Has ASIC been a ‘poodle’ regulator? Crown finally reveals its pokie numbers. Huh! AGL triples profits and the share price falls

This week in The Money Cafe James Kirby was joined by Stephen Mayne for a big discussion on:

  • The most important week for the royal commission as super is examined.
  • Stephen thinks that in a world of mandatory super, a dedicated regulator would be a good idea.
  • Is ASIC a poodle regulator?
  • Why David Murray should focus on fixing AMP, not corporate governance.
  • AGL is trying to look as benevolent as possible amid a firey debate on renewables.
  • Crown whacked for not protecting customers, Australians are losing roughly 14 billion dollars a year on pokies, and high rollers bolster Crown’s balance sheet.
  • Elon goes rogue on Twitter, to great gain, is he in trouble?


Hi, I’m James Kirby, Wealth Editor at The Australian.  With me this week standing in for Alan Kohler but from The Constant Investor is Stephen Mayne, how are you Stephen?

James, I’m very well, great to be here.

Welcome back to The Money Café podcast, good to have you as a constant visitor, Stephen.  I know you’ve got a couple of things you’d love to talk about and when you are with us we always invariably do talk about the gaming and gambling scene as well and it’s a very timely visit from you because of course Crown have just had their session this morning, some amazing stuff coming out of that, so many strands on that, Stephen, we’ll come back to it including James Packer earning $190 million a year on dividends alone.  I suppose the big issue of the week is yet again the bank inquiry, not so much the bank inquiry but to be specific this segment which is on super which started on Monday morning and which I think is actually the most important segment but arguably the liveliest too.  Have you been watching at all or reading?

I’m actually going to pop up this afternoon after our chat for the first time.

I thought you were going to say you were going to pop up in it.

Yeah, no I’m not.

You’re going to pop up at it.

We’ll avoid that.  It’s just generating so much information and it’s moving share prices around and we’re seeing it in the profit results this week.  I don’t know what you thought about AMP and CBA yesterday but clearly the financials are being impacted by the whole optics and impact of the Royal Commission. 

Yeah, and the sentiment, you have to think, I mean there’s a certain point no matter how hard nosed numbers driven quant type mind you had if you were assessing banks you could not assess them now without taking on board the risk, the sentiment risk, the compensation risk which is building, it seems to me all the time.

Yeah.

Are you surprised at how bad and systematic the bad behaviour seems to be?  We’ve only heard from NAB by the way on the super segment, it’s been all NAB for three and a half days but no doubt the other banks will find themselves in the frame sooner or later but what did you think of NAB, were you surprised on what was going on?

I’m surprised that NAB has been targeted to this degree but when you look at the evidence the blatant conflicts of interest, the fees for no service.

I don’t think they’re targeted per se because how it works is that everyone has to submit documents, masses of documents.

Bring out your dead.

Yeah, bring out your dead and then the Commission decides who they want to see.  They wanted to see NAB and there’s reasons for that and there’s reasons why they’re first cab off the rank and they are getting one hell of a grilling.  This woman, Nicole Smith, was in the stand for three days, she just finished up at lunchtime Thursday she went in on lunchtime Tuesday, she’ll never forget that.

She’ll never forget that and she didn’t do as badly as Jack Regan from AMP, I don’t think it’s quite at that level but it’s very untidy, isn’t it?

Yeah, but it wasn’t as shocking because we had been shocked by AMP.  For instance when we hear that they’re charging dead people or that they have consistently run this fees for no service enterprise inside of the bank well it turns out AMP did something very similar so we probably weren’t as shocked as the first time.  I suppose the next issue then is where does it go, do you think some of these guys are going to end up facing criminal charges?

The criminal issue got raised again yesterday.

It was raised twice yesterday.

Yeah, and it was interesting that Matt Comyn, the CEO of CBA, last night on Sky News sort of said he didn’t think it was at the criminal level.  I think if the regulators choose to go that path for shock and awe and long term impact then that’s what they’ll do and I think they do seem to be leaning that way which I think has got the entire financial sector quaking if that comes to pass.

Yeah, if it does because it’s raised but it’s been raised in a sort of manner which is very courteous and I don’t think it has been compelling yet anyway.  The other thing that’s been raised, and this is really interesting and no one really saw this however it came to pass but no one is really in charge of regulating super.  There’s three parties involved in it, APRA, ASIC and the ATO but nobody is top dog.

Given that we have a world unique paternalistic mandatory super system.

Mandatory being the key word, yeah.

It exposes every single working Australian.  You would think that the argument for a dedicated focussed specialist tough super regulator would make a lot of sense because it’s a very different thing to banking and it’s also different to a degree from just wealth management.  It’s got links to it but the whole cross selling and the industry funds and the links with employment, I think it deserves its own regulator. 

Well it’s universal and we don’t choose to have super, we must have super, we have no choice.  To that extent it is amazing.  Professor Allan Fells came out this morning and it was interesting, the Greens yesterday said let’s have the ACCC go in and it sounded interesting but what Fells said was that he admired the ACCC, that they were the toughest regulator, that they went to court more often and that ASIC he implied heavily that they were a soft regulator.

Scoreboard, that’s the truth.

I don’t know which is true but look at the scoreboard, exactly, look what’s going on and how they tip toe around ASIC and they play games with ASIC endlessly.  Did they play games with the ACCC, do you think, in the same manner?

I think the ACCC is more respected, there probably hasn’t been as many games but I think it’s fair to say ASIC has been a poodle over a long period of time.

A poodle did you say?

A poodle, a bit like some of the gambling regulators that they just get captured and they just haven’t delivered.  ACCC has the best track record as a regulator.

Give us an example of the ACCC’s power where it’s actually really scored.

Just the other week when they got the market cap of AGL and Origin down by 1.7 billion in one day when they came out with their energy sector report.  It wasn’t compulsory asset sales but it was pretty brutal and the share market reaction was instant, 1.7 billion.  When has ASIC ever come out and issued a report that’s caused convulsions in share prices of the major banks that it regulates so I think they definitely are the top regulator.  What about CBA putting the dividend up yesterday in the environment of profit falling, that was a pretty bolshy statement.  It was only up 1 cent but 2.30 to 2.31, but the symbol was pretty powerful.

It was powerful, and powerful in the context of Telstra melting a few months ago, going the opposite way, yeah.  That’s quite a good pickup and I’m sure it will be picked up by the shareholders too.  That’s Matt Comyn saying – not bet on me but believe in me, believe in me to carry this bank out of this soft patch.

Yeah.  $4.31 dividend for the year, $4 billion to be paid out on September 28.  That is a very robust 131 billion dollar institution that is sailing through all of this.  Messy accounts, lots of little write offs and one offs here and there, and yes the first drop in 10 years but ultimately still an absolute behemoth, very robust, very resilient and you probably can’t say the same for AMP.

Yeah, they’re both losing money out the backdoor fast on the wealth side, aren’t they?

They are but for CBA it’s the retail bank and the transactions and all this sort of stuff which is the core of their franchise whereas with AMP wealth management is such a key part of it.

Yeah, though the stock price did crawl up a little bit yesterday on AMP.

From the sell off the other day.

Yeah, well the other thing about AMP is it doesn’t have a CEO and CommBank has and I suppose there was lots of debate about whether they should have appointed an insider, they certainly won’t appoint an insider from AMP will they?

Well, I must admit David Murray, 825,000 a year I think he is as Chairman, double what Elizabeth Alexander is getting at Medibank.  Mike Wilkins, 1.5 million a year as acting CEO when he is still getting paid by QBE and Medibank to be a director over there.  Those two lads, they’ve probably made between them 20 to 30 million each at least out of their executive careers at various companies, do they really need to be paid that much at AMP.

Yeah, but the other way to look at it is those two lads are two of the few who have come through unscathed from the whole situation and have quite splendid money making records, I mean for shareholders.

Wilkins is certainly, I think, close to being in a league of his own on the insurance side.  David Murray, I think, is a little bit more contentious.  Certainly, investors made money out of him but he did put together the conglomerate.

Yes, he bought Colonial.

Which is now being unwound piece by piece.

He bought Colonial which is now an albatross, isn’t it?

Yeah.

Yeah, that’s interesting.  No wonder he says they didn’t sell it, he has been, it’s so obvious, well that’s what he said.

I’m just annoyed that David Murray keeps on banging on about corporate governance and the ASX corporate governance guidelines without talking about AMP.  He is there to fix AMP, he is not there to pontificate about corporate governance and regulation, he is using AMP as a soap box in my view for his own sort of anti-regulation views.

Well, he will hold forth and he has always been like that, that’s his role, that’s his nature in the broader scheme of things.  He comes into AMP and just now it’s all promise, of course he hasn’t made any mistakes yet so we’ll see where he goes.  You mentioned AGL and talking about it one of the things is you look at a CEO like David Murray and you say well there was this, there was that, but the thing is if you had money, if you invested in CBA when David Murray was there, you were making it, as a shareholder you did so well.  He was bringing in returns on equities touching 20% for years when he was there and the share price showed that. 

Now AGL, I’m just looking at the share price chart here and there’s Andy Vesey, he’s a high profile CEO, he is of course in constant tit for tat with the government on regulatory issues and the share price was very good, wasn’t it, for a long time.  It basically doubled really from $15 to $30 under his reign but it has since slid from that level to about $22 and the odd thing is they seem to be going fine, their financials seem good.  Can you tell us about what the profit was like?

Well at a statutory level 1.5 billion and it tripled, their statutory profit, but they had a one off sort of hedging benefit of close to 500 million.  The cash flow was up 81% for the year so they’re in good shape.

They’re in very good shape, why is the share price down?

12% today and it’s been a little bit over the last few weeks.

Sorry, it’s turned up today has it did you say?

No, it’s come off a bit today.

It’s come off still, yeah, so if you triple your share price why is your share price going down?

I think it’s regulatory risk.  If you read their statements today they’re giving money away to customers, they’re talking about $50 million in debt relief and putting people who have been with them for more than two years onto automatically the lowest pricing arrangement.  I think that is a bit like Telstra with the data plans that they’re now voluntarily giving up revenue to long captive and loyal customers because of the regulatory pressure and the political pressure which is coming about power prices.

That’s going to squeeze their margins.

Yeah, I think that’s what’s happening and they’ve got the big vote on the NEG scheme tomorrow with all the states and AGL has come out very strongly again today saying that we need to do this and their rhetoric today was that we are investing more in new generation capacity than anyone else in Australia, 3,800 megawatts, but obviously against that is the controversial closure of Liddell albeit a few years away.  So they’re trying to say yes, we benefited from the closure of Hazelwood and this caused unprecedented increases in prices but we’re listening, ACCC we hear you, government we hear you, so we’re giving more back to the customers and we’re investing in new capacity but it’s a classic sort of regulatory risk trade off thing.

If you were an investor and you’re looking at the banks who are being sort of scorched inside in the Royal Inquiry and you’re looking at energy companies which are being closely regulated, intensely regulated, which one do you think has more regulatory risk right now?

Probably the banks I’d say, I just think that if a Labor government comes in you might really see them getting smashed because they’re bigger, they’re worth 400 billion, they’re making 40 billion.  I think for the power companies it’s a much smaller gig, if you like.

Yes, and obviously you’d have the negative gearing changes, you’d have higher tax rates, etcetera.  Is this what you’re thinking of?

I just think it’s the regulator smacking corporate and looking after the customer and the risk of that coming in, I think the Royal Commission you could get a whole bunch of new legislation that reduces bank pricing power for instance.  What if, like in Britain, you weren’t allowed to have an introductory home loan offer.  If that disappeared everyone’s got to get the same price.

But there will still only be four of them, they’ll still have that incredible sort of oligopoly power.

Yeah, and it’s the same with the power sector, I guess there still is the big Energy Australia, AGL, Origin, they are the big boys and unless some government forces them to divest which the ACCC doesn’t have those powers they will probably be okay but I think AGL is sniffing the breeze and is giving a bit back and trying to look as benevolent and generous and caring as possible.

Yeah, and the CEO is on his way out, is that right?  Andy Vesey, Is he leaving?

No, I don’t think so but they did do one thing today I’ve never seen, I’ve never seen a company announce the notice of meeting for their AGM on the same day as the profit.

The AGM?

The AGM, yeah.  Normally, and this was last year, they had a two week gap.

Why is this?

Well they’re bringing it forward, so why have they done it?  I don’t know whether they want to shut the door on someone running for the board.  Normally what happens is the results come out and then…

People digest them.

Yeah, and then if you’re angry you might nominate for the board but now it’s too late because nominations have closed already and they’ve just dropped the notice of meeting today.  I’ve never seen that before.

But the result was good.

The numbers were good, the share price reaction was a bit more disappointing I think because of the regulatory risk.

Is this something you may not know, Stephen?

As someone who has run for 48 public company boards I was thinking I could run for AGL, I’ll wait to see the numbers, too late she cried, the door is already closed.  I thought that was very unusual.

Intriguing.  Now while you’re here we should talk about the gaming and gambling area.  It’s funny, I noticed I just came back from holidays and I think it was a Monday morning and I noticed Star City – is it Sky City or Star City?

Star Entertainment.

Star Entertainment.  I noticed that Star Entertainment their numbers were quite good and that the so called high-rollers were back and I said that’s very interesting because if they’re back there they’re surely back at Crown.  This morning we had the Crown results and some very interesting developments there, tell us about Crown and tell us about James Packer, and what is his role in Crown now?

Well, he’s off the board, he’s out of the country.  He talks to John Alexander, the Executive Chairman, regularly so I would say he’s effectively a shadow director and still calling the shots.  He has just had his personal troubles and he doesn’t want to be responsible at that fiduciary director level.  Crown has had their sort of regulatory warnings from the Victorian government, they’ve just had their five-year review and they’ve been told to clean up their act.

Yeah, from a distance it seemed to me – sure, but they got their licence renewed, right?

They did but they got a whack.  I mean it was the lead story in The Australian on Saturday, they got quite a whack for not managing harm with their customers who gamble too much and also their governance arrangements and they’ve had a pretty controversial period with the China arrests which are still going, there’s still class actions on that and the regulator has put an open finding on the Chinese arrests so there could still be fines flowing from that.  I guess today was all about the numbers and at a transparency level we had a bit of a win, I work with the Alliance for Gambling Reform and we pressured Crown at last year’s AGM to reveal their poker machine numbers and they did it for the first time today.

What do you know that you didn’t know already?

We now know that the punters lost 450 million on the 2,682 poker machines at Crown Melbourne and 265 million on the pokies in Perth whereas previously they just lumped table games, high rollers and pokies all into one.  Now we know that Australians are losing roughly 14 billion a year on the pokies out of the 25 billion which is where we’re world record gamblers and we know that Crown is one of the biggest pokies venues in the world in Melbourne because they’ve now said yes, 25% of all of the gambling losses in Melbourne, and it was 1.78 billion last year, third highest ever, 25% is on the regular pokies, just local players, but the biggest growth this year was the high rollers and they are back.  I think this result does say that the high rollers are back.

Switching gears entirely from the cultural assessment of gambling on an investment assessment is it the arrival of the high rollers that gives the premium to the share price in Crown?

4% increase today, I think it’s the number one factor there, is the high roller number which is very impressive.  Throw in the 400 million dollar buyback and whenever a company announced a buyback you know that the share price is up.  That means that Crown is comfortable that they can spend the 2.2 billion on Barangaroo keeping their balance sheet comfortable and they can buy back $400 million which will lift James Packer’s stake from currently 46% back up closer to 50%, and he takes out some more of the minority shareholders.

In terms of dividends he’s pulling in 190 million a year personally for his stake.

A 30 cent dividend.

Have you any idea what that dividend yield is on Crown?

I haven’t looked at it, it’s getting up towards 5 I think.  It’s quite tidy.

Looking at James Packer it seems that he really shrunk all his activities back down to just Crown, is that right?

Yeah, he’s pretty much out of everything else.  The conglomerate that we used to have with Seek and Foxtel and Channel Nine and the magazines, he was almost the most diversified oligarch sort of billionaire in Australia and he had the big international play after he cashed in PBL…

Yeah, and now it’s down to Crown and Crown in turn is down to basically…

Melbourne, Sydney, Perth and some small casinos in the UK.

Sydney is really a development primarily.

Yeah, with no pokies.

With no pokies.

No pokies, so it’s only a high roller casino.  They’ll be pleased that the high rollers are pouring back in and that’s going to be the key to that.

There’s no pokies because they weren’t allowed pokies, is that right?

That was part of the deal because it was an unsolicited proposal, he just came along and said hey let’s have two casinos in Sydney, this has never happened before and the government said – I mean, James Packer actually told me, we had a meeting a few years ago and he told me that Graham Richardson had told him that him getting a licence for a second casino in Sydney was the greatest achievement of political influencing in a bipartisan sense that Graham Richardson had ever seen.  Now he’s suing the government today for changing the rules on the height of the buildings at Barangaroo.

What was it, the building’s views?

Yeah, so he did a deal, unsolicited proposal, he did a deal to go a certain height and his apartment buyers, penthouse buyers, would get beautiful views of the Opera House and then the government, he says, changed the rules with the station planning around the Sydney Light Rail and to get their money back from more expensive extra station going in, they jacked up the height limits and that’s then blocked out the Crown view.

Is that built or is it just a plan, these are all plans are they?  It’s not built yet.

They’ve got a permit so the rival developer has a permit to go high and he is suing saying you’ve breached our deal, he’s suing in the Supreme Court of New South Wales.  This is Packer, he’s a tough guy, he takes on the big boys and he’s quite happy to sue the same government that gave him a special deal, he’s now suing them in the supreme court so that says that 2.2 billion is not the best investment perhaps for Crown and it’s even worse with the fact that he is now trying to sue.

And they never got the pokies which we now know is very lucrative from the Melbourne numbers.

720 million I think across Perth and Melbourne.

Just before we go I wanted to talk to you about one last story which is nothing to do with gambling or indeed nothing to do with Australian finance but it’s a story we all love I think and it’s about Tesla.  Actually, it’s an ideal opportunity to bring in our Mega Trend, the Mega Trend moment is brought to us by BT Financial Group every week and I think looking at what’s going on with Tesla the mega trend here is the potential of high tech companies, fast growth companies with a key man risk as they used to call it to go private.  You’re probably like me, that most of the privatisations you’ve seen over the years were when companies were in trouble, when they were so cheap that you might as well do it.  There’s been a time where we talked about it in Crown, wasn’t it, it was Flight Centre, there’s always times.  Tesla is going well, right, that is at least it’s going a lot better than those companies were at that time.  You have this amazing idea, have you looked at it?

It is shocking, it really is.  I’ve never seen anything quite so brazen.   He does a 72 billion dollar US privatisation offer on Twitter.

That’s right, and the stock went up.

11%.

Yeah, which was a billion dollars so it was a billion dollar tweet from Elon Musk.

And now the SEC is investigating and his non-executive directors are putting out statements saying they don’t know anything about it.  I mean, imagine if James Packer did a tweet saying I’m thinking of privatising Crown at 17, what do you think guys?  I mean the regulators would be all over it, you can’t do that.

But Musk is a one off, right.  He is the Thomas Edison of our time, we’ve never seen anything like him or certainly he has no parallel and he breaks the rules.

I think he’s in trouble with this one.

You think so?

I think he should be.  I mean he’s been saying some increasingly unhinged comments of late getting stuck into short sellers and on analyst calls abusing people.

Yes, but he will be in trouble because it will be seen as an attempt to ramp the stock and it did ramp the stock.

Yeah, and he’s got no proof, it did ramp the stock.  [indistinct] who, when, what, how.

He said it was fully funded, did he say securely funded or something like that?

Journos are now ringing around shareholders saying have you heard, are you financing it.  I mean, 72 billion is the valuation here.  You’d think that someone would actually put their hand up and go yeah, I’ve shaken with Elon and I’ll be giving him 50 billion to finance the biggest privatisation of a listed tech stock in history.

We’ll see how that one goes, it’s a pity we don’t have very colourful entertaining players like that anymore in the Australian scene though of course they’re entertaining primarily for people who don’t have stock in them.  With Tesla who knows, Tesla is one of those stories we don’t know where it’s going to go.  I think we might leave it there for today, Stephen, but thank you very much for coming on the show again.

It’s a great pleasure, James, lovely to chat, have a great day.

Thank you.  Don’t forget, everybody, you can subscribe to The Money Café on Apple Podcasts or your app of choice and when you’re there it’s very helpful if you leave a review or a rating, it helps listeners find the show.  We’ve had some wonderful ratings and reviews in recent times and of course let’s come back to the questions next week and let’s have some questions from you.  Remember, the e-mail for questions is hello@theconstantinvestor.com and we’ll take on the questions next week on any subject you like.  Until next week, I’m James Kirby, Wealth Editor at The Australian.