Question of the Week

Questions of the Week

Co-founder of the Switzer Report
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Question 1: Will APRA’s announcement about a proposed new capital treatment for hybrid securities and subordinated bonds have any impact on the existing bank hybrid market?

Answer: APRA has released a discussion paper which will change the way banks measure capital, in particular, additional tier 1 and tier 2 capital (capital that is not ordinary shares). While it is a discussion paper that is seeking feedback from market participants, the likelihood is that it will be implemented as is, or with only minor changes. This will see the phase out of the bank hybrid market on the ASX. All existing issues will be called (redeemed) by 2032, and from 2027, Banks will probably not issue new hybrids. Up until 2027, Banks will be under guidance not to increase the volume of hybrids they have on issue.

So, on the basis of reduced supply, phasing out to no supply, prices of existing issues are likely to tick up (be well bid). However, as every issue is going to be called, they will over time all trend back to $100.

 Question 2: NextDC (NXT) has just announced the completion of a placement of $550 million in new shares to institutions. Will there be a share purchase plan, and if so, what are the details?

Answer: NextDC has raised $550 million to fund the rollout of data centres in Asia. This follows the sale of AirTrunk last week for about $24 billion and looks incredibly opportunistic. In addition to the institutional raising, there will be a share purchase plan of about $200 million. The SPP will open toward the end of next week and close on Friday 4 October. The shares will be priced at the lower of $17.15 (the price the institutions paid), and the average ASX trading price of NextDC shares in the week leading up to the close of the SPP, less a discount of 2.5%. As is the case with all SPPs, the maximum application is $30,000.

Question 3: I notice that Woolworths has recently sold its last shareholding in Endeavour Drinks (EDV). The company’s share price has been tracking lower, maybe in anticipation of this. What do the brokers think? Do they see much upside?

Answer: The brokers feel that Endeavour faces some headwinds, with cost pressures, a long term decline in alcohol consumption and wary consumers. They forecast a small decline in earnings in FY25, before a small increase in FY26. As a result, there are two “buy” recommendations and 4 “neutral” recommendations. On valuation, however, they see Endeavour as being reasonably cheap. The consensus target price is $5.47, about 9.7% higher than the last ASX price of $4.99. The range is a low of $5.10 through to a high of $6.20.  The multiple of around 17x FY25 earnings doesn’t look too demanding.

Question 4: I want to buy some shares for my wife, hopefully across a few different companies to create a bit of a portfolio. What is the minimum amount I need to hold in each company?

Answer: You need to invest at least $500 in each company. Once you are a shareholder, you can buy or sell any amount (for example, just one share), but under the ASX Rules, you must have at least $500 to start. Be careful with brokerage. If your parcel size is too small, a chunk of your investment amount can go in transaction costs. Some brokers offer $10 (or even lower) trades.

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