asx market announcements australian securities exchange ...nov 09, 2016 · * the company is...
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AROWANA AUSTRALASIAN VALUE OPPORTUNITIES FUND LIMITED
ABN 27 602 250 644
Level 11, 153 Walker Street
North Sydney NSW 2060
Tel: +61 (0)2 8083 9800 Fax: +61 (0)2 8083 9804
Level 11, 110 Mary Street, Brisbane QLD 4000
PO Box 15575, City East QLD 4002
Tel: +61 (0)7 3182 3200 Fax: +61 (0)7 3182 3299
9 November 2016
The Manager
ASX Market Announcements
Australian Securities Exchange
Exchange Centre
Level 4, 20 Bridge Street
SYDNEY NSW 2000
31 October NTA and Investor Presentation
The Directors of Arowana Australasian Value Opportunities Fund Limited (ASX: AWQ) are pleased to
announce the 31 October 2016 Net Tangible Asset backing per share in the attached monthly update and
NTA report. We also take this opportunity to provide a comprehensive investor presentation on the fund; its
people, process and portfolio news.
The attached 31 October 2016 monthly update and NTA report incorporates the NTA per share information
required under Listing Rule 4.12. This calculation has been made in accordance with the definition of net
tangible asset backing in Chapter 19 of the Listing Rules and is subject to review by the Company’s external
auditor.
On behalf of the Board of AWQ,
Tom Bloomfield
Company Secretary
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MONTHLY UPDATE AND
NET TANGIBLE ASSET REPORT
AS AT 31 OCTOBER 2016
2 | P a g e
Net performance
At 31 October 2016 1 Mth 3 Mths 6 Mths 1 year
Since
Inception
(5-Jan-15)
AAVOF (AWQ) Investment Portfolio* 2.2% (4.2)% 8.6% 13.0% 19.9%
S&P/ASX 200 Accumulation Index (2.1)% (3.2)% 3.5% 6.1% 6.7%
Outperformance 4.3% (1.0)% 5.1% 6.9% 13.2%
* Net return after all fees, costs and company tax and before providing for estimated tax on unrealised gains.
Net Tangible Assets (NTA) per Share
At 31 October 2016
Basic
NTA per share ($)
NTA after tax and before estimated tax on unrealised gains 1.07
NTA after tax and after estimated tax on unrealised gains* 1.03
* The Company is required to estimate the tax that may arise should the entire portfolio be disposed of on the above
date and show the result per share after deducting this theoretical provision. Any such tax would generate franking
credits, whose value would not be lost but rather transferred to shareholders on payment of franked dividends
About Arowana Australasian Value Opportunities Fund Limited (AAVOF)
AAVOF (ASX ticker: AWQ) offers investors an opportunity to gain exposure to a concentrated
portfolio of securities built from a bottom up research process. Whilst the majority of the
portfolio is built around Australian listed securities, AAVOF is able to invest in overseas listed
securities and to hedge its portfolio.
The core objectives of the fund are to:
1. Generate superior returns over the medium to long term,
2. Provide shareholders a rising stream of dividends, and
3. Grow Net Tangible Assets per share
Ordinary Shares
ASX ticker AWQ
Last price $0.965
Number on issue 69,002,079
Pre-tax NTA per share $1.07
Market capitalisation A$66.6m
Gross portfolio value A$72.3m
Year-end dividend* $0.04/share
* Paid 29 September 2016 for the year ended 30 June 2016.
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MONTHLY UPDATE AND
NET TANGIBLE ASSET REPORT
AS AT 31 OCTOBER 2016
3 | P a g e
Market Commentary
October brought negative returns to the Australian market; on a total return basis the
S&P/ASX200 Accumulation index fell 2.2% in October. Calendar year to date, the index is up
4.0%, with dividends driving almost all of that positive return. Bond proxies or dividend stocks
continued their sell off and commodities continued to rally.
Perhaps the big story in retrospect for 2016 is the commodity complex. Iron ore is now up 48%
year to date. Coking coal is trading at over $300/tonne at the time of writing, having been below
$100/tonne in early July 2016.
Hard commodities are in a demand context a derivative of Chinese activity. China is the largest
consumer in the hard commodity complex and since the early 2000s has accounted for almost
100% (in some cases more) of demand growth in materials such as iron ore, copper, aluminium
and the like.
In China the story is of reflation; economic and industrial activity is clearly accelerating with the
official data under-representing the sharp increase in activity. This is being driven by an
incredible and continued credit surge; calendar year to date Chinese bank assets have grown by
45% with banking system assets now greater than 300% of GDP. There are a few economies at
this extended level; none that demonstrate the mind boggling trajectory of future indebtedness
that China does. As one very well informed commentator has remarked, “it is like the star trek
economy…they are taking leverage where no man has gone before.”
We are always intrigued at the unsustainable and what is occurring in China seems to vividly fit
that moniker. If your economy requires 45%+ credit to GDP growth to pump out single digit GDP
growth, you have a problem because it is not sustainable and so something has to give. Bar
coaster math shows if we ran a company with 1x debt to EBITDA and grew EBITDA by 10% a year
by growing debt 45% a year we’d blow the balance sheet up in a few short years.
Portfolio Notes
The portfolio had a strong month in November, rising 2.2% net of all costs. Most of this was
driven by Infigen, which continues to be our largest position.
Elsewhere we added a new position in the fintech sector. Whenever we identify a complex which
is growing strongly and yet where growth for dominant incumbents is slowing we become very
curious…the question always being, is there a disruptive and fast growing business that is
causing this in which we can invest? We continue to build this position and will write about it in
due course.
For the first time in some months we are coming across opportunities. These take time to
diligence. The Australian market in general has become somewhat cheaper in addition which is
helping.
As always, we thank our shareholders for their trust and will continue to dedicate ourselves to
safeguarding and growing their investment in AWQ.
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MONTHLY UPDATE AND
NET TANGIBLE ASSET REPORT
AS AT 31 OCTOBER 2016
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AAVOF CORE OBJECTIVES
AAVOF Asset Allocation Top 5 Holdings
Asset class A$m %** Ticker %**
Australian Equities 33.7 46% IFN Infigen Energy 17%
AUD cash and equivalent 32.8 44% SIV Silver Chef Limited 10%
USD cash and equivalent 1.0 1% HLF.US Herbalife Limited 9%
Australian Hybrids & Bonds - 0% USD USD ETF 6%
International Equities 6.5 9% ELD Elders Limited 6%
Hedges - 0% Top 5 as % of Gross Portfolio 48%
Portfolio Value* 73.9 100%
* Totals may not sum due to rounding
** Percentage of gross portfolio value
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AROWANA AUSTRALASIAN VALUE
OPPORTUNITIES FUND LIMITED
(“AWQ”)
Investor Presentation
November 2016
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DISCLAIMER
2
The information contained in this Presentation or subsequently provided to the recipient whether orally or in writing by, or on behalf of Arowana Australasian Value Opportunities Fund
Limited (AWQ) or any of its directors, officers, employees, agents, representatives and advisers (the Parties) is provided to the recipient on the terms and conditions set out in this notice.
The information contained in this Presentation has been furnished by the Parties and other sources deemed reliable but no assurance can be given by the Parties as to the accuracy or
completeness of this information.
To the full extent permitted by law:
(a) no representation or warranty (express or implied) is given; and
(b) no responsibility or liability (including in negligence) is accepted,
by the Parties as to the truth, accuracy or completeness of any statement, opinion, forecast, information or other matter (whether express or implied) contained in this Presentation or as
to any other matter concerning them.
To the full extent permitted by law, no responsibility or liability (including in negligence) is accepted by the Parties:
(a) for or in connection with any act or omission, directly or indirectly in reliance upon; and
(b) for any cost, expense, loss or other liability, directly or indirectly, arising from, or in connection with, any omission from or defects in, or any failure to correct any information,
in this Presentation or any other communication (oral or written) about or concerning them.
The delivery of this Presentation does not under any circumstances imply that the affairs or prospects of AWQ or any information have been fully or correctly stated in this Presentation or
have not changed since the date at which the information is expressed to be applicable. Except as required by law and the ASX listing rules, no responsibility or liability (including in
negligence) is assumed by the Parties for updating any such information or to inform the recipient of any new information of which the Parties may become aware.
Notwithstanding the above, no condition, warranty or right is excluded if its exclusion would contravene the Competition and Consumer Act 2010 or any other applicable law or cause an
exclusion to be void.
The provision of this Presentation is not and should not be considered as a recommendation in relation to an investment in AWQ or that an investment in AWQ is a suitable investment for
the recipient. The information in this presentation is general only, and has been prepared without taking into account your particular circumstances and needs. Before acting on any
information from this presentation you should assess or seek advice on whether it is appropriate for your needs, financial situation and investment objectives.
References to ‘normalised’ information are to non-IFRS financial information.
Non-IFRS financial information has not been subject to audit or review.
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AWQ: OUR CORE OBJECTIVES
3
Strong Performance
19.9% net return since Jan 20151
High Payout Ratio
70%-100% payout ratio2
Attractive Dividend
Pro forma yield 8.2%3
Sustainability
1. As at 31 October 2016; net return after all fees and other costs and before providing for estimated tax on unrealised gains. Many LIC managers quote returns before fees which may
grossly overstate returns over long periods of time
2. Policy of distributing 70%-100% of post tax income as dividends
3. Annualised yield based off 4 cent per share dividend for half year ending 30 June 2016, projected 4c/share for half year 31 December 2016 and stock price of $0.97 as at 4
November 2016
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AWQ: OUR PERFORMANCE (TO 31 OCTOBER 2016)
4
(2.2)%
(4.4)%
1.3 % 1.5 %
(1.7)%(2.2)%(3.2)%
3.5 %
6.1 %6.7 %
2.2 %
(4.2)%
8.6 %
13.0 %
19.9 %
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
1 month 3 months 6 months 12 months Since inception
S&P/ASX200 Index S&P/ASX200 Accum. Index AWQ
1. Returns are post fees & company taxes and pre taxes on unrealized gains. Fund inception 5 January 2015
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AWQ: OUR ADVANTAGES
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Deep research methodology
Absolute return mindset
Concentrated portfolio
Global perspective
Highly experienced
team
Accountability Transparency Communication Consistency High dividend yield
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AWQ: OUR INVESTMENT TEAM
6
Gary Hui
Lead Analyst/ Chief
Investment Officer
Conor Byrne
Chief Financial &
Operating Officer
Ben Wolrige
Analyst
Benn Lim
Director, Head of
Retail Distribution
Elizabeth Hickey
Office & Quality
Assurance Manager
♦ CIO since inception of AWQ
♦ 7 years Indus Capital (Asian / global hedge fund)
♦ 8 years J.P. Morgan (Proprietary Trading, ECM and M&A)
♦ 5 years Deloitte (corporate finance, audit)
♦ CFOO since inception of AWQ
♦ 8 years as COO of Investors Mutual
♦ 9 years Treasury Group Investment Services
♦ Analyst since May 2015
♦ 3 years Corality Financial Group (specialist infrastructure modeling)
♦ 2 years VGI Partners (global hedge fund)
♦ IR & Bus. Dev. AWQ & AWN
♦ 9 years Financial Adviser at UBS WM
♦ 5 years Financial Adviser at Commonwealth Private
♦ 15+ years administrative experience
♦ 8 years specifically focused on business support within the financial sectorFor
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AWQ: THEMATIC INVESTING
♦ Great investment themes have fundamental underpinnings…
♦ …and as such tend to have an inexorable quality about them
♦ “stronger for longer”
♦ A great investment theme is not enough
♦ The trick is to find sweet spots in an investment theme…
♦ …be it points in an industry chain where rent can be extracted…
♦ …or specific companies that have experienced self inflicted wounds and are now recovering…
♦ …or simply under priced quality
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AWQ: THEMATIC INVESTING OVERLAID WITH A DATA DRIVEN INVESTMENT PROCESS
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IDEA GENERATION
♦ Screening overlays of
fundamental data
♦ Identification of market
inefficiency or mispricing
QUANTIFICATION
♦ Derivation of upside/downside
♦ Quantification through P&L and
balance sheet
SIZING & IMPLEMENTATION
♦ Risk asymmetry drives sizing
♦ Execution
HYPOTHESIS TESTING
♦ Scientific approach; avoiding
confirmation and other biases
♦ Testing nulls/counter factual
PROPRIETARY DATA
♦ Identify areas of critical data
♦ Acquire key high frequency data
MONITOR & EXIT
♦ Guard against thesis drift
♦ Update price target for new data
♦ Exit on drift or change in
asymmetry
MOSAIC BUILDING
♦ Build sector knowledge
♦ Global perspective
♦ Proprietary research
FRAMING & RETESTING
♦ Refine hypothesis
♦ Explore nulls/opposite views
♦ Explore modifications
ERROR ANALYSIS & LEARNING
♦ What key data was missed
♦ What framing error occurred
♦ Guard against recidivism
NO VIEWS – ONLY DATA!
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PORTFOLIO AT 31 OCTOBER 2016
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AAVOF Asset Allocation
Asset class A$m %**
Australian Equities 33.7 46%
AUD cash and equivalent 32.8 44%
USD cash and equivalent 1.0 1%
Australian Hybrids & Bonds - 0%
International Equities 6.5 9%
Hedges - 0%
Portfolio value* 73.9 100%
Top 5 Holdings
Ticker %**
IFN Infigen Energy 17%
SIV Silver Chef Limited 10%
HLF.US Herbalife Limited 9%
USD USD ETF 6%
ELD Elders Limited 6%
Top 5 as a % of gross portfolio 48%
* Total may not sum due to rounding
** Percentage of gross portfolio value
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THEME: RENEWABLE ENERGY
♦ Renewable energy is as much a technology as it is an energy source
♦ Technology is inherently deflationary, meaning costs fall, making it cheaper every year
♦ Renewable energy penetration is very low
♦ Renewable installed capacity growth is very high
♦ In many places now, renewable energy is cheaper than fossil fuel. Every year, the number of locations this applies to increases
♦ Electricity Generation Major Projects Report (BREE, November 2014): “Renewable technologies make up the entirety of the proposed major generation projects that are either under construction or received final investment decision”
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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92
19
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19
94
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97
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20
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Black coal Brown coal Natural gas Other Renew-ables
Mix of Australian Distributed Electricity Generation by Source Fuel
Source: Bureau of Resources and Energy Economics (Australia)
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EXPRESSION OF THEME: INFIGEN ENERGY
♦ We made Infigen our largest position ever when we acquired it
– 13% of portfolio at cost
– Cost was $0.45/share
– Classic example of “recovery”
♦ Limited analyst coverage
♦ Trading below replacement cost
♦ Revenues growing strongly
♦ Debt level was very large...which kept many away
♦ Cash flow is exceptionally strong!
♦ Debt is falling very fast
♦ We think Infigen re-rates, given how cheap it is, when debt is finally refinanced
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Infigen Energy overview
Ticker IFN
Price1 A$0.92
Mkt cap1 A$718m
Enterprise Value1 A$1,313m
EV/EBITDA (FY17F)2 9.9x
Free Cashflow/Mkt Cap (FY17F)2 11.3%
AWQ position size3 17%
1. As at 4 November 2016
2. Based on available Bloomberg consensus forecast
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INFIGEN ENERGY
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Source: Bloomberg
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40O
ct-
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No
v-1
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De
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Jan
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Fe
b-1
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Ma
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Ap
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Ma
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Jun
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Jul-1
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Au
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Se
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Oct-
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Oct-
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No
v-1
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De
c-1
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Jan
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Fe
b-1
6
Ma
r-1
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Ap
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Ma
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Jun
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Jul-1
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Au
g-1
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Se
p-1
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Se
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Oct-
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IFN Share Price (AUD)
AWQ initiates position
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THEME: FINANCIAL INCLUSION
♦ In the early 1980s, prior to financial deregulation it was difficult to get a mortgage
♦ Subsequent to deregulation of Australia’s financial sector, credit growth and bank profits boomed as large unmet demand was finally able to access financing capacity
♦ We have seen this movie play out many times: PayPal, Klarna, Visa, Mastercard, Indonesian banks, Australian banks…
♦ Whenever a clever business model is able to provide financial capacity to an underserved segment there is the potential for large profits…provided the credit costs of doing so can be controlled
13
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EXPRESSION OF THEME: SILVER CHEF
Silver Chef overview
Ticker SIV
Price1 A$10.83
Mkt cap1 A$390m
P/E (FY17F)2 15.2x
RoE (FY17F)2 18.4%
Yield (FY17F)2 4.0%
AWQ position size3 10%
♦ High growth specialty finance business
♦ Unique business model and customer value
proposition
– Strong revenue growth
– Low residual loss experience
– Low “through the cycle” credit costs
♦ Strong recent financial results
♦ Foreign operations (New Zealand and Canada)
growing strongly and profitably
♦ International growth potential not reflected in
valuation
♦ Global potential...“Compounder”…example of
underpriced quality
1. As at 4 November 2016
2. Based on available Bloomberg consensus forecasts
3. As at 31 October 2016For
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SILVER CHEF
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Source: Bloomberg
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00O
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No
v-1
4
De
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4
Jan
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Fe
b-1
5
Ma
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Ap
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Ma
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Jun
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Jul-1
5
Au
g-1
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Se
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Oct-
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Oct-
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No
v-1
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De
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Jan
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Fe
b-1
6
Ma
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Ap
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Jun
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Jul-1
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Oct-
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SIV Share Price (AUD)
AWQ initiates position
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THEME: HEALTHY LIFESTYLE
♦ There is a global move to “healthy lifestyle”
♦ Soda or soft drink volumes under pressure
♦ Blender, smoothie and juice sales booming
♦ more than half of U.S. households (55%) are watching their diet; 66% do so for general health reasons; 55%, to lose weight (US Institute of Food Technologists)
16
Source: Insights Now 2014 Meal Replacement Study
9.0
20.7
22.5
23.9
26.7
29.3
33.2
37.3
38.1
40.0
48.5
IS ORGANIC
HAS HEARTY INGREDIENTS
THE MOST CONVENIENT…
HAS LOW CARBOHYDRATES
IS HIGH IN FIBER
USES NATURAL…
IS LOW FAT
IS FORTIFIED WITH…
HAS LOW CALORIES
LOST OF FLAVOR
IS HIGH IN PROTEIN
Health & Wellness Moments
(%)
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EXPRESSION OF THEME: HERBALIFE
♦ Herbalife makes the #1 selling protein powder globally
♦ Limited research coverage
♦ Multi-level Marketing company – similar to Avon, Tupperware and Amway. The salesforce is externalised
♦ Earnings are growing strongly on a constant currency basis, driven by strong industry tailwinds
♦ Lazy balance sheet; a large stock buyback is a logical possibility given HLF have a history of returning all free cash flow to shareholders
♦ Large buyback could drive a “short squeeze”
♦ Activist investor Carl Icahn is largest shareholder
17
Herbalife overview
Ticker HLF.US
Price1 US$54.96
Mkt cap1 A$5,114m
P/E (FY17F)2 11.1x
EV/EBITDA (FY17F) 2 7.6x
Position Size3 9%
1. As at 4 November 2016
2. Based on available Bloomberg consensus forecasts
3. As at 31 October 2016
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HERBALIFE
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Source: Bloomberg
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00O
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No
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4
Jan
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Fe
b-1
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Ma
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Ap
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Ma
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Jun
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Jul-1
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Au
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Se
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Oct-
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Oct-
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No
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5
De
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Jan
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Fe
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6
Ma
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Ap
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Jun
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Se
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Oct-
16
HLF Share Price (USD)
AWQ initiates position
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THEME: SELF HELP
♦ Sometimes a great business falls on tough times due to bad decisions taken many years prior
♦ So it was with Elders when market capitalisation fell from over $2bn in 2007 to under $30m in 2013
♦ Great businesses don’t die…they just emerge under different management or ownership
♦ When Elders management changed and adopted a self help plan in 2014, a large investment opportunity was created
♦ At inception, Elders common shares and Elders hybrid securities were AWQ’s largest positions
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STOCK UPDATE: ELDERS SHARES (“COMMON”)
♦ Cyclical and structural recovery story
♦ Ongoing structural earnings growth from the Company’s 8 point recovery plan
♦ Ongoing cyclical growth from key markets
♦ Very strong cashflow which we think can support a healthy dividend
Elders overview
Ticker ELD
Price1 A$3.82
Mkt cap1 A$435m
P/E (FY17F)2 9.6x
RoE (FY17F)2 27.0%
Yield (FY17F)2 2.9%
AAVOF position size3 6%
1. As at 4 November 2016
2. Based on available Bloomberg consensus forecasts
3. As at 31 October 2016
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STOCK UPDATE: ELDERS
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Source: Bloomberg
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00O
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No
v-1
4
De
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4
Jan
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Fe
b-1
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Ma
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Ap
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Ma
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Jun
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Jul-1
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Au
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Se
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Oct-
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Oct-
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No
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5
De
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Jan
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Fe
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Ma
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Ap
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Ma
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Jun
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Jul-1
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Au
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ELD Share Price (AUD)
AWQ initiates position
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A FUTURE THEME: AUTO FLEET CHURN FROM GASOLINE TO ELECTRIC
♦ Battery Electric Vehicles (“BEV”) are now typically 5x-10x cheaper to run than gasoline powered cars
♦ This is a staggering cost advantage
♦ BEVs have fewer moving parts, so are easier to maintain
♦ BEVs have much better driving characteristics; faster acceleration to name but one
♦ The two remaining constraints on replacement of gasoline powered cars with BEV are:
♦ Range anxiety. Is 250 miles far enough and how do I refuel?
♦ Cost. BEVs are expensive relatively…with the largest cost component being the battery!
♦ One and the same problem
♦ As energy density is increasing, battery size and cost is falling
♦ As production is increasing, battery cost is falling rapidly
♦ Recharge infrastructure is nascent, yet growing very quickly
♦ We think in many markets, the majority of auto fleet will churn from gasoline to BEV and that this is now inexorable
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AWQ RESEARCH: BEV (BATTERY ELECTRIC VEHICLES)5X – 10X1 CHEAPER THAN YOUR GAS GUZZLER
BEV (BATTERY ELECTRIC VEHICLE) ICE (INTERNAL COMBUSTION ENGINE)
RUNNING COSTS (AUSTRALIA) RUNNING COSTS (AUSTRALIA)
Charging efficiency A % 85.0 % Gasoline cost E $/litre $1.02
Electricity price B $/kWh $0.10 Usage F km/litre 9.17
Usage C kWh/km 0.19 Kilometres per annum D km/year 13,800
Kilometres per annum D km/year 13,800 Annual fuel cost $ $1,534.28
Annual fuel cost $ $312.68
Annual electricity consumption G kWh/year 3,007
Fuel cost difference ICE TO BEV X 4.9 x
A 1. Range of markets studied; depends on electricity cost, gasoline cost and comparative vehicles per Tesla website
B Origin Energy off peak. originenergy.com.au/content/dam/origin/residential/docs/energy-price-fact-sheets/nsw/NSW_Electricity_Residential_AusGrid_Origin%20Supply.PDF
C Per Tesla website, converted from 0.30 kWh/mile, at 1.62 km per mile
D ABS survey 9208.0 - Survey of Motor Vehicle Use, Australia, 12 months ended 31 October 2014
E NRMA. www.mynrma.com.au/motoring-services/petrol-watch/fuel-prices.htm
F Assumes a Toyota Camry. http://www.toyota.com.au/compare-models/specifications?vehicleId=3,6
G Average annual Australian household electricity consumption is 6,635 kWh per annum per ACIL Allen Electricity Benchmarks Report 2015
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THE BEV BATTERY IS BOTH THE LARGEST COST AND LARGEST RANGE CONSTRAINT...BUT THE PROBLEM IS GETTING SOLVED
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Source: International Energy Agency: Global EV Outlook 2016
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THE HISTORICAL ANALOGUE – HORSES WERE REPLACED BY PETROLEUM POWERED VEHICLES
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21.522.1
24.0
26.5
25.2
22.1
18.9
16.7
13.9
11.6
7.6
4.3
3.1
0
5
10
15
20
25
30
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960
US Equine Population During Mechanisation of
Agriculture and Transportation
Number of Horses and Mules
Source: “Horses and Horsemanship”, Ensminger 1969
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