{"id":5276,"date":"2025-01-31T10:25:33","date_gmt":"2025-01-30T23:55:33","guid":{"rendered":"https:\/\/strawman.com\/blog\/?p=5276"},"modified":"2025-01-31T10:25:33","modified_gmt":"2025-01-30T23:55:33","slug":"write-downs-letdowns","status":"publish","type":"post","link":"https:\/\/strawman.com\/blog\/write-downs-letdowns\/","title":{"rendered":"Write-downs & Letdowns"},"content":{"rendered":"\n

I\u2019ve had a tough time of late with my home broadband provider, Optus.<\/p>\n\n\n\n

The details are too painful (and boring) to recount, but let\u2019s just say that after 10 days without internet, I\u2019ve learned the true meaning of \u201con hold.\u201d<\/p>\n\n\n\n

Rather than scream into the void, I decided to channel my rage productively: digging into Optus\u2019s financials. If it sucks this much to be a customer, maybe it\u2019s because shareholders are making out like bandits?<\/p>\n\n\n\n

Spoiler: They\u2019re not.<\/p>\n\n\n\n

Back in 2001, Singapore-based Singtel<\/strong> (SGX:Z74) bought Optus for a cool A$14 billion — or about A$27 billion in today\u2019s money. Given the lackluster growth and repeated impairment charges, it’s safe to say things haven’t gone to plan.<\/p>\n\n\n\n

Even the most recent annual report reveals a litany of red flags: \u201cstrategic resets,\u201d \u201cbroader macro challenges,\u201d and the pi\u00e8ce de r\u00e9sistance<\/em>, a whopping A$1.4 billion in \u201cnon-cash impairment charges.\u201d<\/p>\n\n\n\n

You\u2019ve probably seen write-downs before. They\u2019re not uncommon, and companies love to emphasise that they\u2019re \u201cnon-cash\u201d charges — just some harmless accounting adjustments and not a real loss.<\/p>\n\n\n\n

That\u2019s always stuck in my craw. So, if you\u2019ll humor me, I\u2019m going to vent a little. And yes, I\u2019ll pick on Optus because, well, screw those guys. But my frustration is really directed at any company that tries to downplay the very real evisceration of shareholder wealth.<\/p>\n\n\n\n

Let\u2019s rewind for a second.<\/p>\n\n\n\n

When a company acquires a business, like SingTel did with Optus, the assets are added to the acquirer\u2019s balance sheet. If they paid more than the tangible asset value (as often happens), the difference gets logged as \u201cgoodwill.\u201d<\/p>\n\n\n\n

This isn\u2019t inherently bad. After all, a company\u2019s worth is usually more than the sum of its tangible parts.<\/p>\n\n\n\n

For example, if you build a shiny new fiber optic network for $1 billion, that cost becomes the starting value of the asset on your balance sheet. Over time, depreciation takes a bite out of that value, reflecting wear and tear — the second law of thermodynamics in action.<\/p>\n\n\n\n

But every so often, auditors come knocking. \u201cHang on,\u201d they\u2019ll say, \u201cthese assets aren\u2019t worth anywhere near what you\u2019re claiming.\u201d When that happens, companies are forced to \u2018write-down\u2019 the value of those assets.<\/p>\n\n\n\n

These impairments are labeled as \u201cone-off\u201d because companies hope they won\u2019t have to do it again anytime soon. And yes, they\u2019re technically \u201cnon-cash\u201d because there\u2019s no associated cash flow in the current year. But make no mistake: the loss is very real. It\u2019s a direct acknowledgment that previous investments haven\u2019t panned out.<\/p>\n\n\n\n

For example, SingTel\u2019s FY24 results show a 64% drop in profit, thanks largely to those writedowns. Yet management helpfully offers an \u201cunderlying\u201d profit figure that excludes these pesky adjustments. Voila! A 10% profit increase.<\/p>\n\n\n\n

But make no mistake, the losses represent wasted shareholder funds. It\u2019s only \u201cnon-cash\u201d in the sense that no cash left the bank that year. Try selling those assets, though, and the loss will hit home hard (and could even be worse than the impairment charge suggests).<\/p>\n\n\n\n

It\u2019s like pretending you haven\u2019t lost money on stocks you bought at 10x their current price because “it’s not a loss until you sell”.<\/p>\n\n\n\n

Keep telling yourself that champ, but it doesn’t change the brutal reality of the situation.<\/p>\n\n\n\n

Here\u2019s the real issue: SingTel has copped loads of write-downs over the years. And that\u2019s a loud, flashing warning sign. It screams that they\u2019re either terrible at acquisitions, terrible at managing acquired assets, or both.<\/p>\n\n\n\n

Why? Because good capital allocators don\u2019t routinely throw money at bad investments. And smart capital allocation is the only<\/em> thing that matters when it comes to driving long-term value creation<\/strong>.<\/p>\n\n\n\n

SingTel, however, seems to rely heavily on cost-cutting to drive growth rather than delivering real value to customers — something that is depressingly effective in the short term, but crippling in the long run.<\/p>\n\n\n\n

The bottom line? Be wary of any company that frequently reports write-downs — no matter how much they try and point to ‘underlying’ numbers.<\/p>\n\n\n\n

That said, no company is perfect. Even the best businesses occasionally strike out or overpay for an acquisition. But when that happens, a little honesty from management goes a long way.<\/p>\n\n\n\n

Anyway, I\u2019m jumping ship to Aussie Broadband<\/strong> (ASX:ABB), a company with a clear focus on customer service. Given my recent experience with Optus, it\u2019s no surprise they\u2019ve been winning market share and delivering strong earnings growth for shareholders.<\/p>\n\n\n\n

<\/p>\n\n\n\n

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I\u2019ve had a tough time of late with my home broadband provider, Optus. The details are too painful (and boring) to recount, but let\u2019s just say that after 10 days without internet, I\u2019ve learned the true meaning of \u201con hold.\u201d Rather than scream into the void, I decided to channel my rage productively: digging into Optus\u2019s financials. 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