker 3: and we're demanding more services. However, we're not seeing private
Speaker 3: organizations aren't seeing that. It's again, I think it's a
Speaker 3: complicated because we're also confusing heavily regulated sector with you know,
Speaker 3: we're coming against regulation right rightly. So there should be regulation,
Speaker 3: there should be minimum staffing in age care, there should
Speaker 3: be certain standards and so on. That's a given. However,
Speaker 3: where those themes are coming in, they're not sort of
Speaker 3: compatible with that heavy re agent. So that's where it's going.
Speaker 3: I think health scope and this is all private hospitals too,
Speaker 3: facing another challenge in that when even back in twenty
Speaker 3: nineteen or twenty seventeen, or you know last decade, when
Speaker 3: you went in for your knee repair, James, so you
Speaker 3: could play football on the weekend, you were in usually
Speaker 3: for about four or five days. You're in, you stayed
Speaker 3: in and your health insurer, because you have the Gold coverage,
Speaker 3: was paying it all. However, today you go in the
Speaker 3: morning and you're out by three pm in the afternoon.
Speaker 3: You're playing footy on the weekend too, And that's the
Speaker 3: advance of changes in technology.
Speaker 1: Right, productivity inside healthcare has had the surprise I'll come
Speaker 1: that it's just explaining for my that's a problem financially.
Speaker 3: Well because then me as health Scope, I own this heavy,
Speaker 3: huge hospital that is no longer in full demand all
Speaker 3: the time. So there's another area like also, surgeons are
Speaker 3: not tied to specific hospitals. As you know, you went
Speaker 3: to your surgeon to get your knee fixed, he referred
Speaker 3: you to this day to a day care clinic down
Speaker 3: the road, so that you're not even going to the
Speaker 3: health hospital. So they're sitting there with empty rooms and
Speaker 3: empty beds, still paying their debt and their bills.
Speaker 1: That also happened, So that came on the back of
Speaker 1: post COVID almost or at least the same time.
Speaker 2: So you have those two things working against them.
Speaker 1: I suppos a big question then, Eric is from again
Speaker 1: from an investment perspective, Maybe an investor can simply choose
Speaker 1: to play the other side. You mentioned KK or you
Speaker 1: can now invest in they all have, all the big
Speaker 1: players have ASX listed funds. And in recent times by
Speaker 1: that I mean the last two years, there's been a
Speaker 1: really big push by private equity funds to the average
Speaker 1: retail investor, to mom and dad, and to say, look,
Speaker 1: your super fund has always been in here, They've done
Speaker 1: really wear private equity come and join us, and you
Speaker 1: can just simply buy, you know whatever, a thousand dollars
Speaker 1: both of private equity fund number one, two or three.
Speaker 1: They're very common. They health scope crisis facing brook Field
Speaker 1: is that What does that tell us about private equity
Speaker 1: funds and the risks that they might put in front
Speaker 1: of the average investor that aren't so obvious.
Speaker 3: Yeah, Look for the average investor, the punter, the retail investor.
Speaker 3: As you always to your listeners, you have a broad mix,
Speaker 3: you have your low risk, you have your mid risk
Speaker 3: and maybe just a fraction too of higher risk, and
Speaker 3: private equity as an asset class is expensive. It's high cost,
Speaker 3: but it promises higher return.
Speaker 1: Yeah, right, high risk hy return or at least they're
Speaker 1: elevated risk elevator return.
Speaker 3: Yeah, and for every sort of health scope, which is
Speaker 3: a spectacular disaster, and even Maya and there's a lot
Speaker 3: of high profile Dick Smith was another that was a
Speaker 3: disaster for private equity. There's probably about one hundred little
Speaker 3: no name companies that are actually that are actually that
Speaker 3: actually works, and these aren't necessarily listed companies. And private
Speaker 3: equity it does have a role, and we can't say
Speaker 3: as a rule private equity is all bad. It does
Speaker 3: provide funding at funding source and alternat funding source and
Speaker 3: potentially a pathway for a more established and sophisticated sort
Speaker 3: of investment case. Where it does go bad is when
Speaker 3: they come in they sell off all the furniture and
Speaker 3: leave a very light, heavily leveraged business. And look, that's
Speaker 3: really short term. That's a really short term model. And
Speaker 3: if you keep doing that, you're going to run out
Speaker 3: of run away pretty quickly.
Speaker 2: Which seems to be exactly what happened at the school.
Speaker 1: Tell me the big super funds, what are they good
Speaker 1: guys or bad guys here depending on.
Speaker 2: The day I'd see of the day.
Speaker 3: Really so like some of that list that we spoke about,
Speaker 3: so Spark and Sydney Airport, I mean that they were
Speaker 3: super fun led acquisition, so they're buyouts. Their investment horizon
Speaker 3: is different, so generally it looks to like three to
Speaker 3: five year turnaround case. Another one with Virgin Australia at
Speaker 3: the airline was on the cusp of listings that was
Speaker 3: brought from administration where no one wanted to touch it by
Speaker 3: private equity and it's held onto it for now. What
Speaker 3: is it about five years? Bang on at times times
Speaker 3: spot on. I don't think that the great guys they've
Speaker 3: made it. They've made an absolute windfall on the back
Speaker 3: of this, but they took the risk. They took the
Speaker 3: risk when no one wanted to.
Speaker 2: That was an example where it brooks really nicely.
Speaker 1: I mean we get to retain a second major airline
Speaker 1: domestically and investors took the risk, as you see, and anyone.
Speaker 2: Who was in on that did very well well.
Speaker 1: This is to some extent dependent on the flat what
Speaker 1: would happen soon enough, you would expect if they got
Speaker 1: their docks in a role there, haven't they?
Speaker 3: Yeah? And look, you know, is to the original question
Speaker 3: about is superis of the bad guys? So their investment
Speaker 3: horizon that they buy and hold for the long term
Speaker 3: ten ten to twenty years. So if Ozzie Super came in,
Speaker 3: they did team up with a private equity fund and
Speaker 3: in doing that there aim was to be patient capital.
Speaker 3: We're going to buy this thing and hold on to it.
Speaker 3: So they probably wouldn't have flogged the assets to the
Speaker 3: extent it did.
Speaker 1: They probably mentioned in your piece that they did intervene
Speaker 1: one time and save what's it origin from?
Speaker 3: Yeah, so, and that that's a really interesting sceory. And
Speaker 3: that was a case of where investors, Australia investors, some
Speaker 3: Australia investors. I was in Super and there was a
Speaker 3: couple others behind it stood up and said no. Because
Speaker 3: often when private equity comes in and offers that forty
Speaker 3: percent premium for something, it's not doing it in our
Speaker 3: the goodness of its heart and often jumps on companies
Speaker 3: when they're trading at cyclical lows or you know they've
Speaker 3: had they've made some bad calls or something. So so
Speaker 3: there's shares a way off, so footy percent premium looks
Speaker 3: pretty healthy to to where it is today, but it
Speaker 3: looks pretty ordinary to where it was five years ago.
Speaker 3: So so in that case, Brookfield did come up its
Speaker 3: plan for Origin, big energy company. The plan was to
Speaker 3: buy it and carve it up and flip it into
Speaker 3: several funds. Ironically, Canadian Prime Minister Mark Corney was was
Speaker 3: the face, the friendly face of one of these funds,
Speaker 3: and he was he was leading the acquisition. So that
Speaker 3: Bank of England, Bank of England, that's right, I see. However,
Speaker 3: Australian Super stood up and said, look what you're offering
Speaker 3: is I was it was around about nine dollars mark
Speaker 3: what you're offering for Origin. We think over the long
Speaker 3: term Origin is worth a lot more. It has these
Speaker 3: key key quality assets, key quality attributes about it. I was.
Speaker 3: He Super had it it was able to to sort
Speaker 3: of and asked what's called a blocking the stake just
Speaker 3: under it, and had a couple other friends. It was determined,
Speaker 3: we're not interested in negotiating. We think this business is
Speaker 3: great for we're buying and holding, so see you later.
Speaker 3: And Brookfield tried everything and tried every trick in the book,
Speaker 3: but ultimately had to take its bat and ball and
Speaker 3: go home. It could not buy it.
Speaker 1: Right, Interesting, So they can the big super funds can
Speaker 1: exercise enormous power obviously in these situations and the episodes
Speaker 1: where they were very useful to the local market.
Speaker 3: And the postcript to that is that Ossie Super was
Speaker 3: right that the shares ultimately increased over the offer price
Speaker 3: over time. It didn't happen straight away, but it gradually
Speaker 3: stopped having that direction.
Speaker 1: That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay,
Speaker 1: So Origin is an example. Really, Origin Energy is an example.
Speaker 1: Folks for private equity might have done awfully well and
Speaker 1: in some extent plunder the AESX. Again, in that case,
Speaker 1: Australia Super came in and saved the day. We now
Speaker 1: know because of the movement and price since that time.
Speaker 1: So interesting, two says to every story. All right, we'd
Speaker 1: be back in a moment. We have some really good
Speaker 1: questions from David and Neil and Trevor. Hello, welcome back
Speaker 1: to The Australian's Money Puzzled podcast. James Kirby here talking
Speaker 1: to Eric Johnson. We've been talking about something I think
Speaker 1: is really was really worth looking.
Speaker 2: At today, which is what's going on big picture.
Speaker 1: If you like on the AX, where we depend so
Speaker 1: much on a couple of dozen companies and they are vulnerable.
Speaker 1: It's the very open market, and that's all fine, but
Speaker 1: sometimes we as individual shareholders, we do lose. Right, So
Speaker 1: Sydney Airport whipped away from under our eyes, and everyone
Speaker 1: I think regrets that health scope of five billion dollar
Speaker 1: company was also whipped away from under our eyes, and
Speaker 1: we might have been better off because it turns out
Speaker 1: that it's in receivership, so we're are that five billion
Speaker 1: dollars go?
Speaker 2: Well, individual shareholders didn't lose it. At least that's useful.
Speaker 1: Okay, David asks, I was interested in your recent episode
Speaker 1: on gold. Your guest quoted some interesting figures for returns.
Speaker 1: Who didn't mention the digital gold bitcoin. I've owned both
Speaker 1: for years, and bitcoin outperforms gold. And then David says,
Speaker 1: I asked chat GPT to perform an analysis. I don't
Speaker 1: know if I completely agree with that term, and it
Speaker 1: said bitcoin has delivered significantly higher returns over the past
Speaker 1: decade compared to gold. That is, but gold has been
Speaker 1: more stable surely this would have been worth a mention,
Speaker 1: says David, given the assertion that gold is the hot
Speaker 1: investment product. It's just plain wrong. Okay, David, never advice
Speaker 1: information only. They're both pretty good, first of all. And
Speaker 1: if bitcoin at a certain point in time has delivered
Speaker 1: more on a ten year basis than gold, I don't
Speaker 1: deny that for a moment, So put that on the table.
Speaker 1: It's just a question of your choice. Really, I think
Speaker 1: the more interesting part of the question is using AI
Speaker 1: to get some steer. Look, I don't think there's anything
Speaker 1: wrong with it. I just I would just say to
Speaker 1: David and all the debts out there, it's it's uninterpreted information.
Speaker 1: It's information. It's uninterpreted. That's why we have short like this,
Speaker 1: And I'd be careful how far you go with AI.
Speaker 1: Aren't testing your investment hypothesis in real life?
Speaker 3: What do you think, Eric, Yeah, I look one hundred
Speaker 3: percent on that, and it's a it's about garbage in
Speaker 3: and garbage out in terms of the algorithm, and sometimes
Speaker 3: it's quality of stuff. But you just don't know what
Speaker 3: what ingredients been put in there, So so use it
Speaker 3: for for something, don't rely on it. Becoin. It's really interesting.
Speaker 3: It's a it's a trying to find a correlation to bigcoin,
Speaker 3: and that's been the big struggle. So, so is it
Speaker 3: a global economic trend?
Speaker 2: Just you might just explain what you mean by that.
Speaker 3: So, so how does it move? So does it? So?
Speaker 3: Why does it move? I think that So does it
Speaker 3: move when the economy is booming, doesn't move when the
Speaker 3: economy is slow. So we think about gold. So whenever
Speaker 3: there's inflation explosion, gold goes up. Everyone rushes. Gold is
Speaker 3: a hedge against inflation. And we've also seen that recently
Speaker 3: with gold with uncertainty about the US US bonds and
Speaker 3: the US treasuries as a store of As a store
Speaker 3: of value, bitcoin struggles a bit. There is a thread
Speaker 3: that when there's an excess of money in the financial
Speaker 3: system that actually booms. So you know, I've got to
Speaker 3: spare whatever I can't invest that and that then that
Speaker 3: supports it. But again it comes back to demand now
Speaker 3: and we're increasingly saying obviously when Trump came in, we
Speaker 3: saw a big jump in bitcoin because Trumps saying we're
Speaker 3: gonna We're going.
Speaker 1: To Yeah, more than that, he's very keen, he's very
Speaker 1: keen altogether.
Speaker 2: Is he launching his own coins?
Speaker 3: Yeah? Correct, So so that that's the type of thing,
Speaker 3: so you know, whatever it is comes to Also, like gold,
Speaker 3: bitcoin doesn't pay yield and it depends what you It
Speaker 3: doesn't pay an income, so it's like buying them debartwork
Speaker 3: and hanging on the wall.
Speaker 1: So you're saying that gold as what has the history
Speaker 1: that we know has repeatedly proven itself to be a
Speaker 1: useful non correlated asset in that when the market's going down,
Speaker 1: gold should go up. But bitcoin it's unclear whether it's
Speaker 1: unclear still.
Speaker 3: Yeah, the trend, like the history isn't there, and the
Speaker 3: liquidity isn't there, and it will become and it will
Speaker 3: become a lot clearer over time. And I think it
Speaker 3: is it's a legitimate asset class today because of the
Speaker 3: sheep value of it.
Speaker 2: That's interesting and it's suggesting you say that. Okay, very interesting.
Speaker 1: I hope that was useful to you, David from Neil,
Speaker 1: which is my question could be a podcast topic. What
Speaker 1: is productivity? How is it measured? What does the productivity
Speaker 1: Commission do? And why does it matter to invest us?
Speaker 1: It's a great question. Neil always comes up doesn't it,
Speaker 1: And I think does economic explanation, which is it's not
Speaker 1: rocket science, yes, would be boy efficiency.
Speaker 2: But for investors, why does it matter? I think that's
Speaker 2: the interesting one. Eric.
Speaker 1: How would it reveal it if a company was productive?
Speaker 1: How would it reveal itself as a listed stock? Would
Speaker 1: there be some numbers that would be obvious?
Speaker 2: Is it just profit? Is it simply more profitable or
Speaker 2: what we were to play in?
Speaker 3: Yeah, So when you know what the top of that
Speaker 3: question about what does it look like and what does
Speaker 3: it do? It reminds me of a very famous newspaper cartoonist,
Speaker 3: Bruce Petty based in Melbourne, and he used to draw
Speaker 3: these amazing images about the economy and what the economy
Speaker 3: looked like, all these crazy machines that no one really
Speaker 3: knew what they look like or what they were, but
Speaker 3: they did something. That's the economy. Productivity is much like this,
Speaker 3: much the same, but productivity, And it was talked about
Speaker 3: why does it matter? Because it matters. Everything matters, and
Speaker 3: it all comes back to productivity. So how what makes
Speaker 3: a productive company? So there's a couple of measures. Obviously
Speaker 3: you compare like for like apples for apples. So we're
Speaker 3: very lucky in Australia that we have the big four banks,
Speaker 3: we could relatively vanilla, relatively comparable. So cost to income
Speaker 3: ratio would be one fact.
Speaker 2: Yeah okay, and then the one that has the what
Speaker 2: are you looking for, the one with the lowest.
Speaker 3: Yeah, one lower, And this measure would generally move around
Speaker 3: if you're so you're the amount of revenue that comes
Speaker 3: in and compared to the amount of your cost base.
Speaker 3: So for example, you know, West west Pac runs around
Speaker 3: about sort of mid forties cost to income ratio, whereas
Speaker 3: Common Bank runs is sort of like a high thirties.
Speaker 1: So it's a much better ratio because the lower the better,
Speaker 1: even though it's a much bigger bank where big.
Speaker 3: Go Combank is No, but that means Combank is more efficient.
Speaker 1: So the LA what I said, yeah, come make is
Speaker 1: more efficient even though it's bigger. So that's your That's
Speaker 1: how it translates to in a stock how productivity kicks
Speaker 1: in as a useful measure for a listed.
Speaker 3: Company, and so retailing and is another area. So you
Speaker 3: tend to look at profit margin, your net margin or
Speaker 3: your gross margin, and so that's the amount of profit
Speaker 3: relative that you're making. And so we're looking at Maya
Speaker 3: this week, and that's quite interesting. So it's it runs
Speaker 3: a margin of about two percent, So so from everything
Speaker 3: it's selling roughly, the profit it's making on that is
Speaker 3: about two percent. Where whereas it, as you know, recently
Speaker 3: bought the Solomon lose A Power Brands business and the
Speaker 3: profit margins that's making is around nine percent. So every
Speaker 3: pair of genes it sells and just gens is making
Speaker 3: around nine percent. So my wants to get a bit
Speaker 3: of that margin, and a little bit of that increase
Speaker 3: in margin will translate to a big change in headline profit.
Speaker 3: In fact, my was promising if you can lift its
Speaker 3: margin by just one percent on that two percent, that
Speaker 3: translated to a thirty three million dollar EBIT of earnings increase.
Speaker 1: So a street mathematical. If the margin's improved, the profits improve,
Speaker 1: the share place of improve.
Speaker 3: Yeah, but here it goes and look in the big
Speaker 3: structural thing that's coming around, you can't go. You can't
Speaker 3: see any company briefing today without a CEO getting up
Speaker 3: and talking about AI and the prospect. So look, it
Speaker 3: is coming. It is real. It's not here in a
Speaker 3: big way yet, but it is here a way, and
Speaker 3: companies are just flexing it and starting to figure out.
Speaker 3: And we heard the Teltra boss Vicky Brady this week
Speaker 3: at a strategy briefing. She was quite open about it.
Speaker 3: She said, look, by the end of the decade, the
Speaker 3: way the Telterra looks, it will employ less people from
Speaker 3: what it does today. And that was the basis that
Speaker 3: AI will do a lot of work that is done
Speaker 3: manually today. So that's one aspect that we will start
Speaker 3: seeing an impact on the cost space.
Speaker 1: So neil big issue at the moment is AI on
Speaker 1: the basis that obviously if someone can do what they
Speaker 1: used to do in six hours in two hours or
Speaker 1: two minutes, depending on what the promise is for MEI
Speaker 1: you can see how to cut straight through to profits.
Speaker 2: Yeah.
Speaker 3: Yeah, And I think when Neil would be really good
Speaker 3: exercise for Neil is if he want to get ahead
Speaker 3: of the pack on it is to have a look
Speaker 3: at the big companies that are and how they're talking
Speaker 3: about their use of AI and how they're applying AI
Speaker 3: today because that may not translate to something today, but
Speaker 3: in two or three is time, it may translate to
Speaker 3: something pretty significant. Right.
Speaker 1: Yes, those who master AI will master the universe. Okay, terrific.
Speaker 1: We may we've just went out of time, so I
Speaker 1: think we might just leave it there for today. Great
Speaker 1: to have you on, Eric Johnson, associated is a bus
Speaker 1: that's from the Australian.
Speaker 3: Thanks James, nice to be here.
Speaker 2: Thanks very much for coming on the show. And let's
Speaker 2: have some more correspondents. And usually we'll call out this
Speaker 2: week in that I have lots of emails flowing in,
Speaker 2: but you know what, folks, some questions.
Speaker 1: That aren't about the supertax would be particularly welcome because
Speaker 1: it's a flooding the inbox.
Speaker 2: And we will cover them. As you know, we've covered
Speaker 2: them in special shows and there's more to come. I'm
Speaker 2: sure on that one.
Speaker 1: But there are other issues too, So let's hear from
Speaker 1: you the money Puzzle at the Australian dot com dot au.
Speaker 2: Talk to you soon,