AFRGA1 A013

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www.afr.com | Monday 13 September 2021

Companies&MarketsAFR

InsideWealth Investment modelsfor rich ‘not up to scratch’ p15

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Super QSuper seeks courtnod to levy fee for fines p16

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Maley Bankers nervous aboutpost-COVID bounceback p27

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ACCC to probebanks’ battlewith Apple Pay

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James Eyers

� ASIC lodges action against MichaelKing to recover costs p15

Continued p18

The competition regulator haslaunched a formal investigation intothe way Apple controls bank access tothe antennas on its iPhones that com-municate with payment terminals,responding to concerns raised by Com-monwealth Bank.

The probe comes two weeks afterThe Australian Financial Reviewrevealed Treasurer Josh Frydenbergwould get new powers that wouldallow him to order regulators to targettech giants on payments issues. MrFrydenberg is worried that a lack ofreform in the payments space couldleave its future to be determined by Sil-icon Valley.

Those powers don’t yet exist and theAustralian Competition and ConsumerCommission will conduct its investiga-tion under existing competition laws.

Of concern to the ACCC is the designof iPhones, which restricts paymentcards from making ‘‘tap and go’’ pay-ments unless they are stored in Apple’sdigital wallet. Cards held in a third-party iPhone wallet, such as a bankapp, can pay in a store only if they arerouted through Apple Pay.

Apple charges banks a few cents forevery $100 of transactions, meaning thebanks are giving up some of their heav-ily regulated interchange fee revenuefrom issuing cards to Apple, whichoperates outside payment regulation.

The fees are not disclosed but couldbe approaching $100 million a year andwill grow higher as smartphone pay-ments become more popular.

The ACCC’s investigation intowhether Apple’s iPhone architecturebreaches competition laws comes afterCBA CEO Matt Comyn launched abroadside against the world’s largestcompany on July 27, telling a parlia-mentary joint committee that regulat-ory intervention was needed to

‘‘reintroduce competitive tension’’ inthe digital wallet market.

The rise of smartphones presentsnew dilemmas for banks, which aretrying to keep control of a hotly con-tested payments sector that is quicklygoing global.

In the days of plastic cards, bankscould choose from various manufac-turers and never had issues accessingdevices the cards communicate with.But as payments are routed throughsmartphones, hardware and softwareplatforms are growing more powerful.

In response to CBA’s attack, Appleaccused the bank of being misleadingand self-serving.

The tech giant argued in a supple-mentary submission to the parliament-ary committee filed a month after MrComyn’s appearance that the Apple Paywallet was pro-competitive because itallowed users to toggle between differ-ent digital cards, just like choosing apiece of plastic from a physical wallet,while bank apps would lock users intousing only that bank’s products.

Now the ACCC will decide who isright. ‘‘We are investigating that issuethat the Commonwealth Bank hasraised,’’ chairman Rod Sims told theFinancial Review. ‘‘It is a classic, com-plicated competition issue in the sensethat you get a party like Apple thatbuilds up its own internal business sys-tem, but then they get so big that yousay, hang on, is what you did when youwere small still appropriate when youare big? It is an issue we are looking at.’’

The outcome of the ACCC investiga-tion, which does not have a timetableand is separate to the digital platformsinquiry, will, like any competition lawinvestigation, depend on how the relev-ant market is defined.

‘‘It doesn’t matter if it’s the best business in the world, if you pay the wrong price,it’s not gonna work out for you,’’ says Bob Desmond. PHOTO: DOMINIC LORRIMER

A bear-proof fence builton earnings that endure

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Monday fundie Buy thebest so you can sleepwell through the worst.

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William McInnes

� Stake undercuts stockbrokingmarket by two-thirds p15

Continued p21

If most investors were only allowed toselect 15 companies for a global portfo-lio, few would choose to buy a 155-year-old paint manufacturer based in Cleve-land, Ohio.

But Sherwin-Williams is one of thequiet achievers for Claremont Global, aquality, high-conviction global fundspun out of Evans & Partners. Clare-mont portfolio manager Bob Desmonddescribes it as ‘‘a boring company that

just sells paint’’, but his admirationgoes beyond its palette of bestsellingcolours, from Origami White to IronOre.

‘‘The thing in this company that’squite amazing is the culture,’’ he says.

‘‘It comes from Cleveland in the Mid-west and these companies are down toearth. They serve their customers, theiremployees, their shareholders, they’renot arrogant, and they stick to whatthey’re good at.’’

In the last five years, Sherwin-Williams has tripled investors’ capitaland risen more than 50 per cent sinceits pre-COVID-19 levels.

Perpetual is building the ‘Freehills’ financial advice model● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Aleks VickovichWealth editor

� Unresolved disruption: AMP downgradedby Morningstar p17

Continued p16

‘‘I think it’s sad they’re leaving,’’ formerAMP Australia chief executive AlexWade said of the big four banks’ retreatfrom the business of wealthmanagement in January last year. ‘‘Ithink there is a big problem and I thinkit is better for Australia that there is astrong advice offering.’’

It was an attempt by the formerCredit Suisse banker and short-livedboss of AMP’s domestic wealth andbanking division – who abruptly leftthe business under a cloud followingallegations of inappropriate conductlast year – to steal the moral high-ground and make it clear at that timethat the 172-year-old company wascommitted to its core business.

Rival wealth manager IOOF hasmade similar noises. ‘‘A lot of bankssaw advice as too far away from theircore,’’ chief executive Renato Mota toldThe Australian Financial Review inJanuary last year. ‘‘For them, that isprobably the right decision, but for us,we want advice to be the core.’’

But it turns out they are not the onlycentenarian, ASX-listed companiescommitted to the business modelabandoned by the banks and so

tarnished by the Hayne royalcommission.

Founded in 1886, fund manager andtrustee Perpetual Limited is perhapsbest known for being a vocal Australianproponent of ‘‘value investing’’ –Warren Buffett’s preferred wealthcreation philosophy and one Perpetualhas been forced to repeatedly defendover years of under-performance.

It has built a reputation as a providerof investment and philanthropic adviceto some of the country’s wealthiestfamilies. But the company is alsodipping its toe into the troubled marketdownstream.

In August, Perpetual’s private wealtharm, Perpetual Private, acquiredSydney- and Melbourne-basedJacaranda Financial Planning for anundisclosed sum.

Equity analysts welcomed thedecision, and Macquarie Researchlisted Jacaranda’s contribution of anadditional $915 million in funds underadvice (FUA) to Perpetual’s book in the‘‘what we liked’’ column of its take onthe company’s financial year results.

But the transaction has also raisedeyebrows in the wealth managementmarket, given the stark culturaldifferences between the two firms, atleast in terms of industry perception.

Perpetual is synonymous with thekind of skyscraper-dwelling, golf clubprivate client advice that escaped theglare of the Hayne royal commission. Itlends its brand to the Sydney-HobartYacht Race-winning vessel PerpetualLoyal, no less.

Jacaranda, on the other hand, isknown for its common touch and

regular slot on talk-back radio stations2GB in Sydney and 3AW in Melbourne(both owned by Nine, publisher of theFinancial Review), explaining basicmoney concepts to everydaycommuters.

‘‘Jacaranda is more of a massaffluent business,’’ a wealth industryfigure, who asked to remainanonymous, said after the deal. ‘‘They[Perpetual] will need to be careful theydon’t move down the value segmentand spoil their high-net-worthpositioning.’’

By buying financial advice firms, italso runs the risk of being accused ofinherent conflicts of interest, given it is

Duediligence

S&P/ASX 200 stocks Friday

Advancers Close ($) Change (%)

Nickel Mines 1.08 +8.54Alumina 2.18 +6.34South32 3.42 +5.88Mineral Res 53.16 +5.58Monadelphous Gp 10.28 +4.47

DeclinersPolynovo 1.915 -5.67Omni Bridgeway 3.77 -5.28Chorus 6.59 -2.95Orica 12.47 -1.97IRESS 13.72 -1.93

Indices Close (points) ChangeASX 200 7406.6 +37.1Nikkei 30381.84 +373.65Hang Seng (pm) 26205.91 +489.91Shanghai A 3881.19 +10.48

Currency Change$A/US¢ 73.29 +0.27$A/¥ 80.86 +0.03$A/€ 0.6226 +0.0003$A/£ 0.5317 +0.0001$A/$NZ 1.0337 +0.0005

Rates Close ChangeCash rate % 0.10 steady10-yr bonds $A 101.93 +2.00

Commodities Close ($US) ChangeGold (spot) 1787.27 -6.95Iron Ore future (Sep 21) 131.75 -0.01Oil WTI 67.90 -0.20

AFRGA1 A021

AFR Monday 13 September 2021www.afr.com | The Australian Financial Review

21MarketsMonday

Will $150m stopsmash repairerAMA aquaplaning?

SOURCE: FINANCIAL REVIEW, BLOOMBERG

1.50

1.20

0.90

0.60

0.30

AMA Group share price, daily ($)

Cruise control v head-on

Jan 2021Jul JulJan 2020Jul

Oct 1, 2019Buys Capital Smart for $420m, raises $216m

Aug 26, 2020 $71.5m loss, including $47m impairment against Capital Smart

Jan 31, 2021Andy Hopkins resigns as CEO, denying expense claims

Feb 1, 2021Carl Bizon appointed CEO

Sep 10, 2021$150m capital raising, debt reduction

Aug 24, 2021Posts $99m FY loss inc $90.6m impairment against Capital Smart

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Liam Walsh

Will investors be subject to a crash at AMA, or can it head into cruise control mode?PHOTO: MICHELE MOSSOP

The note went out to the smash repairindustry warning that the latestCOVID-19 outbreak was slowlythrottling the sector.

Capital SMART (it stands for SmallMedium Accident Repair Technology)would be pausing some operations atalmost 15 shops in NSW and Victoria bymid-September. Another 27 would beworking four days a week, said thenotices, sent early this month and seenby The Australian Financial Review.

It was a ‘‘response to the continuingreduction in volume being experiencedas a result of [lockdown] governmentrestrictions’’, said the notices for therepair chain.

The notices were an example of thepincers squeezing Capital’s owner,AMA Group, the Gold Coast-basedbusiness with 180 sites across Australiaand New Zealand. AMA’s 3700 staffrepair everything from buses to slightlydamaged cars, with work ranging fromgrinding down bent panels to spray-painting dinged parts.

But the ASX-listed company hasbeen caught in a storm of concerns,ranging from corporate governancequestions to the effects of COVID-19and chunky write-downs on a$420 million acquisition made onlytwo years ago – buying the Capitalchain from Suncorp.

On Friday, though, AMA found some

relief via a capital raising: a$100 million entitlement offer forexisting investors and a $50 millionconvertible note.

The entitlement offer is for one sharefor every 2.8 that people own at a priceof 37.5¢ a share, with shares suspendedearlier at 42¢. Only two years ago, AMAraised $216 million from investors at$1.15 a share.

Almost $72.5 million is to repay debt,$69.3 million for ongoing activities and‘‘growth initiatives’’, while thefundraising itself, underwritten byUBS, cost $8.2 million.

The question for investors now willbe if this cash injection pulls thebusiness out of a spiral.

On the bull side is AMA’s argumentof a short-term storm. ‘‘This capitalraising will provide us with fundingand flexibility as we face the headwindspresented by COVID-19 and give us thefirepower to execute our strategy,’’chief executive Carl Bizon said.

‘‘AMA ... is uniquely positioned torespond as restrictions lift.’’

Some investors are also piling in.New York-based MittlemanInvestment Management has crept upthe share register to hold 10.6 per centof AMA.

One argument among institutionalinvestors has been that scaling upworks in smash repairing, offering costefficiency, for instance, as repairsbecome more electronically complexand expensive.

Mr Bizon, unavailable last week, has

also argued AMA’s bulk means it cannegotiate better deals for parts.

AMA needed the cash with heavydebt levels and after recording a$99.1 million statutory loss last year.The lion’s share of that stemmed froman impairment charge to the Capitallight-repairs division.

AMA said its ‘‘normalised’’ earningsbefore interest, tax, depreciation,amortisation and impairment came inat $71.5 million. That indicates asecond-half result of only $25.5 million,although the first-half ‘‘normalised’’result included $30.7 million inAustralian and New Zealand jobsubsidies during COVID-19 lockdowns.

Some eyebrows were raised as the

result also showed Mr Bizon, chiefexecutive since February, earned a$165,000 short-term bonus amid his$561,000 pay package.

The accounts included auditors fromKPMG flagging a ‘‘material’’uncertainty around AMA continuingas a going concern.

But while investors are piling intothe capital raising, banks are going theother way.

After paying down debt, the newlimit on borrowing facilities will be$182.5 million, down from$305 million. Banks previously namedin AMA’s lending syndicate have beenNational Australia Bank and ANZ, withindustry sources pointing to NAB,

which declined to comment, as the leadinstitution.

The Financial Review can reveal thesector has previously burnt NAB,which was the $5 million lender insmall smash repair chain Ausarc,which went into liquidation in 2009.

Ironically, former AMA chiefexecutive Andy Hopkins, a Britishsmash repair veteran who had movedto Australia, started his Gemini venturehere by buying out Ausarc’s failedoperations from the bank andconvertible noteholders, is listed increditor minutes as also being owed$18 million.

On AMA’s bear side are revenueconcerns. According to capital raisingdocuments issued on Friday, AMA hadunused capacity at shops nationally at35 per cent for lighter-repair facilitiesand 25 per cent for shops that repairundriveable cars. Numbers were farworse in NSW.

Thirty-one sites across the groupwere either ‘‘hibernated or underpartial stand-down’’, and 344 staff werestood down as at early September asAMA looked to staunch cash outflows.

After the results last month, BellPotter analyst Chris Savagedowngraded revenue forecasts for thisand next financial year by 10 per cent‘‘due to the impact of lockdowns ... andalso an assumed lower level ofacquisitions’’.

Litigation remains anotherheadache. AMA has sued Hopkins for$3 million over alleged expense rortsand non-repayment of a loan.

Hopkins has rejected the allegationsand launched a counterclaim, alleginghe is out of pocket by $5 million inmissed earnings and underpayments.AMA chose not to list thiscounterclaim in its contingentliabilities.

Hopkins said he thought AMA waslosing money monthly and was on abad trajectory, claiming it lacked staffand the support of insurers, the shops’main customers.

AMA, however, paints therelationship differently, saying ‘‘insurerpartners are supportive ... andadjusting revenue structures to reflecta COVID-19-affected environment’’.

Industry chatter suggests AMA isseeking an increase in how muchinsurers pay for each repair.

Last week, one independent repairshop complained that Suncorp had cutwhat it pays for original manufacturerparts by 5 per cent, although theinsurer maintains it also increased therates it pays repairers for labour.

Bear-proof fence builton durable earnings

If it’s resilient ina recession, that’sa really good placeto start.

From page 13

‘‘There’s just something unique in thiscompany,’’ says Desmond.

‘‘The CEO has been there 34 years,the employee turnover is just 7 percent, which is like ridiculously low forretail, and the average manager hasbeen there 24 years.

‘‘It’s raised its dividend for 45 suc-cessive years, it has the best manage-ment, the best store locations, bestculture and that translates into double-digit earnings growth for long periodsof time. And it just sells paint.’’

Sherwin-Williams is a hallmark ofthe type of stocks Desmond looks toown. In the past five years, the Clare-mont Global fund has returned 17.6 percent annually, exceeding the MSCI ACWorld Accumulation Index ex-Australia by 2.9 percentage points. Thefund aims to invest only in the best-quality businesses globally, and neverhas more than 15 to choose from.

The philosophy is one Desmond hasbeen loyal to throughout his invest-ment career, starting in Zimbabwe in1994 when he worked in equities atBard Asset Management, a subsidiaryof Anglo American.

‘‘It was quite an exciting timebecause the country was opening up

and there were a lot of reform pro-grams, Zimbabwe was becoming moremarket friendly and foreign investorswere coming into the market,’’ he says.

Within a year of inheriting a 50-stockportfolio at the firm, Desmond hadtrimmed the fund’s holding to just 12.

‘‘Just the environment of Zimbabwewas so uncertain and towards the endof my time there it was just crazy,’’ hesays. ‘‘You had to be in the best-qualitystocks and that really meant high-margin, pricing power, asset-light andstrong balance sheet. The ones thatdidn’t have that just couldn’t cope withthe adverse economic circumstances.’’

In 1998, he joined Fleming Martin,now Imara, to set up a Zimbabwe andAfrica region-focused fund.

‘‘There were lots of undiscoveredmarkets,’’ he says. ‘‘I remember goingup to Kenya and East African Brewer-ies I think was trading on three or fourtimes earnings.’’

Desmond’s time in Zimbabwe endedat the turn of the century amid the farminvasions and hyper-inflation overseenby then-president Robert Mugabe.

‘‘The continent was opening up butwhile the continent was getting better,Zimbabwe was getting worse,’’ he says.‘‘So I decided to leave Zimbabwe in2001, sadly.’’

After working for Seilern InvestmentManagement in the UK for eight yearshe came to Australia and joined Evans& Partners as a senior equity analyst. In2017, he became head of international

equities for the firm and was put incharge of what is now ClaremontGlobal.

Along the way he has witnessedsome of the biggest economic crises ofthe last three centuries.

‘‘I literally landed in London on theday of 9/11,’’ he says. ‘‘Since then we’vehad the GFC, the euro sovereign crisis,we’ve had Brexit, we’ve had Trump andwe’ve had COVID.

‘‘So instead of trying to predict every-thing, I just think it’s easier to own thebest so that when the worst happens, Ican still sleep well at night.’’

One of his key filters for a qualitycompany is being able to stand the testof time and outgrow a downturn.

‘‘When we look at a new business, wealways look at how that business per-forms in a recession,’’ he says. ‘‘If it’sresilient in a recession, that’s a reallygood place to start. If I look at the port-folio, the average age of the company isover 80 years old. They’ve seen a fewcycles, have been around a while, andthey’re pretty durable.

‘‘The newest company in our portfo-lio is Alphabet.’’

Strong growth prospects are alsoimportant, as well as a good balancesheet.

‘‘We’re trying to get a return of 8 to12 per cent per annum, and we wantmost of that to come from earningsgrowth,’’ says Desmond. ‘‘So we wantbusinesses that have higher returns oncapital, lots of opportunities to deploythat capital, incremental capital andhigher rates of return, because offuture growth opportunities.’’

The portfolio aims to avoid cyclicalcompanies and doesn’t invest in banks,insurance or resource companies.

Desmond says value and timingcount: ‘‘It doesn’t matter if it’s the bestbusiness in the world, if you pay thewrong price, it’s not gonna work out foryou,’’ he says.

Claremont has purchased a stake inNike after monitoring the stock formore than a decade. ‘‘A few years backwe owned Adidas for a while and wewere looking at Nike as a competitor,’’he says.

‘‘But we realised Nike was the betterbusiness, in our opinion. They weretaking share in Adidas’ home marketand we felt Nike was beating them onthe innovation.

‘‘The real crux of Nike is they havescale. They’re 70 per cent bigger thanAdidas, their biggest competitor, andit’s almost a two-horse race.

‘‘We also love businesses that controltheir distribution. About 15 per cent ofsales come from Nike.com and man-

agement have said they’d like to get thatcloser to 30 per cent in the next fewyears.’’

In late March, Nike said it would notuse materials from the of Xinjiangregion, citing the reports of forcedlabour of Uighurs, sparking backlashfrom China.

The outrage triggered a heavy fall inNike’s share price, providing the per-fect entry point for Claremont.

‘‘That’s kind of how we roll. We tendto follow things for a few years andthen there will be a little bump, andthat gives us the entry opportunity.’’

Despite having the opportunity toinvest across the globe, most of Clare-mont’s portfolio is made up of US com-panies. ‘‘It’s not for any particularreason, it’s just that the businesses wewant to own are in the US,’’ the fundmanager says.

‘‘They have enormous advantages interms of a huge domestic market tostart with and they have a lot of busi-nesses in the industries we want toown.’’

Holding a best-in-class portfoliomeans that in the event of a downturn,he doesn’t have to be a seller whenmarket panic sets in, because the earn-ings will be durable.

‘‘When the market’s in trouble, if youown quality, you stick with your invest-ment and you sleep well at night,’’ saysDesmond. ‘‘That means clients thenstick with the strategy and get thereturns they deserve.’’