May 29, 2025 • 32 mins
Everyday shareholders have always been at the back of the queue when it comes to takeovers, but this year global private equity players have clearly emerged as the 'Barbarians at the gate'.
Healthscope, once a $5 billion stock is now in receivership along with its chain of 37 hospitals after a private equity deal went very wrong...what's next?
Eric Johnston, Associate Editor- Business, joins James Kirby in this episode.
In today's show, we cover...
How do we navigate around private equity plunder?
Can social infrastructure such as hospitals ever make useful listed investments?
Have we been unfair to Bitcoin?
How productivity makes a difference to your share portfolio
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:10):
Hello, and welcome to the Australians Money Puzzle podcast.
Speaker 2 (00:13):
I'm James Kirkby. Welcome aboard everybody.
Speaker 1 (00:15):
As a private investor in shares, you're probably already realized
that you're at the back of the queue when things
go wrong, and I think we almost expect to be
dotted out of the best deals.
Speaker 2 (00:26):
In some ways. It's often been like that.
Speaker 1 (00:28):
It's infuriating as well to watch really good stocks being
cherry picked, you know, by overseas takeover merchants as time
goes by. But something on a whole other level has
been happening on the share market this year. It's what
I would call the plundering of the ASX by private
equity groups and it's come to a head with this week.
Speaker 2 (00:48):
There was a.
Speaker 1 (00:48):
Stock folks called health Scope, which was an extraordinary story,
a small company that literally became a five million dollar
company and then it was taken over by private equity
and this week it went into receivership. But thirty seven
hospitals might I add attached to that. Joining me on
the show today is Eric Johnson. He's Associate editor Business
on The Australian. He's been on the show before and
(01:10):
he's been following this from the very beginning.
Speaker 3 (01:12):
Hawai, Eric, gooday, James, thanks for having me on.
Speaker 2 (01:16):
Good to have you on.
Speaker 1 (01:17):
We might briefly explain the importance of this story to
all our listeners because it's the backdrop here is about
the share market we know in which we expect to
invest getting hollowed out right, and we mentioned a few
things there. Takeovers is one and great company has been
taken over. But could you explain to everyone just briefly
about health Scope, what's happened, where are we at there?
Speaker 3 (01:43):
So the name Healthscope is probably not that widely known,
but people would know the local hospitals like a Knox
private hospital. There's a Sydney clinic and people would know that.
So it's a pretty important part of the health sector
in terms of it's the second largest private hospital operator
(02:03):
and it also operates the Northern Beaches Hospital that's relatively
new one up in Sydney as well. And it's a
really important part because it's a lot of the well
the elective surgery, so non critical stuff but still really important.
So James, you'll get your hip operation done there or
your knee operation done there and other things that non
(02:28):
life you know, threatening but still pretty important for your
lifestyle now that it was listed on the AX. Previously
listed back in twenty nineteen, it was subject of a
pretty aggressive takeover battle. Initially, Australian Super was part of
a consortium looking to buy it out. So Ossie Super
wanted to buy it and park it just seeing the
(02:49):
long term potential of this operator. However, they were edged
out by a Canadian company and we've heard of this
company before, called Brookfield, a huge asset manager in terms
of funds under management. Yes, so yes under management. Brookfield
were the ones making the chase for Origin Energy about
two or three years ago ago to and that was
(03:11):
ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that
deal from going out here.
Speaker 2 (03:16):
They blocked them. Yeah, so they often work in tandem.
But so this company, like.
Speaker 1 (03:20):
Health Scope, it was a big six billion dollar company.
It owned hospitals and obviously these guys bolted because they
thought they could make more money out of it. Listeners
would know, like listed on the stock market still something
like Ramsey Health, nothing like the company it was a
few years ago, but still a big company, multi billion
dollar company making you know, half a billion dollar profits.
Those profits are arising, it can be done. So you
(03:43):
were onto this fairly early, and I remember reading, I
don't know, maybe ten days ago you did a piece
and you called the Brookfield people barbarians, and then you
said there was two sort of scenarios that were possible,
and then you know one was receivership, and you said
that was the most likely, and I remember thinking.
Speaker 2 (04:00):
That's a bit strong, But it's come to passer.
Speaker 1 (04:04):
First of all, when you say barbarians, would you explain
for people who aren't familiar, what is the's the game
of these people in Brookfield?
Speaker 2 (04:10):
What do they do?
Speaker 1 (04:11):
Why do they buy the companies in the first place.
If it's ended up in receivership, something's gone terribly wrong.
What was their plan and what went wrong?
Speaker 3 (04:22):
To be fair to the barbarians, they didn't plan for
it to blow up to the extent it did. But
remember these are meant to be the smartest people in
the room, and they enjoy telling everybody that they are.
They badly misread what was happening, but also they undermined
their own business models. So they came in twenty nineteen,
(04:44):
overpaid for it, borrowed heavily, so leveraged up the business
borrowed heavily. Initially, they broke their business, the operating business
up from all the hospitals they're actually operated, So they
sold off the physical hospitals, so the building. So what
was left was a fairly asset like business with a
lot of debt. So that sale or the hospital was
(05:07):
partly used to fund the acquisition, so some of that
distribution went well, that went back to shareholders that previously
owned it. However, as you know, it's always good to
have a strong balance sheet for unexpected and in health care.
Health care is a really complicated industry, and any happened
what happened a couple of months later, COVID hit and
all the private hospital sector shut down. Elective surgery effectively
(05:33):
stopped that starved off the funding the revenue stream, so
that was a crisis. Yet these hospitals still had to
pay rent for their overheads and so on.
Speaker 1 (05:42):
Because these guys had leveraged it up right before the
sort of calamity of COVID, they had no balance sheet
strength when things went wrong.
Speaker 3 (05:52):
Well, look and just to sort of finish that thought
as well, so they're also paying off debt, but then
coming out of COVID was another crist It says, we
all know for the health sectors, so staff shortages, wage inflation,
and then also input costs, so spiraling costs for that. Sorry,
you know, there were people falling out of the system,
(06:12):
so you know, people paying more for wages. So there
was just huge pressure on their cost side. Yet the
revenue about getting from like if surgeries just wasn't covering
this new sort of real world.
Speaker 1 (06:26):
So everything went wrong and it's now in receivership. And
I suppose to the people on the street are people
who use the hospitals. It's pretty scary. So there's thirty
seven hospitals and anyone listening to the show will know
one of them for sure. When I looked at the
listener and I had been in two of them, and
they're major hospitals in the cities. But the question it begs,
I suppose, is to one extent, the wider market is
(06:47):
vulnerable to this sort of thing. You mentioned how Brookfields
when they came in, they geared up. They leveraged up
the balance sheet pretty fast. In some ways they used
the asset they bought to finance the purchase that they did,
and that rings a bell for me, that reminds me
of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's
not exactly the same, but there's parallels, is there.
Speaker 3 (07:12):
And we spoke about it at the top about the barbarians.
So that's not my term. It's not our term. It's
made famous by a book. A couple of former Wall
Street Journal reporters wrote the book about Barbarians of the Gate.
That was the US company KKR acquiring it's been to
acquire US food company conglomerate at a time called an
(07:35):
Abisco and tracking that coming in, stripping the assets, selling
it off and leaving a very capital light business.
Speaker 2 (07:44):
Yeah.
Speaker 1 (07:44):
So this was the benchmark if you like this, when
everyone's realized what the game was.
Speaker 2 (07:49):
And KKR they're still around.
Speaker 1 (07:51):
In fact, they have funds listed on our share market,
and that might be listeners on the show that even
have investments in them. So it's a two sided thing.
But I don't want to go to that just now.
I just want to capture a few other things about this.
So for most people when they look at the share market,
most of the intention and most of the action is
in a small number of companies. The top fifty and
(08:11):
one of the things we've seen is how private acuity
will come in. I think in our country or in
our market, the benchmark, the NJO and the.
Speaker 2 (08:19):
BISCO of our area was Meyer.
Speaker 1 (08:21):
Once upon a time, I think it was TPG if
I've got that right, who came in and did an
amazing deal for themselves, and there was all sorts of
controversy later as to what they did and how they
did it. More recently, had Sydney Airport a beautiful stock,
a fabulous asset that investors loved, long term infrastructure play
again that was shipped off the market and that was
(08:43):
big super funds playing with private equity again, correct me
if I'm wrong on this.
Speaker 2 (08:48):
And then this most recent one, this.
Speaker 1 (08:50):
Health scope, which is when everything went wrong, is private
equity getting it wrong themselves, But it seems to be
a process that's accelerating now. Is the ASEX particularly vulnerable
to this? And as ordinary shareholders, how do we deal
with this fact that these marauding you know, global companies
just cherry pick like this.
Speaker 3 (09:11):
Well, I was just thinking, well, look there's phrase my
old economics teachers to drum into me. He said that
in order for someone to buy something. Someone has to
sell something. So if somebody is paying over the odds
for an asset, well you know that's they've got to
wear the risk. But it does come back to some
(09:32):
of the issues. I mean, can you know this is
a broader question. Can someone come in by a hospital
and sell off all the furniture and cut all the
stuff and then there's a lot of consequences around that too,
because that ultimately puts pressure back onto the public system.
And we don't have time to talk about all that
what's going on in there. But your earlier point about
(09:55):
these quality companies, I was just checking out a list,
so you're right. Sydney Airport Minerals. These are companies that
have left the AX in the last few years. City Airport,
Odds Minerals. There were Spark Infrastructure, so that was a
pretty boring company that no one had ever heard about.
Boring but nice, nice sort of yield stock. We've seen
a whole bunch of holding out of industrials and through
(10:17):
other companies. This is not all private equity acquisitions. Borrel
CSR James Hardy. There's a drama about it.
Speaker 1 (10:24):
Relocated builders, isn't it, Eric, That's the entire building materials sector.
Speaker 2 (10:29):
Yeah, and of what was the a SX, which were.
Speaker 1 (10:31):
All Greek companies and popular with private investors up to
the time they were taken US.
Speaker 3 (10:36):
So look, you know that happens, and as long as
there's stock markets, there's always acquisitions. Nothing wrong with acquisitions.
But what's the structural sort of issue that's been happening
is that Australia or the ASEX hasn't been able to
replenish the companies that are leaving the AX and that's
starting to become an issue. And that's why you're started
(10:56):
to see companies like CBA, you know, you know trading
at your that are wise sky high because it's just
not the man is just not the avenues to pack
your money.
Speaker 1 (11:06):
Really interesting, Yes, that is an interesting explanation of what's
going on. Look, take a short break because I want
to come back, and what I want to do is
try and guide our listeners to how to deal with
this and particularly what's going to happen next in terms
of private equity and takeover merchants on the ASEX and
how you play this. Hello, welcome back to The Australian's
(11:34):
Money Puzzle podcast. I'm James Kirby talking to Eric Johnson,
my colleague on The Australian.
Speaker 2 (11:39):
He's been on the show before.
Speaker 1 (11:40):
He's been covering this really interesting area of large Australian,
famous Australian shares basically disappearing.
Speaker 2 (11:49):
Off the market for one reason or another.
Speaker 1 (11:51):
And this share markt is actually shrinking, that is, the
asex is shrinking. Now, if you are an investor to
some extent your interest here, as Eric said, do you
take the money and run? Why wouldn't you if someone
offers you, you know, forty percent more than they did
the day before for a stock and why wouldn't you
take that cash? Each deal in and of itself is
logical at the time. I just wonder, Eric, particularly about
(12:14):
health Scope. You wonder, without getting into social or cultural conversation,
just strictly as an investment question, whether the troubles you know,
in age care stocks which have been severe, health care
stocks which are exceptionally severe now with the receivership of
(12:34):
a company that was once worth six billion dollars, You wonder,
as an investor, is this area just too much trouble
as long term investment.
Speaker 3 (12:46):
It's a really difficult one because one of the big
themes that you speak to the likes of, you know,
the global asset managers, you know, your black Rocks, your
black styles, saving macquaries and so on. The big several themes.
They talk about digitization, they talk about technology and AI.
Health and aging always comes up as a big theme
(13:10):
as an area to invest in. Yet the names that
you've sort of pointed out, and the sectors you pointed out,
they're really difficult. They're really difficult. They like it as
a theme because we're all getting older.
Speaker 1 (13:21):
Yeah, it's top down, a top down thematic sounds good
right bottom.
Speaker 3 (13:26):
Up, it sounds really good. But we are getting older
and we're demanding more services. However, we're not seeing private
organizations aren't seeing that. It's again, I think it's a
complicated because we're also confusing heavily regulated sector with you know,
we're coming against regulation right rightly. So there should be regulation,
(13:48):
there should be minimum staffing in age care, there should
be certain standards and so on. That's a given. However,
where those themes are coming in, they're not sort of
compatible with that heavy re agent. So that's where it's going.
I think health scope and this is all private hospitals too,
facing another challenge in that when even back in twenty
(14:12):
nineteen or twenty seventeen, or you know last decade, when
you went in for your knee repair, James, so you
could play football on the weekend, you were in usually
for about four or five days. You're in, you stayed
in and your health insurer, because you have the Gold coverage,
was paying it all. However, today you go in the
(14:32):
morning and you're out by three pm in the afternoon.
You're playing footy on the weekend too, And that's the
advance of changes in technology.
Speaker 1 (14:42):
Right, productivity inside healthcare has had the surprise I'll come
that it's just explaining for my that's a problem financially.
Speaker 3 (14:51):
Well because then me as health Scope, I own this heavy,
huge hospital that is no longer in full demand all
the time. So there's another area like also, surgeons are
not tied to specific hospitals. As you know, you went
to your surgeon to get your knee fixed, he referred
(15:12):
you to this day to a day care clinic down
the road, so that you're not even going to the
health hospital. So they're sitting there with empty rooms and
empty beds, still paying their debt and their bills.
Speaker 1 (15:24):
That also happened, So that came on the back of
post COVID almost or at least the same time.
Speaker 2 (15:29):
So you have those two things working against them.
Speaker 1 (15:31):
I suppos a big question then, Eric is from again
from an investment perspective, Maybe an investor can simply choose
to play the other side. You mentioned KK or you
can now invest in they all have, all the big
players have ASX listed funds. And in recent times by
(15:53):
that I mean the last two years, there's been a
really big push by private equity funds to the average
retail investor, to mom and dad, and to say, look,
your super fund has always been in here, They've done
really wear private equity come and join us, and you
can just simply buy, you know whatever, a thousand dollars
both of private equity fund number one, two or three.
They're very common. They health scope crisis facing brook Field
(16:20):
is that What does that tell us about private equity
funds and the risks that they might put in front
of the average investor that aren't so obvious.
Speaker 3 (16:28):
Yeah, Look for the average investor, the punter, the retail investor.
As you always to your listeners, you have a broad mix,
you have your low risk, you have your mid risk
and maybe just a fraction too of higher risk, and
private equity as an asset class is expensive. It's high cost,
but it promises higher return.
Speaker 1 (16:50):
Yeah, right, high risk hy return or at least they're
elevated risk elevator return.
Speaker 3 (16:54):
Yeah, and for every sort of health scope, which is
a spectacular disaster, and even Maya and there's a lot
of high profile Dick Smith was another that was a
disaster for private equity. There's probably about one hundred little
no name companies that are actually that are actually that
actually works, and these aren't necessarily listed companies. And private
(17:14):
equity it does have a role, and we can't say
as a rule private equity is all bad. It does
provide funding at funding source and alternat funding source and
potentially a pathway for a more established and sophisticated sort
of investment case. Where it does go bad is when
they come in they sell off all the furniture and
(17:34):
leave a very light, heavily leveraged business. And look, that's
really short term. That's a really short term model. And
if you keep doing that, you're going to run out
of run away pretty quickly.
Speaker 2 (17:46):
Which seems to be exactly what happened at the school.
Speaker 1 (17:49):
Tell me the big super funds, what are they good
guys or bad guys here depending on.
Speaker 2 (17:56):
The day I'd see of the day.
Speaker 3 (17:59):
Really so like some of that list that we spoke about,
so Spark and Sydney Airport, I mean that they were
super fun led acquisition, so they're buyouts. Their investment horizon
is different, so generally it looks to like three to
five year turnaround case. Another one with Virgin Australia at
(18:22):
the airline was on the cusp of listings that was
brought from administration where no one wanted to touch it by
private equity and it's held onto it for now. What
is it about five years? Bang on at times times
spot on. I don't think that the great guys they've
made it. They've made an absolute windfall on the back
of this, but they took the risk. They took the
(18:43):
risk when no one wanted to.
Speaker 2 (18:44):
That was an example where it brooks really nicely.
Speaker 1 (18:47):
I mean we get to retain a second major airline
domestically and investors took the risk, as you see, and anyone.
Speaker 2 (18:54):
Who was in on that did very well well.
Speaker 1 (18:57):
This is to some extent dependent on the flat what
would happen soon enough, you would expect if they got
their docks in a role there, haven't they?
Speaker 3 (19:04):
Yeah? And look, you know, is to the original question
about is superis of the bad guys? So their investment
horizon that they buy and hold for the long term
ten ten to twenty years. So if Ozzie Super came in,
they did team up with a private equity fund and
in doing that there aim was to be patient capital.
(19:25):
We're going to buy this thing and hold on to it.
So they probably wouldn't have flogged the assets to the
extent it did.
Speaker 1 (19:33):
They probably mentioned in your piece that they did intervene
one time and save what's it origin from?
Speaker 3 (19:39):
Yeah, so, and that that's a really interesting sceory. And
that was a case of where investors, Australia investors, some
Australia investors. I was in Super and there was a
couple others behind it stood up and said no. Because
often when private equity comes in and offers that forty
percent premium for something, it's not doing it in our
the goodness of its heart and often jumps on companies
(20:01):
when they're trading at cyclical lows or you know they've
had they've made some bad calls or something. So so
there's shares a way off, so footy percent premium looks
pretty healthy to to where it is today, but it
looks pretty ordinary to where it was five years ago.
So so in that case, Brookfield did come up its
plan for Origin, big energy company. The plan was to
(20:22):
buy it and carve it up and flip it into
several funds. Ironically, Canadian Prime Minister Mark Corney was was
the face, the friendly face of one of these funds,
and he was he was leading the acquisition. So that
Bank of England, Bank of England, that's right, I see. However,
Australian Super stood up and said, look what you're offering
(20:44):
is I was it was around about nine dollars mark
what you're offering for Origin. We think over the long
term Origin is worth a lot more. It has these
key key quality assets, key quality attributes about it. I was.
He Super had it it was able to to sort
of and asked what's called a blocking the stake just
under it, and had a couple other friends. It was determined,
(21:06):
we're not interested in negotiating. We think this business is
great for we're buying and holding, so see you later.
And Brookfield tried everything and tried every trick in the book,
but ultimately had to take its bat and ball and
go home. It could not buy it.
Speaker 1 (21:20):
Right, Interesting, So they can the big super funds can
exercise enormous power obviously in these situations and the episodes
where they were very useful to the local market.
Speaker 3 (21:31):
And the postcript to that is that Ossie Super was
right that the shares ultimately increased over the offer price
over time. It didn't happen straight away, but it gradually
stopped having that direction.
Speaker 1 (21:42):
That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay,
So Origin is an example. Really, Origin Energy is an example.
Folks for private equity might have done awfully well and
in some extent plunder the AESX. Again, in that case,
Australia Super came in and saved the day. We now
know because of the movement and price since that time.
(22:03):
So interesting, two says to every story. All right, we'd
be back in a moment. We have some really good
questions from David and Neil and Trevor. Hello, welcome back
to The Australian's Money Puzzled podcast. James Kirby here talking
to Eric Johnson. We've been talking about something I think
(22:26):
is really was really worth looking.
Speaker 2 (22:28):
At today, which is what's going on big picture.
Speaker 1 (22:31):
If you like on the AX, where we depend so
much on a couple of dozen companies and they are vulnerable.
It's the very open market, and that's all fine, but
sometimes we as individual shareholders, we do lose. Right, So
Sydney Airport whipped away from under our eyes, and everyone
I think regrets that health scope of five billion dollar
(22:51):
company was also whipped away from under our eyes, and
we might have been better off because it turns out
that it's in receivership, so we're are that five billion
dollars go?
Speaker 2 (23:00):
Well, individual shareholders didn't lose it. At least that's useful.
Speaker 1 (23:04):
Okay, David asks, I was interested in your recent episode
on gold. Your guest quoted some interesting figures for returns.
Who didn't mention the digital gold bitcoin. I've owned both
for years, and bitcoin outperforms gold. And then David says,
I asked chat GPT to perform an analysis. I don't
(23:24):
know if I completely agree with that term, and it
said bitcoin has delivered significantly higher returns over the past
decade compared to gold. That is, but gold has been
more stable surely this would have been worth a mention,
says David, given the assertion that gold is the hot
investment product. It's just plain wrong. Okay, David, never advice
information only. They're both pretty good, first of all. And
(23:46):
if bitcoin at a certain point in time has delivered
more on a ten year basis than gold, I don't
deny that for a moment, So put that on the table.
It's just a question of your choice. Really, I think
the more interesting part of the question is using AI
to get some steer. Look, I don't think there's anything
wrong with it. I just I would just say to
David and all the debts out there, it's it's uninterpreted information.
(24:08):
It's information. It's uninterpreted. That's why we have short like this,
And I'd be careful how far you go with AI.
Aren't testing your investment hypothesis in real life?
Speaker 3 (24:18):
What do you think, Eric, Yeah, I look one hundred
percent on that, and it's a it's about garbage in
and garbage out in terms of the algorithm, and sometimes
it's quality of stuff. But you just don't know what
what ingredients been put in there, So so use it
for for something, don't rely on it. Becoin. It's really interesting.
(24:42):
It's a it's a trying to find a correlation to bigcoin,
and that's been the big struggle. So, so is it
a global economic trend?
Speaker 2 (24:52):
Just you might just explain what you mean by that.
Speaker 3 (24:55):
So, so how does it move? So does it? So?
Why does it move? I think that So does it
move when the economy is booming, doesn't move when the
economy is slow. So we think about gold. So whenever
there's inflation explosion, gold goes up. Everyone rushes. Gold is
a hedge against inflation. And we've also seen that recently
with gold with uncertainty about the US US bonds and
(25:17):
the US treasuries as a store of As a store
of value, bitcoin struggles a bit. There is a thread
that when there's an excess of money in the financial
system that actually booms. So you know, I've got to
spare whatever I can't invest that and that then that
supports it. But again it comes back to demand now
(25:40):
and we're increasingly saying obviously when Trump came in, we
saw a big jump in bitcoin because Trumps saying we're
gonna We're going.
Speaker 1 (25:47):
To Yeah, more than that, he's very keen, he's very
keen altogether.
Speaker 2 (25:52):
Is he launching his own coins?
Speaker 3 (25:54):
Yeah? Correct, So so that that's the type of thing,
so you know, whatever it is comes to Also, like gold,
bitcoin doesn't pay yield and it depends what you It
doesn't pay an income, so it's like buying them debartwork
and hanging on the wall.
Speaker 1 (26:08):
So you're saying that gold as what has the history
that we know has repeatedly proven itself to be a
useful non correlated asset in that when the market's going down,
gold should go up. But bitcoin it's unclear whether it's
unclear still.
Speaker 3 (26:27):
Yeah, the trend, like the history isn't there, and the
liquidity isn't there, and it will become and it will
become a lot clearer over time. And I think it
is it's a legitimate asset class today because of the
sheep value of it.
Speaker 2 (26:38):
That's interesting and it's suggesting you say that. Okay, very interesting.
Speaker 1 (26:41):
I hope that was useful to you, David from Neil,
which is my question could be a podcast topic. What
is productivity? How is it measured? What does the productivity
Commission do? And why does it matter to invest us?
It's a great question. Neil always comes up doesn't it,
And I think does economic explanation, which is it's not
(27:02):
rocket science, yes, would be boy efficiency.
Speaker 2 (27:05):
But for investors, why does it matter? I think that's
the interesting one. Eric.
Speaker 1 (27:12):
How would it reveal it if a company was productive?
How would it reveal itself as a listed stock? Would
there be some numbers that would be obvious?
Speaker 2 (27:21):
Is it just profit? Is it simply more profitable or
what we were to play in?
Speaker 3 (27:27):
Yeah, So when you know what the top of that
question about what does it look like and what does
it do? It reminds me of a very famous newspaper cartoonist,
Bruce Petty based in Melbourne, and he used to draw
these amazing images about the economy and what the economy
looked like, all these crazy machines that no one really
(27:48):
knew what they look like or what they were, but
they did something. That's the economy. Productivity is much like this,
much the same, but productivity, And it was talked about
why does it matter? Because it matters. Everything matters, and
it all comes back to productivity. So how what makes
a productive company? So there's a couple of measures. Obviously
(28:11):
you compare like for like apples for apples. So we're
very lucky in Australia that we have the big four banks,
we could relatively vanilla, relatively comparable. So cost to income
ratio would be one fact.
Speaker 2 (28:25):
Yeah okay, and then the one that has the what
are you looking for, the one with the lowest.
Speaker 3 (28:30):
Yeah, one lower, And this measure would generally move around
if you're so you're the amount of revenue that comes
in and compared to the amount of your cost base.
So for example, you know, West west Pac runs around
about sort of mid forties cost to income ratio, whereas
(28:51):
Common Bank runs is sort of like a high thirties.
Speaker 1 (28:54):
So it's a much better ratio because the lower the better,
even though it's a much bigger bank where big.
Speaker 3 (29:00):
Go Combank is No, but that means Combank is more efficient.
Speaker 1 (29:05):
So the LA what I said, yeah, come make is
more efficient even though it's bigger. So that's your That's
how it translates to in a stock how productivity kicks
in as a useful measure for a listed.
Speaker 3 (29:18):
Company, and so retailing and is another area. So you
tend to look at profit margin, your net margin or
your gross margin, and so that's the amount of profit
relative that you're making. And so we're looking at Maya
this week, and that's quite interesting. So it's it runs
a margin of about two percent, So so from everything
(29:41):
it's selling roughly, the profit it's making on that is
about two percent. Where whereas it, as you know, recently
bought the Solomon lose A Power Brands business and the
profit margins that's making is around nine percent. So every
pair of genes it sells and just gens is making
around nine percent. So my wants to get a bit
of that margin, and a little bit of that increase
(30:04):
in margin will translate to a big change in headline profit.
In fact, my was promising if you can lift its
margin by just one percent on that two percent, that
translated to a thirty three million dollar EBIT of earnings increase.
Speaker 1 (30:20):
So a street mathematical. If the margin's improved, the profits improve,
the share place of improve.
Speaker 3 (30:26):
Yeah, but here it goes and look in the big
structural thing that's coming around, you can't go. You can't
see any company briefing today without a CEO getting up
and talking about AI and the prospect. So look, it
is coming. It is real. It's not here in a
big way yet, but it is here a way, and
companies are just flexing it and starting to figure out.
(30:48):
And we heard the Teltra boss Vicky Brady this week
at a strategy briefing. She was quite open about it.
She said, look, by the end of the decade, the
way the Telterra looks, it will employ less people from
what it does today. And that was the basis that
AI will do a lot of work that is done
manually today. So that's one aspect that we will start
(31:12):
seeing an impact on the cost space.
Speaker 1 (31:15):
So neil big issue at the moment is AI on
the basis that obviously if someone can do what they
used to do in six hours in two hours or
two minutes, depending on what the promise is for MEI
you can see how to cut straight through to profits.
Speaker 2 (31:28):
Yeah.
Speaker 3 (31:29):
Yeah, And I think when Neil would be really good
exercise for Neil is if he want to get ahead
of the pack on it is to have a look
at the big companies that are and how they're talking
about their use of AI and how they're applying AI
today because that may not translate to something today, but
in two or three is time, it may translate to
something pretty significant. Right.
Speaker 1 (31:49):
Yes, those who master AI will master the universe. Okay, terrific.
We may we've just went out of time, so I
think we might just leave it there for today. Great
to have you on, Eric Johnson, associated is a bus
that's from the Australian.
Speaker 3 (32:01):
Thanks James, nice to be here.
Speaker 2 (32:02):
Thanks very much for coming on the show. And let's
have some more correspondents. And usually we'll call out this
week in that I have lots of emails flowing in,
but you know what, folks, some questions.
Speaker 1 (32:13):
That aren't about the supertax would be particularly welcome because
it's a flooding the inbox.
Speaker 2 (32:18):
And we will cover them. As you know, we've covered
them in special shows and there's more to come. I'm
sure on that one.
Speaker 1 (32:23):
But there are other issues too, So let's hear from
you the money Puzzle at the Australian dot com dot au.
Speaker 2 (32:30):
Talk to you soon,
Hello, and welcome to the Australians Money Puzzle podcast.
Speaker 2 (00:13):
I'm James Kirkby. Welcome aboard everybody.
Speaker 1 (00:15):
As a private investor in shares, you're probably already realized
that you're at the back of the queue when things
go wrong, and I think we almost expect to be
dotted out of the best deals.
Speaker 2 (00:26):
In some ways. It's often been like that.
Speaker 1 (00:28):
It's infuriating as well to watch really good stocks being
cherry picked, you know, by overseas takeover merchants as time
goes by. But something on a whole other level has
been happening on the share market this year. It's what
I would call the plundering of the ASX by private
equity groups and it's come to a head with this week.
Speaker 2 (00:48):
There was a.
Speaker 1 (00:48):
Stock folks called health Scope, which was an extraordinary story,
a small company that literally became a five million dollar
company and then it was taken over by private equity
and this week it went into receivership. But thirty seven
hospitals might I add attached to that. Joining me on
the show today is Eric Johnson. He's Associate editor Business
on The Australian. He's been on the show before and
(01:10):
he's been following this from the very beginning.
Speaker 3 (01:12):
Hawai, Eric, gooday, James, thanks for having me on.
Speaker 2 (01:16):
Good to have you on.
Speaker 1 (01:17):
We might briefly explain the importance of this story to
all our listeners because it's the backdrop here is about
the share market we know in which we expect to
invest getting hollowed out right, and we mentioned a few
things there. Takeovers is one and great company has been
taken over. But could you explain to everyone just briefly
about health Scope, what's happened, where are we at there?
Speaker 3 (01:43):
So the name Healthscope is probably not that widely known,
but people would know the local hospitals like a Knox
private hospital. There's a Sydney clinic and people would know that.
So it's a pretty important part of the health sector
in terms of it's the second largest private hospital operator
(02:03):
and it also operates the Northern Beaches Hospital that's relatively
new one up in Sydney as well. And it's a
really important part because it's a lot of the well
the elective surgery, so non critical stuff but still really important.
So James, you'll get your hip operation done there or
your knee operation done there and other things that non
(02:28):
life you know, threatening but still pretty important for your
lifestyle now that it was listed on the AX. Previously
listed back in twenty nineteen, it was subject of a
pretty aggressive takeover battle. Initially, Australian Super was part of
a consortium looking to buy it out. So Ossie Super
wanted to buy it and park it just seeing the
(02:49):
long term potential of this operator. However, they were edged
out by a Canadian company and we've heard of this
company before, called Brookfield, a huge asset manager in terms
of funds under management. Yes, so yes under management. Brookfield
were the ones making the chase for Origin Energy about
two or three years ago ago to and that was
(03:11):
ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that
deal from going out here.
Speaker 2 (03:16):
They blocked them. Yeah, so they often work in tandem.
But so this company, like.
Speaker 1 (03:20):
Health Scope, it was a big six billion dollar company.
It owned hospitals and obviously these guys bolted because they
thought they could make more money out of it. Listeners
would know, like listed on the stock market still something
like Ramsey Health, nothing like the company it was a
few years ago, but still a big company, multi billion
dollar company making you know, half a billion dollar profits.
Those profits are arising, it can be done. So you
(03:43):
were onto this fairly early, and I remember reading, I
don't know, maybe ten days ago you did a piece
and you called the Brookfield people barbarians, and then you
said there was two sort of scenarios that were possible,
and then you know one was receivership, and you said
that was the most likely, and I remember thinking.
Speaker 2 (04:00):
That's a bit strong, But it's come to passer.
Speaker 1 (04:04):
First of all, when you say barbarians, would you explain
for people who aren't familiar, what is the's the game
of these people in Brookfield?
Speaker 2 (04:10):
What do they do?
Speaker 1 (04:11):
Why do they buy the companies in the first place.
If it's ended up in receivership, something's gone terribly wrong.
What was their plan and what went wrong?
Speaker 3 (04:22):
To be fair to the barbarians, they didn't plan for
it to blow up to the extent it did. But
remember these are meant to be the smartest people in
the room, and they enjoy telling everybody that they are.
They badly misread what was happening, but also they undermined
their own business models. So they came in twenty nineteen,
(04:44):
overpaid for it, borrowed heavily, so leveraged up the business
borrowed heavily. Initially, they broke their business, the operating business
up from all the hospitals they're actually operated, So they
sold off the physical hospitals, so the building. So what
was left was a fairly asset like business with a
lot of debt. So that sale or the hospital was
(05:07):
partly used to fund the acquisition, so some of that
distribution went well, that went back to shareholders that previously
owned it. However, as you know, it's always good to
have a strong balance sheet for unexpected and in health care.
Health care is a really complicated industry, and any happened
what happened a couple of months later, COVID hit and
all the private hospital sector shut down. Elective surgery effectively
(05:33):
stopped that starved off the funding the revenue stream, so
that was a crisis. Yet these hospitals still had to
pay rent for their overheads and so on.
Speaker 1 (05:42):
Because these guys had leveraged it up right before the
sort of calamity of COVID, they had no balance sheet
strength when things went wrong.
Speaker 3 (05:52):
Well, look and just to sort of finish that thought
as well, so they're also paying off debt, but then
coming out of COVID was another crist It says, we
all know for the health sectors, so staff shortages, wage inflation,
and then also input costs, so spiraling costs for that. Sorry,
you know, there were people falling out of the system,
(06:12):
so you know, people paying more for wages. So there
was just huge pressure on their cost side. Yet the
revenue about getting from like if surgeries just wasn't covering
this new sort of real world.
Speaker 1 (06:26):
So everything went wrong and it's now in receivership. And
I suppose to the people on the street are people
who use the hospitals. It's pretty scary. So there's thirty
seven hospitals and anyone listening to the show will know
one of them for sure. When I looked at the
listener and I had been in two of them, and
they're major hospitals in the cities. But the question it begs,
I suppose, is to one extent, the wider market is
(06:47):
vulnerable to this sort of thing. You mentioned how Brookfields
when they came in, they geared up. They leveraged up
the balance sheet pretty fast. In some ways they used
the asset they bought to finance the purchase that they did,
and that rings a bell for me, that reminds me
of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's
not exactly the same, but there's parallels, is there.
Speaker 3 (07:12):
And we spoke about it at the top about the barbarians.
So that's not my term. It's not our term. It's
made famous by a book. A couple of former Wall
Street Journal reporters wrote the book about Barbarians of the Gate.
That was the US company KKR acquiring it's been to
acquire US food company conglomerate at a time called an
(07:35):
Abisco and tracking that coming in, stripping the assets, selling
it off and leaving a very capital light business.
Speaker 2 (07:44):
Yeah.
Speaker 1 (07:44):
So this was the benchmark if you like this, when
everyone's realized what the game was.
Speaker 2 (07:49):
And KKR they're still around.
Speaker 1 (07:51):
In fact, they have funds listed on our share market,
and that might be listeners on the show that even
have investments in them. So it's a two sided thing.
But I don't want to go to that just now.
I just want to capture a few other things about this.
So for most people when they look at the share market,
most of the intention and most of the action is
in a small number of companies. The top fifty and
(08:11):
one of the things we've seen is how private acuity
will come in. I think in our country or in
our market, the benchmark, the NJO and the.
Speaker 2 (08:19):
BISCO of our area was Meyer.
Speaker 1 (08:21):
Once upon a time, I think it was TPG if
I've got that right, who came in and did an
amazing deal for themselves, and there was all sorts of
controversy later as to what they did and how they
did it. More recently, had Sydney Airport a beautiful stock,
a fabulous asset that investors loved, long term infrastructure play
again that was shipped off the market and that was
(08:43):
big super funds playing with private equity again, correct me
if I'm wrong on this.
Speaker 2 (08:48):
And then this most recent one, this.
Speaker 1 (08:50):
Health scope, which is when everything went wrong, is private
equity getting it wrong themselves, But it seems to be
a process that's accelerating now. Is the ASEX particularly vulnerable
to this? And as ordinary shareholders, how do we deal
with this fact that these marauding you know, global companies
just cherry pick like this.
Speaker 3 (09:11):
Well, I was just thinking, well, look there's phrase my
old economics teachers to drum into me. He said that
in order for someone to buy something. Someone has to
sell something. So if somebody is paying over the odds
for an asset, well you know that's they've got to
wear the risk. But it does come back to some
(09:32):
of the issues. I mean, can you know this is
a broader question. Can someone come in by a hospital
and sell off all the furniture and cut all the
stuff and then there's a lot of consequences around that too,
because that ultimately puts pressure back onto the public system.
And we don't have time to talk about all that
what's going on in there. But your earlier point about
(09:55):
these quality companies, I was just checking out a list,
so you're right. Sydney Airport Minerals. These are companies that
have left the AX in the last few years. City Airport,
Odds Minerals. There were Spark Infrastructure, so that was a
pretty boring company that no one had ever heard about.
Boring but nice, nice sort of yield stock. We've seen
a whole bunch of holding out of industrials and through
(10:17):
other companies. This is not all private equity acquisitions. Borrel
CSR James Hardy. There's a drama about it.
Speaker 1 (10:24):
Relocated builders, isn't it, Eric, That's the entire building materials sector.
Speaker 2 (10:29):
Yeah, and of what was the a SX, which were.
Speaker 1 (10:31):
All Greek companies and popular with private investors up to
the time they were taken US.
Speaker 3 (10:36):
So look, you know that happens, and as long as
there's stock markets, there's always acquisitions. Nothing wrong with acquisitions.
But what's the structural sort of issue that's been happening
is that Australia or the ASEX hasn't been able to
replenish the companies that are leaving the AX and that's
starting to become an issue. And that's why you're started
(10:56):
to see companies like CBA, you know, you know trading
at your that are wise sky high because it's just
not the man is just not the avenues to pack
your money.
Speaker 1 (11:06):
Really interesting, Yes, that is an interesting explanation of what's
going on. Look, take a short break because I want
to come back, and what I want to do is
try and guide our listeners to how to deal with
this and particularly what's going to happen next in terms
of private equity and takeover merchants on the ASEX and
how you play this. Hello, welcome back to The Australian's
(11:34):
Money Puzzle podcast. I'm James Kirby talking to Eric Johnson,
my colleague on The Australian.
Speaker 2 (11:39):
He's been on the show before.
Speaker 1 (11:40):
He's been covering this really interesting area of large Australian,
famous Australian shares basically disappearing.
Speaker 2 (11:49):
Off the market for one reason or another.
Speaker 1 (11:51):
And this share markt is actually shrinking, that is, the
asex is shrinking. Now, if you are an investor to
some extent your interest here, as Eric said, do you
take the money and run? Why wouldn't you if someone
offers you, you know, forty percent more than they did
the day before for a stock and why wouldn't you
take that cash? Each deal in and of itself is
logical at the time. I just wonder, Eric, particularly about
(12:14):
health Scope. You wonder, without getting into social or cultural conversation,
just strictly as an investment question, whether the troubles you know,
in age care stocks which have been severe, health care
stocks which are exceptionally severe now with the receivership of
(12:34):
a company that was once worth six billion dollars, You wonder,
as an investor, is this area just too much trouble
as long term investment.
Speaker 3 (12:46):
It's a really difficult one because one of the big
themes that you speak to the likes of, you know,
the global asset managers, you know, your black Rocks, your
black styles, saving macquaries and so on. The big several themes.
They talk about digitization, they talk about technology and AI.
Health and aging always comes up as a big theme
(13:10):
as an area to invest in. Yet the names that
you've sort of pointed out, and the sectors you pointed out,
they're really difficult. They're really difficult. They like it as
a theme because we're all getting older.
Speaker 1 (13:21):
Yeah, it's top down, a top down thematic sounds good
right bottom.
Speaker 3 (13:26):
Up, it sounds really good. But we are getting older
and we're demanding more services. However, we're not seeing private
organizations aren't seeing that. It's again, I think it's a
complicated because we're also confusing heavily regulated sector with you know,
we're coming against regulation right rightly. So there should be regulation,
(13:48):
there should be minimum staffing in age care, there should
be certain standards and so on. That's a given. However,
where those themes are coming in, they're not sort of
compatible with that heavy re agent. So that's where it's going.
I think health scope and this is all private hospitals too,
facing another challenge in that when even back in twenty
(14:12):
nineteen or twenty seventeen, or you know last decade, when
you went in for your knee repair, James, so you
could play football on the weekend, you were in usually
for about four or five days. You're in, you stayed
in and your health insurer, because you have the Gold coverage,
was paying it all. However, today you go in the
(14:32):
morning and you're out by three pm in the afternoon.
You're playing footy on the weekend too, And that's the
advance of changes in technology.
Speaker 1 (14:42):
Right, productivity inside healthcare has had the surprise I'll come
that it's just explaining for my that's a problem financially.
Speaker 3 (14:51):
Well because then me as health Scope, I own this heavy,
huge hospital that is no longer in full demand all
the time. So there's another area like also, surgeons are
not tied to specific hospitals. As you know, you went
to your surgeon to get your knee fixed, he referred
(15:12):
you to this day to a day care clinic down
the road, so that you're not even going to the
health hospital. So they're sitting there with empty rooms and
empty beds, still paying their debt and their bills.
Speaker 1 (15:24):
That also happened, So that came on the back of
post COVID almost or at least the same time.
Speaker 2 (15:29):
So you have those two things working against them.
Speaker 1 (15:31):
I suppos a big question then, Eric is from again
from an investment perspective, Maybe an investor can simply choose
to play the other side. You mentioned KK or you
can now invest in they all have, all the big
players have ASX listed funds. And in recent times by
(15:53):
that I mean the last two years, there's been a
really big push by private equity funds to the average
retail investor, to mom and dad, and to say, look,
your super fund has always been in here, They've done
really wear private equity come and join us, and you
can just simply buy, you know whatever, a thousand dollars
both of private equity fund number one, two or three.
They're very common. They health scope crisis facing brook Field
(16:20):
is that What does that tell us about private equity
funds and the risks that they might put in front
of the average investor that aren't so obvious.
Speaker 3 (16:28):
Yeah, Look for the average investor, the punter, the retail investor.
As you always to your listeners, you have a broad mix,
you have your low risk, you have your mid risk
and maybe just a fraction too of higher risk, and
private equity as an asset class is expensive. It's high cost,
but it promises higher return.
Speaker 1 (16:50):
Yeah, right, high risk hy return or at least they're
elevated risk elevator return.
Speaker 3 (16:54):
Yeah, and for every sort of health scope, which is
a spectacular disaster, and even Maya and there's a lot
of high profile Dick Smith was another that was a
disaster for private equity. There's probably about one hundred little
no name companies that are actually that are actually that
actually works, and these aren't necessarily listed companies. And private
(17:14):
equity it does have a role, and we can't say
as a rule private equity is all bad. It does
provide funding at funding source and alternat funding source and
potentially a pathway for a more established and sophisticated sort
of investment case. Where it does go bad is when
they come in they sell off all the furniture and
(17:34):
leave a very light, heavily leveraged business. And look, that's
really short term. That's a really short term model. And
if you keep doing that, you're going to run out
of run away pretty quickly.
Speaker 2 (17:46):
Which seems to be exactly what happened at the school.
Speaker 1 (17:49):
Tell me the big super funds, what are they good
guys or bad guys here depending on.
Speaker 2 (17:56):
The day I'd see of the day.
Speaker 3 (17:59):
Really so like some of that list that we spoke about,
so Spark and Sydney Airport, I mean that they were
super fun led acquisition, so they're buyouts. Their investment horizon
is different, so generally it looks to like three to
five year turnaround case. Another one with Virgin Australia at
(18:22):
the airline was on the cusp of listings that was
brought from administration where no one wanted to touch it by
private equity and it's held onto it for now. What
is it about five years? Bang on at times times
spot on. I don't think that the great guys they've
made it. They've made an absolute windfall on the back
of this, but they took the risk. They took the
(18:43):
risk when no one wanted to.
Speaker 2 (18:44):
That was an example where it brooks really nicely.
Speaker 1 (18:47):
I mean we get to retain a second major airline
domestically and investors took the risk, as you see, and anyone.
Speaker 2 (18:54):
Who was in on that did very well well.
Speaker 1 (18:57):
This is to some extent dependent on the flat what
would happen soon enough, you would expect if they got
their docks in a role there, haven't they?
Speaker 3 (19:04):
Yeah? And look, you know, is to the original question
about is superis of the bad guys? So their investment
horizon that they buy and hold for the long term
ten ten to twenty years. So if Ozzie Super came in,
they did team up with a private equity fund and
in doing that there aim was to be patient capital.
(19:25):
We're going to buy this thing and hold on to it.
So they probably wouldn't have flogged the assets to the
extent it did.
Speaker 1 (19:33):
They probably mentioned in your piece that they did intervene
one time and save what's it origin from?
Speaker 3 (19:39):
Yeah, so, and that that's a really interesting sceory. And
that was a case of where investors, Australia investors, some
Australia investors. I was in Super and there was a
couple others behind it stood up and said no. Because
often when private equity comes in and offers that forty
percent premium for something, it's not doing it in our
the goodness of its heart and often jumps on companies
(20:01):
when they're trading at cyclical lows or you know they've
had they've made some bad calls or something. So so
there's shares a way off, so footy percent premium looks
pretty healthy to to where it is today, but it
looks pretty ordinary to where it was five years ago.
So so in that case, Brookfield did come up its
plan for Origin, big energy company. The plan was to
(20:22):
buy it and carve it up and flip it into
several funds. Ironically, Canadian Prime Minister Mark Corney was was
the face, the friendly face of one of these funds,
and he was he was leading the acquisition. So that
Bank of England, Bank of England, that's right, I see. However,
Australian Super stood up and said, look what you're offering
(20:44):
is I was it was around about nine dollars mark
what you're offering for Origin. We think over the long
term Origin is worth a lot more. It has these
key key quality assets, key quality attributes about it. I was.
He Super had it it was able to to sort
of and asked what's called a blocking the stake just
under it, and had a couple other friends. It was determined,
(21:06):
we're not interested in negotiating. We think this business is
great for we're buying and holding, so see you later.
And Brookfield tried everything and tried every trick in the book,
but ultimately had to take its bat and ball and
go home. It could not buy it.
Speaker 1 (21:20):
Right, Interesting, So they can the big super funds can
exercise enormous power obviously in these situations and the episodes
where they were very useful to the local market.
Speaker 3 (21:31):
And the postcript to that is that Ossie Super was
right that the shares ultimately increased over the offer price
over time. It didn't happen straight away, but it gradually
stopped having that direction.
Speaker 1 (21:42):
That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay,
So Origin is an example. Really, Origin Energy is an example.
Folks for private equity might have done awfully well and
in some extent plunder the AESX. Again, in that case,
Australia Super came in and saved the day. We now
know because of the movement and price since that time.
(22:03):
So interesting, two says to every story. All right, we'd
be back in a moment. We have some really good
questions from David and Neil and Trevor. Hello, welcome back
to The Australian's Money Puzzled podcast. James Kirby here talking
to Eric Johnson. We've been talking about something I think
(22:26):
is really was really worth looking.
Speaker 2 (22:28):
At today, which is what's going on big picture.
Speaker 1 (22:31):
If you like on the AX, where we depend so
much on a couple of dozen companies and they are vulnerable.
It's the very open market, and that's all fine, but
sometimes we as individual shareholders, we do lose. Right, So
Sydney Airport whipped away from under our eyes, and everyone
I think regrets that health scope of five billion dollar
(22:51):
company was also whipped away from under our eyes, and
we might have been better off because it turns out
that it's in receivership, so we're are that five billion
dollars go?
Speaker 2 (23:00):
Well, individual shareholders didn't lose it. At least that's useful.
Speaker 1 (23:04):
Okay, David asks, I was interested in your recent episode
on gold. Your guest quoted some interesting figures for returns.
Who didn't mention the digital gold bitcoin. I've owned both
for years, and bitcoin outperforms gold. And then David says,
I asked chat GPT to perform an analysis. I don't
(23:24):
know if I completely agree with that term, and it
said bitcoin has delivered significantly higher returns over the past
decade compared to gold. That is, but gold has been
more stable surely this would have been worth a mention,
says David, given the assertion that gold is the hot
investment product. It's just plain wrong. Okay, David, never advice
information only. They're both pretty good, first of all. And
(23:46):
if bitcoin at a certain point in time has delivered
more on a ten year basis than gold, I don't
deny that for a moment, So put that on the table.
It's just a question of your choice. Really, I think
the more interesting part of the question is using AI
to get some steer. Look, I don't think there's anything
wrong with it. I just I would just say to
David and all the debts out there, it's it's uninterpreted information.
(24:08):
It's information. It's uninterpreted. That's why we have short like this,
And I'd be careful how far you go with AI.
Aren't testing your investment hypothesis in real life?
Speaker 3 (24:18):
What do you think, Eric, Yeah, I look one hundred
percent on that, and it's a it's about garbage in
and garbage out in terms of the algorithm, and sometimes
it's quality of stuff. But you just don't know what
what ingredients been put in there, So so use it
for for something, don't rely on it. Becoin. It's really interesting.
(24:42):
It's a it's a trying to find a correlation to bigcoin,
and that's been the big struggle. So, so is it
a global economic trend?
Speaker 2 (24:52):
Just you might just explain what you mean by that.
Speaker 3 (24:55):
So, so how does it move? So does it? So?
Why does it move? I think that So does it
move when the economy is booming, doesn't move when the
economy is slow. So we think about gold. So whenever
there's inflation explosion, gold goes up. Everyone rushes. Gold is
a hedge against inflation. And we've also seen that recently
with gold with uncertainty about the US US bonds and
(25:17):
the US treasuries as a store of As a store
of value, bitcoin struggles a bit. There is a thread
that when there's an excess of money in the financial
system that actually booms. So you know, I've got to
spare whatever I can't invest that and that then that
supports it. But again it comes back to demand now
(25:40):
and we're increasingly saying obviously when Trump came in, we
saw a big jump in bitcoin because Trumps saying we're
gonna We're going.
Speaker 1 (25:47):
To Yeah, more than that, he's very keen, he's very
keen altogether.
Speaker 2 (25:52):
Is he launching his own coins?
Speaker 3 (25:54):
Yeah? Correct, So so that that's the type of thing,
so you know, whatever it is comes to Also, like gold,
bitcoin doesn't pay yield and it depends what you It
doesn't pay an income, so it's like buying them debartwork
and hanging on the wall.
Speaker 1 (26:08):
So you're saying that gold as what has the history
that we know has repeatedly proven itself to be a
useful non correlated asset in that when the market's going down,
gold should go up. But bitcoin it's unclear whether it's
unclear still.
Speaker 3 (26:27):
Yeah, the trend, like the history isn't there, and the
liquidity isn't there, and it will become and it will
become a lot clearer over time. And I think it
is it's a legitimate asset class today because of the
sheep value of it.
Speaker 2 (26:38):
That's interesting and it's suggesting you say that. Okay, very interesting.
Speaker 1 (26:41):
I hope that was useful to you, David from Neil,
which is my question could be a podcast topic. What
is productivity? How is it measured? What does the productivity
Commission do? And why does it matter to invest us?
It's a great question. Neil always comes up doesn't it,
And I think does economic explanation, which is it's not
(27:02):
rocket science, yes, would be boy efficiency.
Speaker 2 (27:05):
But for investors, why does it matter? I think that's
the interesting one. Eric.
Speaker 1 (27:12):
How would it reveal it if a company was productive?
How would it reveal itself as a listed stock? Would
there be some numbers that would be obvious?
Speaker 2 (27:21):
Is it just profit? Is it simply more profitable or
what we were to play in?
Speaker 3 (27:27):
Yeah, So when you know what the top of that
question about what does it look like and what does
it do? It reminds me of a very famous newspaper cartoonist,
Bruce Petty based in Melbourne, and he used to draw
these amazing images about the economy and what the economy
looked like, all these crazy machines that no one really
(27:48):
knew what they look like or what they were, but
they did something. That's the economy. Productivity is much like this,
much the same, but productivity, And it was talked about
why does it matter? Because it matters. Everything matters, and
it all comes back to productivity. So how what makes
a productive company? So there's a couple of measures. Obviously
(28:11):
you compare like for like apples for apples. So we're
very lucky in Australia that we have the big four banks,
we could relatively vanilla, relatively comparable. So cost to income
ratio would be one fact.
Speaker 2 (28:25):
Yeah okay, and then the one that has the what
are you looking for, the one with the lowest.
Speaker 3 (28:30):
Yeah, one lower, And this measure would generally move around
if you're so you're the amount of revenue that comes
in and compared to the amount of your cost base.
So for example, you know, West west Pac runs around
about sort of mid forties cost to income ratio, whereas
(28:51):
Common Bank runs is sort of like a high thirties.
Speaker 1 (28:54):
So it's a much better ratio because the lower the better,
even though it's a much bigger bank where big.
Speaker 3 (29:00):
Go Combank is No, but that means Combank is more efficient.
Speaker 1 (29:05):
So the LA what I said, yeah, come make is
more efficient even though it's bigger. So that's your That's
how it translates to in a stock how productivity kicks
in as a useful measure for a listed.
Speaker 3 (29:18):
Company, and so retailing and is another area. So you
tend to look at profit margin, your net margin or
your gross margin, and so that's the amount of profit
relative that you're making. And so we're looking at Maya
this week, and that's quite interesting. So it's it runs
a margin of about two percent, So so from everything
(29:41):
it's selling roughly, the profit it's making on that is
about two percent. Where whereas it, as you know, recently
bought the Solomon lose A Power Brands business and the
profit margins that's making is around nine percent. So every
pair of genes it sells and just gens is making
around nine percent. So my wants to get a bit
of that margin, and a little bit of that increase
(30:04):
in margin will translate to a big change in headline profit.
In fact, my was promising if you can lift its
margin by just one percent on that two percent, that
translated to a thirty three million dollar EBIT of earnings increase.
Speaker 1 (30:20):
So a street mathematical. If the margin's improved, the profits improve,
the share place of improve.
Speaker 3 (30:26):
Yeah, but here it goes and look in the big
structural thing that's coming around, you can't go. You can't
see any company briefing today without a CEO getting up
and talking about AI and the prospect. So look, it
is coming. It is real. It's not here in a
big way yet, but it is here a way, and
companies are just flexing it and starting to figure out.
(30:48):
And we heard the Teltra boss Vicky Brady this week
at a strategy briefing. She was quite open about it.
She said, look, by the end of the decade, the
way the Telterra looks, it will employ less people from
what it does today. And that was the basis that
AI will do a lot of work that is done
manually today. So that's one aspect that we will start
(31:12):
seeing an impact on the cost space.
Speaker 1 (31:15):
So neil big issue at the moment is AI on
the basis that obviously if someone can do what they
used to do in six hours in two hours or
two minutes, depending on what the promise is for MEI
you can see how to cut straight through to profits.
Speaker 2 (31:28):
Yeah.
Speaker 3 (31:29):
Yeah, And I think when Neil would be really good
exercise for Neil is if he want to get ahead
of the pack on it is to have a look
at the big companies that are and how they're talking
about their use of AI and how they're applying AI
today because that may not translate to something today, but
in two or three is time, it may translate to
something pretty significant. Right.
Speaker 1 (31:49):
Yes, those who master AI will master the universe. Okay, terrific.
We may we've just went out of time, so I
think we might just leave it there for today. Great
to have you on, Eric Johnson, associated is a bus
that's from the Australian.
Speaker 3 (32:01):
Thanks James, nice to be here.
Speaker 2 (32:02):
Thanks very much for coming on the show. And let's
have some more correspondents. And usually we'll call out this
week in that I have lots of emails flowing in,
but you know what, folks, some questions.
Speaker 1 (32:13):
That aren't about the supertax would be particularly welcome because
it's a flooding the inbox.
Speaker 2 (32:18):
And we will cover them. As you know, we've covered
them in special shows and there's more to come. I'm
sure on that one.
Speaker 1 (32:23):
But there are other issues too, So let's hear from
you the money Puzzle at the Australian dot com dot au.
Speaker 2 (32:30):
Talk to you soon,
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