Question 1: Do you think the Treasurer increasing the Petroleum Resource Rent Tax will bring about material falls in the stock values of Woodside (WDS) and Santos (STO)? When is the impact likely to hit the share value?
Answer: I am certainly not an expert on the Petroleum Resource Rent Tax. We will have to wait till the Budget on 9 May and subsequent analysis. According to a report in the Australian Financial Review, this is what Macquarie is speculating: ‘Offshore gas and energy producers Woodside and Santos face a potential tax hit from the Labor government’s proposed changes to the petroleum resource rent tax (PRRT), according to Macquarie. Government is clearly reviewing options to increase tax revenues (and bring forward PRRT receipts) to help stem federal budget deficits – LNG projects now appear an easier target politically,” the broker told clients.
“It estimated Woodside could face a 2 per cent to 5 per cent valuation hit if the changes as speculated come to fruition. However, Santos could also face some smaller impacts,” it said.’
Question 2: I am interested in buying Coles (COL) or Woolworths (WOW). Which company do you prefer?
Answer: I have always been in the Woolworths camp rather than the Coles camp for two reasons. Firstly, I back market leaders rather than the number “2”, and secondly, Coles will face a significant capex outlay as it builds new distribution centres and brings its warehousing/inventory management/logistics capability up match Woolworths. But it is more expensive.
The major brokers have Coles trading on a multiple of around 23 times forecast FY24 earnings, whereas with Woolworths, it is around 27 times forecast FY24 earnings.
They see marginally more downside risk with Woolworths (consensus target price is $35.66 compared to last ASX price of $38.55, 7.5% lower), than for Coles (consensus target price is $17.63 compared to last ASX price of $18.00, 2.0% lower).
Notwithstanding the broker input, I still prefer Woolworths. But both stocks are arguably a touch expensive (they have traded well recently due to their defensive characteristics), and if you are looking for growth, I would look elsewhere.
Question 3: Why do bank capital notes or hybrid securities only pay in cash 70% (or 0.7 times) of the published interest rate?
Answer: They are structured this way to make allowance for the distribution potentially being franked. The 0.7 is applied if the distribution is fully franked, if not, a higher factor (1.0 if 0% franking) is used. For example, if the capital note pays interest at a margin of 3% higher than the 90-day bank bill rate (which we will assume to be 3.5%), then the actual cash interest payment if it is fully franked is 0.7 x (3.0% + 3.5%) = 4.55%. You will also have franking credits that are worth an effective 1.95%.
If for some reason the distribution cannot be franked, then the cash distribution is adjusted higher. If there is no franking, you will get 6.5% in cash.
Question 4: What is the minimum parcel I can trade on the ASX? Can I just buy 1 share?
Answer: Potentially, yes. If you don’t already own the stock, your order must be for at least $500. If you own the stock and want to add to it, there is no minimum order size so it is effectively just 1 share. On the sell side, there are no minimums so again, it is just 1 share.
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