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    HUNTING ELEPHANTS: BIG OPPORTUNITIES IN AUSTRALIA’S INFRASTRUCTURE-TYPE ASSETS
    Hunting elephants: a term used to describe a strategy of going after very large customers to sell goods or services, as well as targeting
    large companies for acquisition.
    The takeover offer for Sydney Airport in early July has reminded the market of the inherent value many investors place
    on long duration infrastructure assets. In this latest Quarterly Report, the 30th in the series prepared by Contact Asset
    Management, we consider a few listed companies that may likely attract the attention of investors with long-term
    investment strategies. We believe there are several dynamics driving demand for these assets, namely (i) cheap money
    / low interest rates; (ii) the increasing involvement of Industry Superannuation Funds in Private Equity and (iii) demand
    from offshore capital.
    The Sydney Airport example
    In early July, Sydney Airport (SYD) announced that it had “received an unsolicited, indicative, conditional and non-binding
    proposal from a consortium of infrastructure investors (“the Consortium”) to acquire, by way of scheme of arrangement
    and trust scheme, 100% of the stapled securities in Sydney Airport at an indicative price of A$8.25 cash per stapled
    security”. The Consortium comprises IFM Investors, QSuper and Global Infrastructure Management. Of note, another
    large industry super fund, UniSuper, already owns approximately 15% of Sydney Airport's total securities.
    The approach is interesting for several reasons, not least of which is the timing. As noted by SYD, the Proposal has been
    made during a global pandemic which has deeply affected the aviation industry. Passenger numbers are a fraction of
    what they were pre-COVID-19 and the path to “normal” is unclear. In its 2021 AGM to discuss the results for calendar
    year 2020, SYD noted that in 2020: passenger numbers declined by 75%; NPAT fell by 150% to a loss of $108 million; and
    the distribution was cut to zero. During 2020, SYD conducted a $2 billion equity raise and issued a $600 million USPP
    bond. For full disclosure, all Contact managed Portfolios sold out of SYD in 2020 and did not participate in the raisings.
    The lack of a distribution and the fact that there is little prospect of a distribution for some time makes an investment in
    SYD difficult given we value income so highly.
    The price being offered by the Consortium is below SYD’s pre-pandemic share price, however the financials are vastly
    different. The prolonged impact from COVID-19 has highlighted the extent of debt being carried by SYD, which was
    previously acceptable for an infrastructure company with a high degree of recurring revenue and monopoly-like assets.
    The rationale for the transaction can be justified in many ways, not least of which is that SYD is a world class monopolylike asset. However, we find two other points interesting; (i) the Consortium is made up of investors with very long-term
    investment strategies who can afford to be patient, and (ii) there is a glut of cheap money available in this ultra-low
    interest rate world, which makes SYD’s debt obligations more palatable.
    In all, it is a seemingly full price at 22.8x SYD 2019 EBITDA. As depicted in the following chart, the price is huge based on
    2020 EBITDA. Nevertheless, the Proposal gives us pause to consider what value might be placed on other long-duration
    assets for those investors taking a longer time horizon. Firstly, we consider APA Group and Transurban Group.
    BKI is managed by Contact Asset Management
    AFSL 494045
    Source: Factset, Contact Asset Management
    APA Group
    APA Group (APA) is a leading energy infrastructure business. APA controls 15,000 kilometres of natural gas pipelines that
    connect sources of supply and markets across mainland Australia, connecting 1.4 million Australian homes and businesses
    to natural gas. APA also owns or has interests in gas storage facilities, gas-fired power stations and renewable energy
    generation (wind and solar farms). All up, APA owns or manages and operates a portfolio of assets of around $22 billion and
    delivers half the nation’s natural gas usage.
    APA’s primary source of income is the fees they charge the gas producers and exploration companies to transport gas through
    APA owned pipelines. These fees are usually calculated on the spot price for gas as well as the volumes required to be
    transported. They also have a small number of energy generation assets and gas storage assets primarily along the east coast
    of Australia. APA currently earns approximately 63% of revenue from unregulated pipelines.
    Contact considers APA to be a high-quality business with an excellent market share position in Australia and scope to grow
    domestically and abroad. The business is well managed and has a good history of attractive cash flow generation which is
    expected to underpin distribution growth for many years into the future. Contact expects APA to offer a growing distribution
    stream and offers an attractive total return profile with valuation upside. Contact values APA at $12.28 using a DCF valuation
    (7% discount rate and 3% terminal value). If we placed APA on a similar multiple to the recent SYD takeover offer, being c.20x
    EV/EBITDA, the implied valuation for APA is over $18.00 – double the current share price.
    APA is a stock that has attracted corporate interest in the past. In 2018, Hong Kong based CK Infrastructure made a $13
    billion bid for the company. APA’s market cap is currently $10.5 billion.

    Transurban Group
    Transurban Group (TCL) was founded in 1996 and is today one of the world’s largest builder and operators of toll roads. TCL’s
    network is a Monopoly set of assets, they currently have 19 roads under operation across Melbourne, Sydney, Brisbane and
    North America (Greater Washington and Montreal). The assets are long life. Over its network, TCL’s Average Concession
    Expiry is 37 years and has an Annual Average Toll Escalation Growth rate of 3.0%
    Future growth opportunities exist, with WestConnex in Sydney and the West Gate Tunnel in Melbourne to be delivered over
    the next 2-5 years. These projects will also now be fast tracked due to infrastructure stimulus announced by State and Federal
    governments. Future projects that Transurban will also play a vital role in design, construction and management include the
    Beaches Link, Western Harbour Tunnel, Sydney Gateway and M6 in Sydney.
    Contact values TCL at $14.99 using a DCF valuation (7% discount rate, 3% terminal value, net cashflow in year 6-10 of 5% and
    CAPEX growth of 5%). TCL provides investors with a very robust and consistent earnings stream. As depicted in the preceding
    chart, the stock has re-rated slightly in recent months. The stock was volatile in 2020 when lockdowns created volatile traffic
    numbers. We would consider any significant weakness during the current Sydney lockdown to be a buying opportunity. Like
    SYD, TCL appeals to long-term investment strategies. Unisuper is the largest shareholder with a 12% stake.
    Other companies with Infrastructure-like characteristics
    Telecommunications
    The telco sector is another segment of the market with increased corporate activity. In late June, Telstra (TLS) disclosed that
    it had agreed to sell 49% of its Mobile Towers business to a consortium of infrastructure investors. The company achieved a
    higher value than most expected. TLS will use roughly 50% of the proceeds (~$1.4bn) to pay down debt. The balance (~11cps)
    will be returned to shareholders. This is a positive transaction and comes at a time when we are seeing continued signs of a
    return to more rational industry pricing. The last two months have been positive for mobile pricing and this should, hopefully,
    be maintained.
    The TLS Towers transaction was another deal executed at what would historically be considered a very full price: 21x
    EV/EBITDA. This is even more impressive when one considers that the sale of 49% ensures TLS retains 51% and control. This
    is important in TLS’ goal to preserve a mobile network competitive advantage. The market responded favourably to news of
    the transaction with TLS shares closing 4.5% higher on the announcement.
    This leads us to consider the potential intrinsic value in TPG Telecom’s tower assets. We have long believed that the
    infrastructure and backhaul is an underappreciated asset for TPG. That may soon change as infrastructure becomes a more
    sought-after asset class. According to Morgan Stanley Research, an estimated value of $325-500 million is feasible for TPG’s
    mobile towers. The broker makes the point that this only covers the towers and it is important to consider that while TPG
    has a smaller mobile tower portfolio than Telstra, it owns substantially wider telco infrastructure assets such as fibre. Last
    week, TPG made the following comments through the media, "For the last year, TPG has been integrating the multiple
    infrastructure assets of the group including mobile towers, macro and small cells, fibre and data centre assets owned by the
    pre-merger Vodafone and TPG businesses. These are significant infrastructure assets and we are always considering options
    to unlock more value for our business". We are watching this space.

    Real Estate
    While Real Estate is valued in a different manner to the purer infrastructure-type businesses discussed above, we thought it
    worth discussing a few opportunities in the sector. The themes in this report have several similarities to the drivers discussed
    above. Namely:
    Real Estate is an asset class that is in demand from the large industry super funds, pension funds and global private equity.
    The flows into these mega-Funds show no sign of slowing. The increase in compulsory superannuation rates in Australia is
    an example of the tailwinds. Industrial assets and Office are two segments that have been strong in recent years because of
    the demand. Industrial has the additional tailwind of the eCommerce trend. Goodman Group (GMG) is an obvious beneficiary
    here. We consider GMG to be an extremely well-managed business with a strong Balance Sheet and a first-class portfolio of
    assets.
    Globalisation is also a factor. In a recent report, Knight Frank noted that better returns from high grade assets is the major
    reason for the sharp increase in international demand for Australia’s Corporate Real Estate. Investors from offshore targeting
    Australia can still achieve attractive returns relative to other global cities. For example, office yields in Sydney are 4% versus
    Hong Kong at 2.5%. Charter Hall (CHC) has done extremely well in attracting offshore flows to Australia. We are very
    optimistic on CHC’s expected growth in Assets Under Management and the potential for earnings enhancement through
    performance fees.
    Lower interest rates and cheap money have underpinned demand for Real Estate. This has put downward pressure on cap
    rates. Yet, different businesses have different approaches to how aggressively they value their property assets. As we’ve
    discussed before, we believe that Harvey Norman’s (HVN) property portfolio is underappreciated by the market. While
    several of HVN’s properties are interlocked with its retail operations, we do not view this as a negative. HVN is a high-quality
    retailer. We consider the HVN property portfolio to be very conservatively valued, particularly given the Annual Report
    disclosed cap rates between 6%-10% across the portfolio. This compares to some Bunnings assets being valued at low-tomid 4% cap rates. We continue to be optimistic on the HVN investment case – its Balance Sheet is close to net cash, it is well
    managed by an aligned team and the dividend yield is compelling.
    Conclusion
    We believe that one edge possessed by Contact Asset Management and BKI Investment Company is our ability to think longterm. Many of the transactions discussed in this report are driven by investors with the long-term in mind. We believe the
    opportunities never cease and that these long-term investors will continue to seek high quality assets. The combination of
    cheap money, big mandates and significant capital flows suggests that we can expect several mega-transactions before this
    cycle is over.
    With that, we conclude by quoting Lou Simpson. While little known, Lou ran Geico’s (owned by Berkshire Hathaway)
    investment portfolio for 25 years and delivered excellent returns (over 20% per annum): “Attempting to guess short-term
    swings in individual stocks, the stock market or the economy is not likely to produce consistently good results. Short-term
    developments are too unpredictable. We are sort of the polar opposites of a lot of investors. We do a lot of thinking and not
    a lot of acting. A lot of investors do a lot of acting, and not a lot of thinking.”

    Disclaimer and Important Information
    The material contained within the BKI Investment Company Limited Quarterly Report (The Report) has been prepared by Contact Asset Management on
    behalf of BKI Investment Company Limited. Figures referred to in The Report are unaudited. The Report is not intended to provide advice to investors or
    take into account an individual’s financial circumstances or investment objectives. This is general investment advice only and does not constitute advice to
    any person. The opinions within The Report are not intended to represent recommendations to investors, they are the view of BKI Investment Company
    Limited and Contact Asset Management as of this date and are accordingly subject to change. Information related to any company or security is for
    information purposes only and should not be interpreted as a solicitation of offer to buy or sell any security. The information on which The Report is based
    has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy or completeness. Investors should consult their financial
    adviser in relation to any material within this document

    courtesy of Bell Direct
    ==============================================================================================
    DYOR

    i hold BKI

    but this might give some insights to all investors in the current market

  2. 79.4k
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    QUARTERLY REPORT
    WHO HAS THE PRICING POWER?
    Welcome to the 32nd edition of the BKI Quarterly Report, prepared by Contact Asset Management (“Contact”).
    2021 has been an extraordinary year. As the calendar year closes, we continue to experience the secondary effects from
    flooding the world economy with cash through global stimulus packages distributed during 2020 and 2021. We have written
    about our concerns with production capacity challenges, price rises and a global supply chain bursting at the seams several
    times in previous Quarterly Reports and Contact Insights pieces. We saw how negative operating leverage hampered many
    businesses in early 2020, followed by a quick recovery in demand of almost every good and service which restored sales
    numbers to kick these issues down the road. As we enter 2022, we face further issues involving inflation, a lack of service
    and labour shortages. We monitor these ongoing issues very carefully and focus on which companies have a fixed cost base
    and those companies that can pass on prices to their customers to ensure continued profitability and earnings growth. With
    these issues as a backdrop, we seek to identify which companies have pricing power.
    Despite product shortages and supply chain issues, the show goes on
    Multiple support packages, low rates and a shift of international travel spend over the last two years culminated in a
    staggering boost in demand for goods and services. This is highlighted by strong retail sales data in almost every sector. This
    ongoing situation places even further pressure on the supply chain. We wrote about this in the Contact Quarterly Report in
    September 2020… “The other issue garnering our attention is the supply chain. Our discussions across various industries
    increasingly point to bottlenecks in the supply chain – be it mobility of labour, access to inventory or availability of spare parts.
    Domestically, the lockdowns in Victoria are creating supply chain headaches for many businesses. However, this is also a
    global issue. We think this issue could be a potential headwind on the earnings recovery story.”
    Then, as we wrote in the Contact Insights piece in June 2021… “A swift change in consumer behaviour from multiple stimulus
    packages and availability of cash across the globe is causing some damage to economies that may outweigh the positives of
    inflation. There is such a significant demand for goods and services, that we are now seeing substantial shortages in supply.
    There are also significant shortages in labour, in manufacturing, in shipping, in containers, in pallets… in almost everything.
    Our ports are saturated, we do not have enough dockworkers or truck drivers. The system is stretched and is approaching
    breaking point. This has caused a shortage of product across most parts of the world, and we have all experienced the
    extensive wait times when purchasing goods. Inventory levels are so low that many stores are holding products that have
    already been sold. Wait times for cars, industrial machinery, farm machinery, boats, campers, bikes, building products and
    sporting products have ballooned.”
    We have had interest rates at near zero levels and multiple government support packages, such as JobKeeper, JobSeeker,
    HomeBuilder, early superannuation access and tax concessions handed out over the last two years. We also witnessed the
    significant impact international holiday travel spending has had on the economy. This created an environment that made it
    easier than ever for people to buy, invest and to borrow. Second homes, renovations, boats, cars, campers, electrical goods,
    furniture have all been purchased and, as restrictions eased,we’ve seen many consumers dining out multiple times per week
    at restaurants and cafes across Australia. Despite the significant lack of supply, the consumer spending spree continues in
    full swing.
    BKI is managed by Contact Asset Management
    AFSL 494045
    We now have another major issue… a lack of service
    As 2021 rolled on, the product shortages and supply chain issues were joined by another major issue, a lack of service. Put
    simply, the COVID-19 relief packages appear to have made it far too easy for people to avoid work. The knock-on effect of
    this is that Australia is now significantly short labour.
    We have all seen and heard the stories of businesses unable to reopen post lockdown due to lack of staff. Labour shortages
    are now as serious a concern as the product shortages and supply chain issues we were introduced to in late 2020. There are
    many factors that cause shortages in labour across different industries, but at the end of the day, it all stems from COVID19.
    Compounding this is that forced border closures have prevented immigration and migrant workers from entering Australia.
    As we emerged from lockdown, we also saw a massive rise in resignations in certain industries most affected by COVID-19,
    tourism and hospitality in particular. Moreover, the spike in COVID-19 cases from the Omicron variant has placed further
    pressures and labour shortages due to many staff members testing positive to COVID-19 or becoming a close contact, forcing
    the need to self-isolate.
    There are also other sectors that struggle with labour shortages due to their success throughout COVID-19 and resulting
    from Australia’s extremely strong economic recovery. Many businesses simply can’t meet demand due to a lack of staff and
    not being able to provide the appropriate service to their customers.
    In November, Australian job advertisement figures from Australia and New Zealand Banking Group Ltd jumped 7.4%. This
    follows the October monthly increase of 7.5%. The figures now show that Australian job advertisement figures are 52% higher
    than a year earlier and 44% higher than pre-COVID-19 numbers. Normally these figures would have us all excited about how
    well the economy is doing; however, due to the lack of desire to work and the lack of immigration and international students,
    there are simply not enough people to fill these positions. This situation is having the opposite effect on the economy and
    will cripple growth throughout 2022 unless there is an immediate change.
    The other sleeping issue amongst all of this is the “great resignation” of our baby boomers. This issue hasn’t eventuated to
    the scale forecast by many thus far, so this added pressure is still to come in the next few years.
    Inflation and the added cost of addressing service and labour issues
    There is no question that the supply-chain disruptions discussed above have added to today’s concerns around inflation. We
    believe that the current issues surrounding inflation can be attributed to supply chain issues and the increasing cost of doing
    business in the current economic environment.
    When we wrote about supply and product delay issues in September 2020, we highlighted just how susceptible many
    businesses are to a change in normal operating conditions. Many management teams over the years have spoken about how
    resilient their businesses were, but then reported a halving of profits in the depths of COVID-19. Fortunately, many of these
    businesses recovered quickly thanks to government support packages and a very robust economy experienced throughout
    much of 2020 and all of 2021.
    We remain concerned some business models will suffer when the stimulus runs out and revenues flatten or even fall year on
    year. We were surprised by the pace at which negative operating leverage hampered many businesses in early 2020 due to
    revenue declines and high fixed costs. What continues to worry us is that while revenue growth seems reasonable in the
    current market, the added costs of COVID-19 are now really beginning to crimp margins. The increase in operating costs can
    be extreme. Many businesses are getting caught out trying to source increased staff to meet demand, and face higher
    sourcing costs, higher cleaning costs and higher logistics expenses.
    We’ve all seen how the labour shortage has forced many restaurants to close over the Christmas and New Year period, which
    unfortunately is one of the busiest times for the year. We’ve seen many businesses simply not reopen post lockdowns
    because it’s all too difficult and we’ve heard stories of a top end restaurant in Sydney offering to pay their dishwashing staff
    as much as $90 an hour, but still can’t fill the position.
    We believe those companiesthat have scale but don’t have pricing power, and there are many, will see their business model
    come under significant pressure during the next 12-24 months. If that business happens to be in a highly competitive sector
    and these additional costs aren’t able to be passed on quickly to the consumer, that company’s competitive advantage is
    eroded.
    On a more positive note, several industries have actually enjoyed strong revenue growth over the last two years and will
    continue, we believe, to do so over 2022. Many companies within these industries may have a relatively fixed cost base but
    they also have pricing power, so any additional costs incurred during these COVID-19 times can be passed on. A clear
    competitive advantage in this environment. It is these quality companies that can pass on additional costs that we intend to
    invest further in during the year ahead.
    Every cloud has a silver lining
    Despite times of uncertainty there are always opportunities to invest within equity markets. The Board of BKI and the
    Portfolio Managers at Contact have seen many difficult investment periods before, and it is in periods like these that it is
    more important than ever to maintain a robust investment process. The quality assessment of companies that Contact
    undertakes forms a critical part of the BKI investment process. We’ve discussed the Contact and BKI six step investment
    process many times over the years, and as we keep noting, it is robust and repeatable. We look at 1) Principal Activity, 2)
    Income, 3) Financial Strength, 4) Management, 5) ESG and 6) Valuation. Our goal is always to invest in high quality businesses
    with a strong balance sheet, a competitive advantage and that are managed by capable and trustworthy people. We seek to
    invest in businesses that will pay us an attractive and sustainable dividend stream and we look to invest in these businesses
    at a reasonable price with a view of holding them for the long‐term to create long-term capital growth.
    It is through uncertain periods such as we’re in now that we home in on step one of our process, Principal Activity. Questions
    we ask ourselves here include; Do we understand the business and how it makes money? Does this business have a
    sustainable business model? Does the product they produce or service they provide give them a clear competitive
    advantage? Are there high barriers to entry, making it difficult for other competitors to enter their space or take market
    share? What are the industry dynamics and are there any regulatory threats?
    As long-term investors we are confident that a company with a clear and simple business model, and one which has
    sustainable pricing power will be able to protect their profit margins, competitive advantage and be successful in most cycles.
    Further, with slowing top line growth, rising inflation and other COVID-19 related uncertainties on the horizon for 2022, we
    will focus on companies that don’t just have nominal pricing power but real pricing power. Real pricing power is more of a
    focus for us as it refers to a company’s ability to raise prices above inflation.
    On this topic, Warren Buffet has been quoted saying “If you’ve got the power to raise prices without losing business to a
    competitor, you’ve got a very good business. And if you need a prayer session before raising the price by a tenth of a cent,
    you’ve got a terrible business.”
    Taking a closer look – Who has the pricing power?
    Several companies have enjoyed solid revenue growth for the first quarter of FY2022. It’s not whole sectors grabbing
    headlines but rather specific stocks. Indeed, there has been a clear divide within sectors of the supermarket retailers, online
    retailers, healthcare and resources.
    We have begun to see that while revenue growth has been robust for the supermarket retailers, the unexpected costs of
    COVID-19 have crimped margins of some of the major players. While online sales have increased significantly, not all online
    retailers can pass the additional costs on to their customers. Despite still being in the middle of a pandemic, not all healthcare
    companies have performed equally well. Whilst lacking pricing power on commodities produced, the high-quality resource
    companies continue to drive their cost of production to historically low levels, enabling them to protect and grow earnings
    despite fluctuations in commodity prices.
    Woolworths Limited (WOW). WOW despite having significant market share and a clear competitive advantage in the retail
    space, has proven with their latest announcement to the market that they cannot pass on all additional COVID-19 costs to
    the consumer through price increases. Woolworths has had to deal with these pressures for the best part of two years now,
    and recently announced a profit downgrade on its FY 2022 first half trading performance.
    Woolworths Group CEO, Brad Banducci, said: “The first half of FY22 has been one of the most challenging halves we have
    experienced in recent memory due to the far-reaching impacts of the COVID Delta strain and its impact on our end-to-end
    stock flow and operating rhythm. We have continued to put the health, safety and wellbeing of our customers and team first
    in the context of this challenging and volatile operating environment.”
    “Sales growth in Australian Food is positive on a one-year basis and strong on a two-year basis but moderated in Q2 following
    the easing of restrictions in NSW and Victoria. We are pleased with our sales growth compared to the overall market.”
    “However, the ongoing material costs of operating in a COVID environment has impacted our expected earnings in H1. COVID
    has had a significant impact on costs, even more so than last year due to the combination of both direct COVID-related costs,
    together with the indirect impacts from disruption caused by COVID. This includes the significant disruptions we have seen
    across the end-to-end supply chain, and the material inefficiency this causes in our stores, distribution centres and
    transportation.”
    Woolworths noted in their announcement that for “H1, direct COVID costs in Australian Food are expected to be
    approximately $150m, with the costs split between supply chain and stores, to ensure the safety of customers and team. In
    addition, the indirect disruption to stores and distribution centres from operating in a COVID environment has led to elevated
    operating costs of approximately $60m to $70m in the half.”
    What this announcement highlights to us is that Woolworths and many of their competitors, despite having real pricing
    power, are overly focused on market share and revenue growth, not profits. If competition within this space wasn’t so fierce,
    then we would expect to see continual price inflation and profit margins being maintained. Woolworths is able to lift prices,
    if only a fraction, to offset these additional COVID-19 related costs and maintain profits for its shareholders, but they appear
    to have chosen not to.
    Metcash Limited (MTS). Metcash, on the other hand, have been a beneficiary of the recent COVID-19 situation. As the
    company wrote on the 6th December 2021 in their Half Year 2022 ASX Announcement, “The preference for local
    neighbourhood shopping and shift from cities to regional areas helped our independent retail networks all deliver ‘like for like’
    sales growth in the half. Compared with 1H20, substantial growth was delivered with IGA Supermarkets up 18.8%, Liquor up
    27.0%, Independent Hardware Group stores up 17.7% and Total Tools stores up 51.0%. This is a significant achievement given
    the many challenges in the half including staff isolations, labour shortages, supply chain issues, continuously changing health
    regulations and other lockdown-related impacts.”
    Along with strong revenue growth from all their pillars, Supermarkets, Liquor, Hardware and Total Tools, Metcash’s Group
    underlying EBIT and underlying profit was also higher, up 13.9% and 13.1% respectively. Metcash’s earnings per share grew
    15.0% to 14.6 cents per share, enabling Directors to lift their interim dividend by 31.0% to 10.5 cents per share. A great result
    for shareholders and a display of real pricing power.
    Metcash went on to say in their outlook that “strong sales have continued in the first five weeks of 2H22 buoyed by the shift
    in consumer behaviour and improved competitiveness of our retailer networks. The Food and Liquor pillars are expecting to
    benefit from a strong Christmas/New Year trading period and the extensive regional presence in our retail networks. We
    expect supply chain disruption, and increased COVID-related and labour costs, particularly in distribution centres, to continue
    to be a risk for all Pillars in 2H22.” Despite these risks we are confident Metcash is focused on the shareholder and will
    execute real pricing power to ensure continued profit and dividend growth for shareholders into the future.
    Transurban Group (TCL) – Transurban, as one of the world’s largest builder and operators of toll roads, has pricing power.
    Toll collections for TCL’s network of roads across Melbourne, Sydney, Brisbane and North America are growing annually as
    price increases are either linked to CPI or to a greater mandated amount, providing large pricing powers for the group. The
    annual price rises aren’t just a one off either - Transurban’s assets are long life with the average concession being over 30
    years. Across the network there is approximately 1.7 million trips per day, with this expected to grow through the group’s
    multiple projects currently under construction. Since the reopening post COVID-19, traffic volumes have improved
    significantly across all markets, with the recovery trend particularly evident in Sydney and Melbourne following lifting of
    restrictions late in 2021.
    Sonic Healthcare (SHL) – As a medical diagnostics company with operations in pathology, Digital Imaging and medical centres
    across Australia, New Zealand, the USA, Germany, Belgium, Switzerland and the UK, SHL has significant pricing power. Sonic
    Healthcare has been in Australian clinical labs and pathology for many years and has more recently seen an increasing
    contribution from offshore markets due to its organic growth and acquisition strategy. Since the commencement of the
    pandemic, SHL has been able to diversify its business model further from pathology collection and testing to include COVID19 testing.
    Today, Sonic is performing crucial laboratory testing on tens of thousands of people every day for COVID-19. The company
    estimates that to date they have conducted approximately 40 million COVID-19 PCR tests. They also perform whole genome
    sequencing to aid identification of COVID-19 variants. In Australia Sonic has also provided more than 1 million COVID-19
    vaccinations to the public.
    For these services, in this environment, SHL has real pricing power as shown in their recent release to the market. SHL’s
    headline financial results for the four months to 31 October 2021 showed Revenue growth of 5%. Pleasingly SHL has been
    able to pass on all additional costs and charge for their services appropriately, as evidenced by their EBITDA growing 16%.
    Amcor Inc (AMC) – AMC generates annual revenues of approximately USD$13 billion by supplying flexible plastics and rigid
    plastics across a wide range of products including food, beverage, pharmaceutical, medical, home and personal care. As a
    global leader in packaging and production of flexible and rigids, Amcor Inc, has pricing power. This was proven once again
    recently when Amcor confirmed that it had passed on price increases of up to 15% for products across its global businesses
    effective from the 1st January 2022. These pass throughs are part of the company's ongoing response to supply constraints
    and higher input costs across multiple categories including raw materials, transport and energy. Peter Konieczny, Amcor's
    Chief Commercial Officer, was quoted saying "Amcor is working closely with customers and supply chain partners to keep
    servicing elevated demand for high performance packaging. These price increases are necessary to ensure we continue to
    minimize the effects of challenges in global supply chains."
    Reece Limited (REH) - Supplier of plumbing and bathroom products Reece Limited, announced in their Q1 FY2022 sales
    update that they had achieved “sales revenue of A$1,771m for the first quarter, up 13.2% on the same period last year. In
    ANZ, sales revenue was up 9.0%. In the US sales revenue grew 18.6% on a USD basis.” Peter Wilson, REH’s CEO and Managing
    Director said in the announcement that, “Sales revenue for the first quarter has been positive, reflecting momentum from
    FY21. We have continued to see growth in both regions which has exceeded our expectations. However, the future continues
    to be unpredictable with inflation dynamics, supply chain disruptions together with tight labour markets and wage inflation
    we are expecting to accelerate in Q2 and persist for the balance of FY22. As an essential service we will rely on our adaptive
    and resilient business model to protect and preserve our business today, whilst creating a position of strength to accelerate
    our long-term strategy”.
    Despite the caution, and the issues we’ve spoken about in this quarterly report, the company did also flag that their EBITDA
    for the first half of FY2022 would grow between 8%-11% on last years figures. At 11% EBITDA growth, we are again confident
    REH has pricing power and will be able to pass on additional costs to their customer without the fear that they will be losing
    business to a competitor.
    ARB Corporation (ARB) - ARB Corporation has been designing, manufacturing, distributing and selling 4WD vehicle
    accessories and light metal engineering works since the 1970’s. They boast a globally recognised brand and focus on
    innovation and R&D as a core part of the Company’s strategy. They have significant pricing power and have displayed this
    multiple times over the years. More recently ARB’s export segment has produced double digit sales growth and remains a
    key growth area for the business. ARBs domestic and international order book remains very strong.
    The company recently stated in a presentation to shareholders that they are, “continuing with its product development work,
    store development program in Australia and the expansion of its manufacturing capability. The Board is pleased to report
    that, in the absence of unforeseen circumstances, sales and profit growth is expected to continue for the first half. The Board
    believes that the Company is well positioned to achieve long term success with strong brands around the world, increasing
    manufacturing and distribution capacity, capable senior management to meet any challenges and a strong balance sheet to
    take advantage of opportunities as they arise.”
    BHP Group (BHP) – It has been a great time for Australian resources as we have seen a soaring demand for major commodities
    being met with limited supply. However, within these periods we often see big business get fat. As the business grows and
    their revenues increase to levels never seen before there is always that temptation for management teams to increase fixed
    costs. Add additional staff, appoint additional contractors, spend surplus capital on unnecessary equipment. If a management
    team isn’t disciplined on their costs throughout the cycle the company can very quickly see their higher fixed costs stick
    despite the issues of potential commodity price corrections in the future. To the credit of BHP management, despite seeing
    record commodity prices for much of 2021, their cost discipline is excellent.
    Despite not having pricing power, BHP continue to be one of the lowest-cost iron ore majors globally, with Iron Ore unit costs
    of US$14.82 per tonne, which is remarkable. BHP’s copper unit costs at Escondida are US$1.00 per pound and Petroleum
    unit costs are only US$10.83 per barrel of oil equivalent. Queensland Coal unit costs are US$82 per tonne and NSW Energy
    Coal unit costs US$64 per tonne which are also very favourable and competitive. Despite these low costs, we are confident
    they will continue to improve on this in years to come. BHP has announced in the 1st Quarter Report in October that “all
    production and unit cost guidance remains unchanged for the 2022 financial year.”
    Fortescue Metals (FMG) – Fortescue has announced a strong start to FY2022 with their latest quarterly report stating that
    “mining, processing, rail and shipping combined for record first quarter shipments of 45.6mt, 3% higher than the prior
    comparable period. Ore processed and railed also achieved record first quarter volumes, reflecting strong operational
    performance across the supply chain and expanded system capacity following the ramp up of Eliwana.”
    It is also a similar story with Fortescue and their focus on costs. FMG’s cost of production for the first quarter of FY2022 was
    US$15.25/wmt. Again, a remarkable achievement.
    Despite what 2022 brings and the ongoing concerns with production, price rises, supply chains, inflation, serviceability and
    labour availability we will continue to focus on investing in quality companies. We will target those quality companies with
    the ability to pass on prices to their customers to ensure continued profitability, earnings growth and dividend growth for
    their shareholders. It will be these businesses that will prove to be the standout investments during this period of uncertainty.

    Disclaimer and Important Information
    The material contained within the BKI Investment Company Limited Quarterly Report (The Report) has been prepared by Contact Asset Management on
    behalf of BKI Investment Company Limited. Figures referred to in The Report are unaudited. The Report is not int ended to provide advice to investors or
    take into account an individual’s financial circumstances or investment objectives. This is general investment advice only and does not constitute advice to
    any person. The opinions within The Report are not intended to represent recommendations to investors, they are the view of BKI Investment Company
    Limited and Contact Asset Management as of this date and are accordingly subject to change. Information related to any company or security is for
    information purposes only and should not be interpreted as a solicitation of offer to buy or sell any security. The information on which The Report is based
    has been obtained from sources we believe to be reliable, but we do not guarantee its accuracy or completeness. Investors should consult their financial
    adviser in relation to any material within this document.

    courtesy of Bell Direct
    ==============================================================================================
    DYOR

    i hold BKI

    but this might give some insights to all investors in the current market

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