[Music] The Australian Financial Review [Music] Hello, I'm James Thompson, senior Shontakli economist at the AFR. Welcome to a weekly news breakdown of all things business, finance and markets. [Music] With Minute 8, as always, it's my Shontakli colleague, he's hotter than a data center company hunting for capital. It's Anthony McDonald, how are you Anthony? I'm hoping I can be an AI beneficiary one day. James, for sure, for sure. [Music] This week we take you inside the circus surrounding the biggest ASX float in a generation. We examine disastrous blowups at two companies that were once considered market darlings. And we try and answer your question on what it's really going to take to end the war in Iran. [Music] But first, James, the build up to the federal budget on May 12 continues at pace. And the big focus this week was the Albanese government's decision to rein in the national disability insurance scheme. It will seek to reduce the budget of the NDIS by $15 billion by the end of the decade, in part by tightening eligibility requirements, such that participant numbers will fall by 160,000. Is this the right move, James? I think it is Anthony. I mean, what struck me is the rhetoric coming out of the government that actually the whole NDIS could collapse unless the spending was rained in. And I think that's exactly what we don't want. I mean, we've said many times on this podcast that the NDIS has been a good program for lots of Australians. And we want to keep the core of the good that it does. What we need to do is rein in the rotting and waste, such that the program can provide maximum bank for its buck. And I think the government has decided to finally attack that now. This is still going to be a major, major bit of spending for the government going forward. I mean, we are talking about taking $15 billion out of the budget by 2030, but we'll still be spending $55 billion on this program. So it's still a major program. And yes, there will be a real human cost to the fact that 160,000 fewer participants will be eligible than we have today. That will have an impact on the lives of people and the lives of families. We shouldn't ignore that. But I think the government's finally got its head around the idea that there is a lot of rotting. There is a lot of waste. In some cases, there's lawlessness going on in the NDIS that ruins the whole thing for everyone. So it's good to see the program tweaked and streamlined and improved. And we don't want this thing to collapse. So let's make it sustainable. The one little caveat I've got here, Anthony, is I'm a bit concerned that Labor is trying to sell this to us as real reform. This isn't reform. This is cleaning up something that should have been cleaned up years ago. This is not a policy change that is going to help grow the economy and make it such that a, you know, Australian doesn't break out in inflation sweats once growth gets into second gear. This isn't real reform. And I hope the government doesn't try and pretend that it is because Anthony, this can't be the centerpiece of the budget. This is good move in the budget. This is good to reduce government spending. We've got to see more from Jim Charms, don't we? We do, James. I mean, the government's just knocked the top off the NDIS here and it's had no choice. Had to happen. Like, it'd be nice if this marks a new era in Australian fiscal discipline. Let's say, like the NDIS, perhaps the embodiment of the government's going to pay to fix whatever problem we've got. We sort of need to stamp that out in Australia. It's not a liberal thing. It's not a labor thing. It's just about responsible spending. Right. It's about running balanced budgets. You know, surplus isn't good times. We're borrowing funds from future generations by using debt and deficits in bad times. And the government's balance sheet, and that's your balance sheet. My balance sheet, James, like we are that balance sheet. It shouldn't just be there to fund everyday items and disability support, healthcare, intersection of both of these, which the NDIS is, that's an everyday item. So we've had deficits in 14 or the past 16 financial years. For most years, just to fund everyday spending. Now, the deficits we should be drawing on at times like COVID when we really need it to protect the economy. And if we want to have things like NDIS, that's great and it's incredibly worthy and everything. We've got to find room for it within the government's income receipts, not just borrowing from future generations to pay for services that are needed today. So it'd be nice if this was the start of a new era and just smash the society's expectations of the government handout. Start by putting that 20.6 cents a litre back on the petrol price tomorrow. I don't know what feels like in Melbourne, James, but it's back at $1.85 or so in Sydney today. Yeah, it's a bit of a same in Melbourne, Ethics. I know that $1.85 only includes half the fuel exercise, but really, James, like it is not wartime pricing. And I'm not sure it's sending the right message to drivers that we need to be careful with our fuel, because this is something that scares and we're struggling to get our hands on at the moment. We've got to get realistic about the budget. You know, the NDIs would be nice if it was the start of that. I doubt it is, but at least they're finally running it in. Yeah, good point. Anthony, I want to bring up a story that I know caught your eye from one of our markets, Guru's Gus McCubbing. He reported that exchange traded funds, and these are the passive vehicles that allow investors to well track the entire share market rather than picking individual stocks. They could grow to $380 billion in funds under management this year, up from about $320 billion last year. And back in 2020, it was just $71 billion. That is huge growth, Anthony, but it speaks to some broader, really important shifts in Australian capital markets, doesn't it? It does, James. And what really catches my eye? This is one of the unspoken about changes in Australian capital markets and globally in capital markets. Like, when we talk about the rise in passive investing, something that you and I do most weeks, James. Yes. We're normally thinking about, you know, this is big super funds just throwing money into the ASX 200 index and letting that money filter down to companies or throwing it into the S&P 500 index. And these are very passive asset allocation decisions. But it's actually so much more than that. And behind these big index funds, we have this giant wave of thematic investing and thematic funds. And people allocating money into ETFs as actual active investment decisions. They're choosing themes to investing and they're doing it via ETFs. That's really another element in the market that's sort of changing way the share prices are set, changing the way that stocks trade. It's just getting stronger and stronger and stronger. So Anthony, just to break that down a bit, a theme might be something like, here's an AI ETF that collects together a bunch of AI stocks or a theme might be, here's a gold ETF that collects together a bunch of gold miners. It allows you to play these big narratives in markets. Yeah, 100%. So if you think about Commonwealth Bank, for example, it might be caught up in some dividend ETFs, quality earnings ETFs, sustainability ETFs, Australia ETFs, banks ETFs, all this sort of stuff. So you might have an investor somewhere in the world thinking, I want to buy some Australian banks. I want to buy quality Australian earnings. I want to buy global sustainability dividend leaders and CBAs caught up in that. So we're talking about the rise of ETFs in Australia, but this is a global story. Investors are choosing them as a cheaper way to implement their ideas. Instead of giving money to an external fund manager who might charge them, 50 basis points a year to do it, they can get their idea invested via an ETF for a fraction of the cost and think that's good enough to do the job. There's this report out from the stockbroker city last week, a week before James. And it's talking about US $25 trillion worth of these active ETFs by the end of the decade. Right. And we're at about 10 trillion now. And that 10 trillion now is way more than I thought it would be five years ago. So each point is these things are just growing exponentially and they're having a huge impact on markets. Companies are trying to get their heads around it. I mean, it's a big reason why we're getting some stocks that are falling off a cliff on what seem like maybe reasonably small or moderate earnings downgrades. Investors, it's changing the way they invest. Everyone from big super funds down through to everyday retail investors. These ETFs have just opened up new ways of thinking. And that's all part of the evolution of capital markets. Because if you are a company Anthony and something good happened or something bad happened, you want to go and explain it to an investor. Now that's easy enough if you're going to explain it to a big fund manager or a stock picker, right? But who do you talk to at the ETF? You can't talk to one of these things. It's a passive vehicle. There's nobody to say, hey, you know, gee, we did this well or we can explain that bad thing that happened. That's the problem, isn't it? Does this sort of spell even more disaster for fund managers, stockpickers? Well, in the near term, it's definitely hurt them, right? And that's hurt their performance in the short and medium term. Longer term, this should all work itself out. You would think that over the longer term, these fundamental ideals that they invest along should correct in the passive money or follow them and it should all work out in the fund managers' favor. But we're just not seeing that yet. We're sort of maybe five years or more into this story and the active fund managers are under more pressure than ever. And unless things start going their way pretty soon, it feels like it's going to get a whole lot worse. Yeah, absolutely. Okay, Anthony, let's get on to our first big topic. And this week, the circus around the biggest float on the ASX, this
here and I reckon in many years got underway in Sydney as the leaders of data center company firmess met with fund managers to show their wares. Now this wasn't a hard launch of the float that firmess is going to make in the next couple of months but more like a casual get to know your lunch. Anthony take us inside the room. What was firmess trying to do here and how did it go down with the fund managers of Australia? Firmess was trying to let the genius out of the bottle and boy did it. This RACI factory builder, you know, Bitcoin miner want to be not that long ago. It's storming towards an issue public offering and listing on the ASX. It's created immense paper gains for its founders and seed investors in a handful of fund managers and it wants to turn those into realizable wins for all involved but we won't have a prospectus out for another couple of months but the way these things work James is companies like firmess that have to go out and start meeting investors early telling their story well ahead of time so those investors can go out and do their own work, start thinking about it, start thinking about where something like firmess may fit inside their portfolios and it just gets the IPO ball rolling. Firmess has taken this pitching process to a whole new level. We call them non-deal road shows as the name suggests they're not about a deal so much it's just going out and meeting investors. Normally they happen with a couple of dozen one-on-one meetings and a few lunches held inside stockbrokers offices over the course of a week and it's all good. But firmess is like I said it's at a whole new level so their lunch on Monday was at the soft hotel, went worth a hotel. They had to book a big room in a hotel, you know, 150 seats just to fit everyone in. The stockbrokers offices weren't big enough and there's just so many people that want to hear this story and why? Because investing is all about the thrill of the chase, right? It doesn't matter whether you're a retired seven-year-old making a few trades once a month on CompSec or whether you're the biggest investor in Sydney or Melbourne. It's all about the thrill of the chase, finding the next big thing. Firmess could be the next big thing. I mean, we know that because of the money it's been able to raise in the past six months ahead of its IPO. It's raised nearly $2 billion in Australian terms in the past six months. That's huge. That's more than any listed company has raised in the past six months in terms of equity. That $2 billion, that's all real money. That's not up for dispute. It's not fake. It's actual money that's gone into the business. But it's gone into the business at an ever-rising valuation. Firmess is now up to, apparently, it's worth $7.7 billion. I think that number's still going north. That's bigger than a bunch of companies in ASX100. Absolutely. So we've got this thing that feels like a bolt from the blue. It's been raising a lot of money. It's now pitching to fund managers for the first time. It's created huge buzz. I'm not saying it's a good IPO investment or it's not a good IPO investment or what, but the buzz is there. It's all because it shapes us potentially the next big thing in a market of people that just want to know about the next big thing. Absolutely. Anthony, I need to ask you a really important question. Big lunch, 150 stockbrokers. What was on the menu? Sandwiches. Sandwiches. Try the same as what you and I have much. But GYG is great because if this was GYG you turn up and that up burritos. Doesn't sound very AI to me. James, I'm interested. You called this the biggest flight in a generation at the top of the show. Are you talking about size there or hype or something else? A bit of all three, I think. I mean, the size is clearly going to be very big. I'm sure you'll tell me in a minute that there's been bigger flights over the journey. But I guess I'm interested in what firm is sort of represents. Yes, OK. We've had some data center operators on the ASX. And a few flights in that area, DigiCo last year was one and it hasn't been all that successful for its investors. This feels a bit different. You know, this is a real AI company with huge ambitions. The backing of Nvidia, lots of money at stake. And I think you did a great job this week of bringing the buzz of this thing to readers and listeners. It just feels like a real moment. Is this the moment where we on the ASX have a genuine pure play AI company in our midst? And one of those companies come to the ASX at a big valuation, can it be nurtured on the ASX? Can it grow from the ASX and expand throughout the country and potentially overseas? So I don't know, Anthony, am I wrong? It feels like a bit of a moment. A test. Am I overreging it? You're right. It's a test. The US, they're having the same debate about a company called SpaceX, Elon Musk company, it's trying to raise US $80 billion. Right. That's more than what Westpac or ANZ or National Australia Bank's worth. It's trying to raise that for its IPO and that US $80 billion is only worth a couple of percent of the company. This thing's worth, you know, a trillion dollars or more. We don't have those in Australia, but what we do have is we have this quite contentious data center either start up or scale up depending how you look at it. I think to raise, I don't know, maybe $1 billion, $2 billion, we'll see at the float at something like a $10 billion valuation, which for us it's really big. But I think you know that as to why it matters is because the biggest story in capital markets is AI. This is the turbocharged Australian highly leveraged play on AI and where AI is going. If you're a believer in AI and if you're a believer in, you know, and Thropics Claude, open AI's Chapchap, GPT, Google, Gemini and the rest, they're going to need these AI factories to house their models in. That's where firmness fits in. It wants to build these factories. But you'll also be backing a business that's got very little track record in actually doing anything. It is still getting off the ground. And at the moment, if you look at it, it's basically a bucket of contracts and it's done fantastically well to sign huge contracts with some of the biggest players in the world. It's got meta platforms in the US, biggest social media company in the world. It's got Blackstone, the biggest private markets financial in the world. It's got Nvidia, the biggest company in the world. It's got CDC data centers here in Australia, the number two data centers player by capacity in Australia. It's got great contracts with all those people. It's attracted money. It's in the right place at the right time. But there's still this like, what are the chances of all this happening? What are the chances of all this coming together? Can they pull it off here? It's a great question. Anthony, I'm just wondering how good the sandwiches would be at the space. I'm going to be six, lunch ahead of their IPO. What's interesting is that firmness is sort of preparing to rattle the tin for investors over the coming weeks and months. But they're not the only ones out there trying to raise capital in the data center game in Australia. Are they? There's a real, well, gold rush is probably not the word, but there's a real rush for investor money. Yeah, you're right. Gold rush, probably not the worst way to put it. Like the AI CapEx story. It was the story of US capital markets last year. It's continued into this year. We're seeing that in Australia in our own way. Like I said, the numbers here are much smaller than the US as always, but they're significant for Australia and for the Australian market. I mean, we're even seeing some of this data center CapEx pop up in the business CapEx numbers for the economy and making the economy do better than it was. And firmness is just one of them. So this week we have next DC raised 1.5 billion dollars in equity. That's the biggest equity raising in public markets this year. And it raised 1.7 billion in high average, 700 million or so supported in a debt. It's been about getting a few billion dollars extra off the banks. At it all up, you've got $5 billion or so. It's raised in a couple of weeks, which is nuts. $5 billion. It's a huge, huge amount of money. That's just what it plans to spend next year building data centers. Right? And no one's bleak. No one's bleak. We've had air trunk this week. People will remember that's Robin Curtis company, the one that sold to Blackstone in 2024. Fantastic story that you bought a business in India. It's getting ready to expand there. It's thinking about IPOs in Singapore. It's trying to test bond markets in Australia and offshore. It's already got a syndicate of 60 plus banks. It can't really get that much more out of the banks doing lots of stuff. Yeah. And we had CDC data centers here. The company I've referred to before. Second biggest in Australia in terms of installed capacity. It went out and got itself an investment grade rating this week, James. Now you only do that when you're about to go to bond markets. CDC says, now hold your horses. It's not happening soon, but it's all about funding optionality. And then you have the firmest IPO roadshow all on top of that. That's all what happened in the first three days of this week. Yes. We've got the three biggest players in Australia, air trunk, next to CDC, CDC, all either lining up money or getting ready to line up money at the same time. You've got this new entrant in the new world of AI factories, stitching together all these contracts and getting ready to IPO at the same time. It's gone pretty bananas. Yeah, absolutely. This is all data center news. First half of the week. Thursday, in the world's biggest data center customer came to town, Microsoft, the boss Sachin Nadella, he said he's planning to spend $25 billion on digital infrastructure over the next four years just in Australia. I think Microsoft spending US 120 billion this year alone on CapEx. Is that $25 billion really going to bite much? I don't know. It's a bit like that saying in Austin Powers, the evil villain says, I'm going to spend $1 million. $25 billion doesn't really sound all that much anymore. Sachin Nadella and the Microsoft team were on an AI world tour where they basically flew around everywhere. They stopped off in New Zealand, promised them a big whack of spending, stopped off in Sydney Met with the Prime Minister, promised him a big whack of spending. Now I don't know how we're really going to measure this spending. It's on digital infrastructure. I know over time, Microsoft will sign contracts and already has contracts with several of the data center players you've already mentioned. There is spending going there, but I don't think they're coming with a big vat of gold coins that they'll suddenly say, here we go. It'll be progressive spending over the time. It'll probably be pretty hard for us to track, I think, which is interesting.
but there's a raft of promises in this Microsoft visit. I think they have promised to train three million people in AI, and they claim they've already trained one million people. So I'd be interesting to see what Microsoft classifies as training. This is the full court press we're getting. You think of what's happened this year? We've had open AI, we've had anthropic and now Microsoft all come, all make big promises, all show up and have a meeting with the prime minister. So this is the AI Gold Rush coming to Australia. We're seen as an important market. We've got a burgeoning data center sector, and we've got the super funds and we've got lots and lots of cash that these big hyperscalers might need. So look, Anthony, I think it's just part of the circus, isn't it? You know, there's a war going on, but it's interesting. The level of activity this week says that over time, this AI show is going to be much bigger than the Iran show, isn't it? Yeah, Microsoft's $25 billion announcement. That was like a Donald Trump truth social post, James. If I had to rank everything I saw this week from 110 on the bull dust meter, I'm giving this an 11. Right. Like it's just the, you know, $25 billion big number. Like what's it actually spending on? There's nothing there and $25 billion. That actually doesn't buy much in this world of data centers. Microsoft would have invested way more than that, spent way more than that in data centers here, James. By the time you buy the chips in the data centers, by the time you pay for the power bills, by the time you pay the rent, I mean, next DC, it started the week by announcing it had signed a customer for a 250 megawatt contract. Now 250 megawatt contract. I know that's jargon, but I'm not sure how else to put it. Yeah. But whoever signed that contract could have been Microsoft. If it wasn't there, it was Google or Amazon. They are preparing to spend $50 billion. Yeah. Over the next decade, just on that one site, the next DC's building. So I mean, I think Microsoft, what it's doing directionally here might be good, but it's doing the whole AI story, I think, a massive disservice, right? Because you're just chucking big numbers out there at us. There's not actually much behind it. And it's good that the Prime Minister turns up. I mean, this looks like Australia's attracting $25 billion worth of investment. Yes. But what are we getting for it, James? Not sure. Like, we don't know. Do we? Like, what the country's getting for it? We don't know what the tax is going to be behind it. We don't know if this is about setting up a new export industry forest, the AI tokens. We don't know anything. And the most important thing, James, is feels to me like we're not going to get much out of the actual data centers themselves. There's a chance they could help us with all the stuff around the data centers that we really need help with, right? And I'm particularly talking about energy here and the energy transition. Yeah. Where's the contracts on that? Where's Microsoft saying we are backing two and a half gigawatts of new wind farms and battery storage and whatever. And that's going to help you Australia. So we can, we can run our models here and we can show up the energy for our data centers. That's the missing piece. Yeah, to be fair though, Anthony, we struggle enough to get one of those renewable projects off the ground ourselves, the local players here. So maybe Microsoft gets a little leeway to do this over time. But I think you're right. I think it's worth sort of trying to keep tabs on how this $25 billion actually gets spent and how it tell ease up. Okay, James, it's time for our second topic, which could well be called the walk of shame on Wednesday. Two companies that were once market darling served up absolute poo sandwiches, worse than the chicken sandwiches that firms as long as the switch. First corporate travel management revealed that the scandal and its British business that saw it rip off its customers to the tune of 80 million bucks has snowboard such that it's overcharging is estimated to be $220 million. And the bionic earmaker, cochlear, a great Australian tech success story, plunge 40% in a day after delivering a nasty profit downgrade. James, take us through the corporate travel management story, which read like something out of a crime novel. Oh, this was unbelievable. It's not often you get a ASX announcement that's like a spy story, but this was one. I mean, let me take you back, Anthony, to April 2021. The pandemic still very much in the news and Joe Biden decides to pull out of Afghanistan. It's a bit of a mess. You know, the member of those scenes of people trying to cling to the planes that were taking off awful scenes. Britain also withdrew and the British government handed corporate travel management a contract, a deal to help it with the repatriation of lots of its people from Afghanistan. So embassy staff interpreters, you know, lots of people. And basically corporate travel management had to book something like 1.4 million nights of hotel accommodation across 60 hotels across Britain to get this contract done. It was an absolute mess, really complex, all done in a big rush. You can understand all that, but it appeared to be really profitable at least until like 2022, when all of a sudden corporate travel management figured out there was a bit of a discrepancy 55 million British pounds between what corporate travel management had charged the government and wanted it actually paid to these hotels. It looked like the government had been wildly overcharged. Now this 55 million bucks, it went back to the boss of the UK division at the time, got called Michael Healey and it said, what's going on here? And so they started to investigate. They came up with a plan where they would get some letters done that would set out with the British government. Here's, you know, here's how these contracts have ended up. Here's the differences. We'll need to make some refunds to you. We'll keep part of the amounts. It'll all work out. We'll set it all out in a letter. We'll get the letter signed and then we'll all be on the same page. Michael Healey apparently goes away and does this according to the corporate travel management account of all this and as far as corporate travel management is concerned, the issue is over. They don't tell shareholders about it and the world rolls on. We roll forward to late 2025. When all of a sudden corporate travel management is told, oh, you know, those letters that we had that seem to be sitting this all to rest, we're not actually quite sure they're real. Really? So they go to the British government and they say, oh, those letters, you know, they're all good. And the British government says, no, no record of them never receive them. Don't know what you're talking about. Oh, yeah. And so corporate travel management realizes it's got a big problem on its hands. So the company has been suspended from trade from August 2025 and is still suspended from trade on the ASX. They've been trying to work out with the help of KPMG. What's happened with this business? The KPMG's done a forensic investigation. The results of which came back and were put into this ASX announcement. And basically what corporate travel management said on Wednesday was that the KPMG investigation has found misconduct on the part of this UK. The CEO, Michael Healy, and they basically threw him under the bus. The board said, well, we relied on information from him. Our auditors relied on information from him. We're very sorry, but you know, this is where we're at now. Now there's a little problem here, Anthony, in that the ripoffs are now at the tune of 220 million bucks. Okay. Corporate travel management's cash and debt facility. It's about 190 million bucks. So investors are pretty worried about the discrepancy between those two numbers. Corporate travel management reassuring everybody that the refunds it has to make. They won't be as big as 220 million dollars. The British government's going to let them pay off the debt over time. They're going to get through this. It's all going to be okay. But at the end of the day, corporate travel management is still suspended from trade on the ASX. It's got this national value out there of $2.3 billion. But who knows what the real value is when the company finally starts trading on the ASX again. It's a complete mess. He left in February, but the chairman, you and Crouch, he's still there. It's going to be difficult for him to see out the year, but he's promising to stay on and fix this up over the next few months. It's an incredible mess. Awful disclosure, awful accountability, awful transparency, total classic Australian corporate scandal. Absolutely. And sounds like there's a bit of a debt and deficit story in their James and Mark Butler showed us earlier this week what happens there when when you're I was beginning your stomach. I guess so you've done the balance sheet for it. So can this company survive? I'm not sure Anthony. It's a good question. What they say is look, the rest of the business outside Britain still going okay, customers are sticking with us. We're generating cash. Obviously they're rebuilding the governance and controls and risk management process and all that sort of stuff. Does it survive in its current form? Does a competitor come in and try and swoop in and buy this thing on the cheap? I think both of those are live options. I think this thing traded about 16 bucks a share. The last time it traded last August, what's it worth now? That's the question that nobody can answer. Is it worth half as much? Is it worth a third as much? Is it worth two bucks a share? Okay, go. That's the bit that I think the answer's probably closer to zero, but it's impossible to know and we're not going to know until June that the end of June is when they're hoping that the company can trade again. So watch this space. It's an incredible mess and an amazing story. But Anthony corporate travel management, so comparative tidla compared to Cochlear, which started this week as a 12 billion dollar company and ends it worth about half that. What the hell happened here? Big story, James. ASX listed corporate story in the month in my book. Cochlear blew us to Blue Chip Australian companies. The Cochlear implant, Professor Graham Clarker, the University of Melbourne, developed the Cochlear implant.
mimic the coding of sound. You know, that's in the late 70s. They commercialized it, gone global out of Australia. Super duper story. One of the true global champions we've gotten Australia, very, very mission driven, purpose led, great purpose, helping people with hearing loss. Listed in 1995. So not only was there a good idea that they commercialized, it's turned into a great Australian company. Now for most of the parts since 1995, it's grown revenue and earnings each year and it's a good business. What have been thought to be one of the highest quality businesses on the ASX? Promise they James has been stuck in a downgrade cycle since 2024. So it's basically it's not selling the volumes it could should or would or it's set itself up to do. So it's gone from being a stellar performer into a serial disappointment as far as investors are concerned. And the big daddy of the downgrades came this week when Cochlear said it's business across the board but particularly in the US has really slowed. And it's gone from expecting $450 million profit this financial year to about $315 million. Now remember first half profits already in the bank. So the first half profit was worth $195 million. So it's gone from expecting about $250 in the second half to $120 or so. So it's half. Yeah. Now it's one thing for business conditions to sour and Cochlear's have been sowing a bit lately across most fronts. But it's another thing to be so blindsided by it. And that within just two months of it saying in February that that profit number that $450 or so this financial year just within two months of saying that it's going to halve what it would earn this half. And I made for an absolute shocker. That's why the shares got sold off so hard. So the CEO dig out I mean he kind of explained that the business is getting pinched in the US where patients are under financial pressure and dropping out of getting an implant. You know it's a couple of months process to line it all up and they're sort of getting to the end of it seeing the bill and not able to afford it or not choosing to spend that money. And he thinks that's the new thing recently that has led to the downturn over there. I mean in Europe there's a mix of sort of hospital wait times are blown out industrial action in hospitals which aren't helping them. It's also got the Middle East. But I mean the Middle East is probably 5 to 10% of its orders at most. Yeah. I mean it's slowed down there because of the conflict. So we got two problems here James. We've got the actual cochlear business itself. Yep which the CEO dig out says you know needs to double down on its hearing loss is a serious problem not something issue delay fixing message. And then we've got the guidance issue which just from your and my day-to-day existence in capital markets. I mean this one this one's a real doozy. You put them together you get an ASX dialing with it's wings not just clipped but torn off. Yeah. This week you know the stock's gone from 320 bucks early last year to 95 dollars today. It's down by two thirds a cochlear one of our best businesses. Now no one ever ever thought that would have happened. So the earnings forecast has been smashed now. So it finishes this week analysts are saying next year's earnings the year after earnings they're going to be 20 to 25% less than what we thought. So there's no quick rebound here there's no reversal there's no silver bullets that's going to make this thing into the reliable great stellar performer that we've come to expect it. The question then is so what do you pay for that? I mean if this isn't as premium in business as we thought what's the multiple we put on its earnings and James is still trading at about 25 times earnings. All right the market still pretty much 16 17 times still a premium. Yeah. Now CSL which has also come unstuck recently. Made it was trading up in the 30 times earnings and it's now back at 13 times. So you can get the downgrade and the risk here is that they do get further downgrade. So it's a real ugly one. Anthony I want to bring in a listener question here. I guess it's more of a comment really from Craig in Victoria who's sent this invite the widget that's on the bottom of all Shontaklear stories at afr.com and Craig says have a look at average days outstanding inventory for cochlear over the last 10 years. It's all there in black and white. Wasn't a surprise to see them in trouble. They've nearly doubled inventory over the last 10 years and it's up significantly in the last three years. Anthony can you just explain a little bit what Craig's talking about here and is it the early warning sign that he suggests? Yeah so cochlear essentially it's a hearing device but it's just like any other widget maker. In its case it's got very expensive widgets and sells them but the more you make the more you sell the quickest seldom for the higher the price of the more money investors make at the end of the day. cochlear carries a lot of inventory like about 500 million bucks worth at June 30 last year. It was a third of that 10 years ago so it's built up a lot and it's particularly built up a lot since COVID and the sales growth just hasn't matched it. Now the reasons it built so much recently it's had a new product launched so it's sort of stocking that in its own factories before it goes to market with them and then it was also trying to increase its supply chain resilience by storing more of some of the parts that it's a little bit worried that if the world goes bad it won't be able to get. But the more you store the higher risk of obsolescence there's the riskier carrying things that you're not going to be able to sell and there's an actual cost to that as well. It sucks up your working capital in the business. So you're paying for a lot of stuff up front. They're not going to be selling for quite a while. That's an expensive way to do things for shareholders. It's much better if you run GYG and you're making burritos in and then getting the cash in the door and in there and you're not having to carry the inventory as much on the way through. In terms of Craig's question on average day's inventory, I mean that measures how long you're holding stock before you sell it and yeah it's blown out which is very costly for business. Every day's inventory at Cochlear was approximately 320 days FY25. It was 233 days a decade ago, 285 days five years ago. And so it's a little accounting tool. I mean to Craig's point it's one of those little red flags you can watch out for. But it tells us that this slow down at Cochlear comes as it's sort of been building this more chest of inventory. It's been building these products and sitting on them. So it's been hit by a slow down at the same time it's sitting more on more of its products which is not a good thing. Yeah absolutely. Great spot Craig. Alright Anthony, it's a bit of a sad story and as you say it's a shame to see Cochlear and CSL two of our really big global tech healthcare giants. You know down trodden at the same time but we'll be back after the break. It's a huge week for central banks and interest rates back in a sec. Welcome back if you want to know more about what we're talking about today and a whole lot more AFR subscribers can sign up to the Shontaklian newsletter at join.afr.com/shontaklia. Every Saturday morning the newsletter pulls together the best Shontaklia Collins from the week and delivers them straight to your inbox. Now Anthony I promised it's a big week of central banking on Tuesday the Bank of Japan makes its interest rate decision and the big question there is whether I spent enough on my holiday to influence inflation in Japan. I don't think I did so it should be okay. No no decision tip there. On Wednesday we get inflation data for the month of March and the March quarter. The inflation rate, the headline inflation rate is going to reflect some of the higher fuel costs. It's tipped to hit 4.6%. And it's probably on its way to 5.5% or maybe even 6% in the middle of the year. So this is the start of the bad news for the RBA. On Thursday we the Federal Reserve America Central Bank also has a rate decision. Again they'll probably sit on their hands given the cross currents of the war in Iran and their inflationary pressures that's bringing. Remember the Fed had been expected to cut rates this year but Anthony it looks like the Fed's just going to have to stay on hold for most of the year now. So that's another tailwind for the market sort of gone I guess. Absolutely. I'm more interested in the Australian inflation than the James. That's a huge reading. Right. I mean what two weeks or so from the next RBA board meeting it's going to be fascinating. Yeah it's a real it's a real pinch point for the RBA. Well we love questions here at the Shontaklia podcast. We had one from Craig earlier. If you have a question you want to send in you can email us at
[email protected]. You'll find the link in our show notes. Or you can just send us a question in audio form by recording a voice memo on your phone including your name and where you from and emailing it through to us. And as Craig did there's that widget on the bottom of every Shontaklia article. So you can send us a question that way too. This week's question is from Julian Perth and it's a relatively simple one I think. I'll get our super producer Maddie to do the eyes. Hello Chooks I suspect like many of your listeners I'm starting to feel a bit of a run war fatigue. There's news every day but has anything really changed when will we know if this conflict is really over. That's a good point Julie. We've had a strange week on the war front. A ceasefire that is now indefinite but we've got the Iranians and the Americans boarding each other's tankers and all sorts of stuff that looks a lot like the end of the war is not inside. But Anthony I've got an answer on this from a very senior oil industry executive this week at a function I attended. Okay. And they gave me one simple number to watch. That number is 135. What's one thing five? That is the number of ships that were going through the strait of the moose before this war started. And so in this executive's view it's only once we get back to 135 ships a day going through the strait that we will know that the global energy industry is healed. So I
I think it's actually a nice way of thinking about it, at least from an economic perspective, or all this ceasefire stuff, and all the stuff around talks, and the posturing from Donald Trump, all that really matters here is that the straighter for mousse gets reopened and not just reopened a little bit. The straight can't be a jar, it needs to be fully opened, and we need to see that daily traffic get back up to 135 ships. Any other things Julie should watch? - I agree with Julie, it's impossible to know. Both sides also shaping up to each other. So, you know, I mean, the market for what it's worth, Julie, and I don't know if it's worth much at all, but the market's looking straight past it. Thanks to the worst is WebHiness. - Yeah, and they're all focused on AI and firmness as chicken sandwiches. All right, Anthony, well, we've talked a lot about food on today's podcast, without actually mentioning the food industry, and I'm feeling a bit peckish. So I think we should wind it up here. Thanks for your hard work and great insights, and Anthony, we'll see you next week. Catch you next week, James. (upbeat music) If you like the podcast, send it to a friend as it helps other listeners find us, and don't forget to follow wherever you get your podcasts so you'll never miss an episode. At the Financial Review, we investigate the big stories about markets, business, and power. For more, go to AFR.com, and you can subscribe to the Financial Review, the Daily Habit of Successful People. Shantakli was hosted by me, James Thompson, and Anthony McDonald. It was produced by Mandy Cullen. Head of audio is Alex Gow, who also composed our theme, and the head of premium content is Fiona Buffini. (upbeat music) (upbeat music) - The Australian Financial Review.
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