Macquarie’s annual conference this year hosted 70 companies and a gaggle of local and international fund managers scrounging for hidden gems. Here’s a couple of ideas that I took away from the event.
Sydney Airport has always had monopolistic characteristics, but that is not sufficient to simply say it is a good business in which to invest. Macquarie acolyte Kerrie Mather has been running the company since the jet engine was invented it seems, but she has done a cracking job at steering it through a succession of important issues, none more so than the approaching decision on the Western Sydney airport at Badgerys Creek.
Sydney Airport Corporation has first right of refusal to develop the new airport but it won’t have to make a decision until the Federal Government puts its proposal to the company sometime near the end of this year. The government wants the new airport to open by the mid-2020s with initial capacity to manage 3 million passengers a year from a single runway.
The second Sydney airport is edging towards reality and SYD is likely to be a major beneficiary when it is built.
Part of the long term dynamics of air travel to and from Sydney is the compelling theme of more Asian travellers, especially from China. Ms Mather proffered the interesting anecdote that half the Chinese people living in Australia reside in Sydney. Readers will not be surprised to learn that many of them are students or immigrants.
But the big kicker from this theme was the discussion around inland Chinese cities (such as Chengdu, Wuhan and others) that are beginning to open up to bilateral arrangements for air travel to Sydney. Seat capacity to and from China is expected to triple in the medium term and China already represents 16.4% of inbound passengers in CY14.
Within the airport itself, travellers will be well aware that a lot of shop construction has been underway behind boarded up stores. All is about to be revealed pre-Christmas as 400 new brands appear under the Heinemann Duty Free contract umbrella. The boost to retail earnings over the next few years will be closely watched.
Other themes that support SYD include growth from emerging markets, new generation aircraft, up-gauging of aircraft, low cost carriers, airline partnerships and expansion of bilaterals. All these factors combine to create higher tourism numbers and greater non-leisure travel. SYD will get to shake down each and every passenger (and car parking visitor) to some extent.
The company may look expensive on many metrics but it has so many positive aspects that it should be part of most portfolios with a long term view.
The next idea is IPH, which listed earlier this year and owns the Spruson & Ferguson patent attorney business. The IPO was very successful as the share price more than doubled with only a modest retracement since.
The story about IPH is its expansion into Asia via its Singapore base which already has 120 people serving as a hub to around 25 Asia-Pacific countries. Much of the business is coming from US/UK/European clients and partner firms who need a competent agency on the ground. With 27% share of the Singapore market already, IPH is in pole position to fulfil that role.
In Australia, IPH has 11% market share and will look to acquire smaller firms to aggregate share towards 20% over time.
The patent industry relies on a massive amount of accumulated data in some cases. MD David Griffiths was recently acquainted with a brilliant young West Australian, Tom Haines, who has developed a software application that has become a ‘must-have’ application for patent attorneys worldwide. IPH bought the business ‘Practice Insight’ in April and is convinced it will be a winner for IPH.
Valuing this business is not easy but it is becoming clear that there is some untapped potential here. While it won’t be a core stock for most investors, those looking to risk some money on a high growth business could add some IPH stock.
In the healthcare sector, private hospital operator Healthscope presented a credible story. Many investors compare HSO to the much admired Ramsay Health Care business and rightly so.
HSO is a brownfields opportunity with approximately 1,000 beds being added to its portfolio out to 2018 through a range of hospital upgrades and relocations.
HSO already runs 31 acute facilities, 6 dedicated rehabilitation centres, 7 mental health centres and a pathology business domestically and internationally. The hospital businesses generate 80% of operating earnings and it would be fair to say the domestic pathology business isn’t much chop.
But the brownfields expansion is firmly based on the growing appetite for high quality private healthcare with the tacit and direct support of government (Federal and State). The 450-bed Northern Beaches hospital development in Sydney is a good example of the cooperation and mutual benefits available from this approach. It will open in 2018.
HSO presented a fascinating idea of much greater transparency in reporting clinical outcomes of hospital procedures. Its website now openly reveals 21 key performance indicators that it hopes will drive brand enhancement and a deeper engagement with the health funds that contract to the hospitals.
CEO Robert Cooke pointed out that an average knee replacement operation could cost anywhere from $10,000-$29,000 but there was no evidence as to which operation delivered the best clinical outcome. Private hospitals conduct two-thirds of elective surgery in Australia, so positioning HSO as a provider of choice would naturally benefit the company in the long term.