Research

GLOBAL EVALUATION

Our global study involving 37,000 companies across 42 markets shows that only Croatia and Greece have higher corporate leverage than China and India; Portugal and Spain have similar leverage. These are not good bedfellows. Still, it is reassuring that corporate leverage elsewhere is fine. Unfortunately, China (A-shares) and India are also the world’s most expensive stock markets and yet there is no EPS growth; nor has there been for four years. A combination of high leverage, slowing growth and expensive stock markets creates a potentially volatile situation and will lead to a higher incidence of fraud. Investors should remain underweight…
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Insights

TREASURY WINE ESTATES (TWE AU)

Full-year results allay concerns…somewhat

Nigel Stevenson · 16 August 2019

Treasury Wine’s full-year results undoubtedly showed a major improvement in operating cash flow, as receivables declined from elevated levels. While channel-stuffing cannot be ruled out, there is limited evidence of this in the latest financials. Our concerns have been somewhat allayed, although questions remain regarding earnings quality. The direct gains from acquisition accounting appear to have wound down, but we suspect there could be some lagging profit benefits from the sale of other held-back inventory. We maintain our AVOID recommendation given the ongoing uncertainty over earnings quality. GET PDF

SHORT-SELLERS

Blue Orca attacks Ausnutria

Gillem Tulloch · 15 August 2019

In the 8th short-seller attack on Hong Kong listed companies this year, Blue Orca alleges that Ausnutria has been faking sales and profits. The company’s shares are suspended pending a rebuttal from management. It is sometimes possible to demonstrate that a company’s financials do not reflect the allegations, but not here. The company shows similar financial traits to past frauds, and these have become more pronounced over the past two years. Ausnutria’s unusual corporate structure, with production assets in Europe and sales in China, might help explain some of these traits. The best shareholders can hope for is a comprehensive…
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TREASURY WINE (TWE AU)

Disappointing vintage

Nigel Stevenson · 7 August 2019

Treasury Wine Estates (TWE) may have inflated profits by up to 50% over the last two years through the use of acquisition accounting to write-down inventories and establish other liabilities. Weak operating cash flow with a widening divergence from cash profits raises additional concerns that profits are being manipulated. Tell-tale signs include rising receivables and inventories which suggest possible channel-stuffing and deferral of overheads. The winding down of benefits from acquisition accounting may have left a hole in earnings; if we are correct, there is 35% downside to A$10.60/share. We currently recommend investors AVOID the stock but poor forthcoming results…
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