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We can’t match America’s muscle

Why has the US sharemarket reclaimed its pre-financial crisis high when the Australian sharemarket is still 25 per cent short of it? Because in important ways, the Americans are better than us.
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The US economy was the epicentre of the global crisis and half a decade later it is still struggling. Its debt-to-GDP ratio is too high at about 75 per cent and is expected to grow by less than 2 per cent this year, as automatic government spending cuts totalling $US85 billion feed in.

Australia’s new national accounts reveal this economy expanded by 3.6 per cent last year.

The annual run rate was 2.6 per cent in the second half of the year and the Reserve Bank is watching the slowdown closely, but Australia will log its 22nd year of growth in 2013 and probably outpace America.

Sharemarket investors buy the near future, rather than the present or a more distant future where, in America, structural problems become impossible to ignore. When they look at the US market they see potential. They also see better value: even after racing ahead of Australia to reclaim its pre-crisis high, the American market is cheaper.

The surge in America’s jobless rate that accompanied the global crisis came as companies laid off workers. The productivity gains that flowed will be largely retained as new jobs are created. After falling from 10 per cent cent in October 2009 to 7.9 per cent, America’s jobless rate is still 2.5 percentage points higher than Australia’s, but it is falling.

Australia is posting productivity gains after losing its way for most of the past decade. The gain in 2012 was 3.3 per cent, better than the 2.5 per cent growth rate in the mid-’90s, when Australia famously collected a deregulation dividend. National productivity will get another boost as resources projects that have sucked up capital begin producing and generating returns. Companies are also on efficiency drives as they look to offset soft demand.

If you are betting that this economy will be more productive than America’s over the long term, you are assuming a sea change. However, America’s long-term productivity growth rate of about 2.2 per cent a year is twice as good as Australia’s.

The US economy is also on the verge of harvesting an economic dividend as its massive reserves of shale gas underpin a heavy industry renaissance. Cheap domestic gas will deliver a cost advantage for decades.

American intellectual property sits behind market hot spots including information technology, and US companies are being protected in their deep home market and supercharged in export markets by a US dollar that is being kept low by the US Federal Reserve’s zero-interest-rate regime and quantitative easing. They hold record cash reserves of about $US5 trillion, have healthy balance sheets after the crisis purge and are borrowing money at historically low rates.

Australia has higher borrowing costs and higher domestic energy costs, and its currency is at levels that hurt export competitiveness and open up companies to low-priced import competition. External factors including zero interest rates and quantitative easing in America are behind the Australian dollar’s strength, but it is what it is.

This economy is also attempting a delicate shift in activity to the industrial sector as the resources boom cools. Private capital expenditure led by the miners contributed almost two-thirds of Australia’s 3.6 per cent GDP growth in 2012, but it fell by 6 per cent in the December quarter and will fall more this year. The question, not answered in the latest national accounts, is whether the non-mining economy will accelerate and close the gap.

Despite all that, and despite the fact the S&P/ASX 200 share index is 25 per cent below its November 2007 high of 6828.7 points, the Australian market is more expensive than Wall Street.

The Dow Jones Industrial Average, which hit new highs on Tuesday night US time, is valued at about 12.5 times expected earnings in the next year. The S&P index of 500 top US shares is 1.6 per cent below its high and valued at 13.6 times expected earnings. Our S&P/ASX 200 is trading at 14.5 times expected earnings.

While the resources boom was raging, cracks in the industrial economy were being papered over. Now the boom has cooled. Commodity prices have eased, mining profits and mining company share prices have fallen and as interest rates and the Australian dollar remain relatively high, pressure on the industrial sector continues. Earnings growth has been outpaced by share price rises and our market has moved to a price-earnings premium.

Australian companies still offer dividend yields that look good compared with fixed interest and the productivity gains are great news. A fall in the value of the dollar will be a game changer, and it will eventually happen. For now, though, this market has some pressure points. It is short of its pre-crisis high for good reason.

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A weaker dollar would benefit those with northern exposure

As the Australian dollar drifts lower it is worth revisiting stocks whose earnings get a boost from a weaker currency.
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There are a host of stocks with substantial northern hemisphere operations that can benefit from a softer local currency. These include James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare. Others cheering the Aussie lower are domestic companies competing against cheap imports. Among this group are BlueScope, Capral and Select Harvest.SDI Ltd

A smaller company that should thrive in a lower-dollar environment is dental manufacturer SDI (ASX code SDI). We wrote about the company last year, emphasising the cost reduction program under way, a move that inspired a doubling of the share price. The company recently upgraded its earnings guidance for the year to June 30, 2013, to between $4 million and $5 million net profit. This places the company on a price-earnings (P/E) ratio of about 13 times.

SDI generates about 90 per cent of its income offshore, in Brazil, the US and Europe. The Aussie has been weaker against all three currencies in recent months, providing a tailwind for SDI’s earnings.

A further benefit is the softness in the silver price. SDI’s amalgam products require a significant amount of silver to manufacture.Mayne Pharma

Another company that could look smart if the currency descends below US96¢ is pharmaceutical upstart Mayne Pharma (MYX), revamped with the arrival of Scott Richards as chief executive.

When the Australian dollar was trading around $US1.04 in October, the company announced the acquisition of US-based generic drug developer and manufacturer Metrics Inc for $US120 million. The deal was struck on a historical earnings before interest, tax and depreciation (EBITDA) multiple of about six times. Metrics swamped the existing Mayne business and effectively made the company a pharmaceutical play in the US.

Mayne said in its half-yearly results that Metrics was operating to budget. This has proved sufficient to push the stock up 10 per cent to 42¢, more than double where the company struck its rights issue to buy Metrics.

It is difficult to justify Mayne’s valuation on 2013 earnings but with a full-year contribution from Metric in 2014 it should be able to generate EBITDA of about $30 million, for an EBITDA multiple of 8.3 times. While this is not cheap, Richards will use the Metrics acquisition as a launching pad to build a larger US operation.K&S Corp

The Melbourne-based transport group (KSC) has been on a tear over the past year, jumping 70 per cent compared with a 15 per cent rise in the All Ords.

We wrote about the stock last year when the share price was $1.60, believing it offered the dual attraction of a cheap entry into a cyclical upswing in the economy and the injection of fresh management. Today it’s $2.30.

The company lived up to its word by announcing earnings of 11.3¢ a share for the first half, up 37 per cent on the previous corresponding period, achieved on a modest 8 per cent increase in revenue, showing how leveraged a transport business can be. It also benefited from a robust performance of K&S’s West Australian Regal Transport.

It must be remembered that besides the strong results in WA, few areas are firing for K&S. It has a major exposure to the much-maligned domestic steel industry and the depressed housing market.

If we double the first-half result, the company is trading on a 2013 price-earnings (P/E) multiple of 10 times. This compares favourably with the larger Toll Holdings that has jumped out to a P/E of 13.

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Fairfax Media does not take responsibility for stock tips.

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Lenders find it tougher going in Asian markets

Two of the biggest foreign banks in Asia have underlined the tests facing lenders in the region, as profits are constrained by slower growth and stiff competition.
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In a sign of the challenges facing ANZ, which is targeting Asian banking as a key source of growth, UK-listed Standard Chartered reported slowing income growth in several key Asian markets, as its 2012 profits edged up by less than 1 per cent to $US4.79 billion, compared with 12 per cent growth a year earlier. Standard Chartered, heavily focused on emerging economies, said its income growth in Hong Kong had slowed to 6 per cent, from 19 per cent in 2011, and income in Singapore rose 5 per cent, compared with 27 per cent a year earlier.

While it had experienced a surge in income from China, the bank described the previous year as ”challenging” and predicted this would continue into 2013.

London-based HSBC, one of the biggest banks in the world with a major presence in Asia, also this week reported that its net interest margin had narrowed in the year to December to 2.32 per cent, from 2.51 per cent a year earlier.

Group finance director Iain Mackay said its margins in Asia outside Hong Kong had been squeezed by the slump in global interest rates, but were holding up ”remarkably well”. He made the comments after HSBC handed down a 6 per cent slump in pre-tax profit to $US20.6 billion, after it was hit with hefty fines in relation to money-laundering charges in the US and Mexico.

The results come after ANZ Bank last month said its margins had been squeezed by more competition in Asian markets, which are also a focus for Commonwealth Bank, NAB and Westpac.

Although HSBC and Standard Chartered were optimistic about China’s growth prospects, their results highlighted the challenge created by economic uncertainty and more competition in the region. HSBC chief executive Stuart Gulliver said the bank was expecting economic growth of 8.6 per cent in China this year, compared with growth rates in developed economies of just 1 per cent.

”Whilst the operating environment for financial institutions remains difficult, our core business will continue to reap the benefit of recovering economic growth in mainland China and its positive impact on other faster-growing regions,” he said.

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House brands squeeze out Tahbilk

Over a barrel: The high dollar and private-label brands are taking their toll.Establishment winemaker Tahbilk has fingered private-label wines and low-cost imported wine for swamping liquor store shelves and reducing the space once given to proprietary brands.
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Tahbilk chief executive Alister Purbrick said the growth in house-brand wines was not limited to the major liquor chains owned by Woolworths and Coles, but was also becoming a feature of the large independent banner and supermarket groups.

The other hidden impact, according to Mr Purbrick, was the strength of the Australian dollar, which made imports more competitive.

”So you have got the double whammy of own-brand and imports taking space away from us, up go our promotional slot costs and there is less opportunity for us in any case,” he said.

Mr Purbrick said Tahbilk would walk away from uneconomic promotional and discount deals with retailers.

Last year Ross Brown, the former boss of 121-year-old winery Brown Brothers, used an industry function to launch a spray against leading retailers for flooding stores with private-label wines that he said were ”hollow”, ”copycats” and ”masquerading as real brands”.

The retail squeeze affected Tahbilk’s sales for the 2012 financial year, with domestic sales weaker for the 153-year-old winemaker. But the resilience of its popular Tahbilk Wine Club bolstered the bottom line and allowed the family-owned company to post an improved full-year profit.

Revenue for 2011-12 was $13.187 million, down slightly from $13.675 million in the previous year, while pre-tax profit increased to $776,768 from $736,430. However, after accounting for a dividend payment of $113,805, Tahbilk’s full-year profit was $51,168 against $235,137 recorded in 2011-12.

”Our wine club generates about 65 per cent of the total Tahbilk branded sales,” Mr Purbrick said.

He said the wine club allowed the company to perform well in the face of the strong Australian dollar and collapsing margins.

”There is not a lot of margin in exports, so the best way to describe our exports at the moment is that we have them in a holding pattern. We are not going out aggressively to grow because we can’t make margin out of it, but we want to maintain our presence in those markets.”

China is still a growth market, as the exchange rate with the yuan is more favourable to exporters such as Tahbilk.

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Fels calls for tougher laws

Twenty years after the toughening of the competition test for mergers, the architect of the changes, Professor Allan Fels, has called for more action to deter anti-competitive behaviour by large companies.
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Speaking at an event in Sydney to mark 20 years of the merger test, Professor Fels said Parliament should consider tougher laws to deal with creeping acquisitions. He also wants more effective laws on abuse of market power by large companies and powers to seek court orders for divestiture when they abuse their power.

His suggestions come as the Australian Competition and Consumer Commission investigates whether the big two supermarkets, Woolworths and Coles, are misusing their market power to exploit suppliers. Banks have also come under scrutiny over their failure to pass on interest rate cuts.

As chairman of the Trade Practices Commission and later the ACCC, Professor Fels was instrumental in convincing the government in 1993 to change the law so mergers could be blocked if they were likely to lead to a substantial lessening of competition.

Before that, mergers were blocked only if a company would dominate the market.

The change, fiercely opposed by business, gave the ACCC teeth to block several mergers, though it has still allowed powerful duopolies to develop in supermarkets, hardware, airlines and packaging.

Professor Fels said it was time for more change. For instance, when a large retailer acquired a small shop in a country town, the effect might be profound in the town, but would not fall foul of the current test, which requires a substantial lessening of competition.

”It would be useful if the law more explicitly addressed creeping acquisitions,” he said.

In the case of section 46 abuse of market power cases, Australia had opted for a requirement to prove that the actions were for the purpose of abusing that power.

”The US and the European Union have an effects test and it is much better to focus on the economic outcome of the act,” Professor Fels said. ”Our system induces a cops-and-robbers mentality, where regulators are focused on finding emails and the like to prove the purpose.”

A change in the test would be significant for the supermarket suppliers who allege the big two use their power to drive down prices of commodities such as milk.

He also wants divestiture added to the armoury of penalties, though the penalty should be available only where a court has established abuse of market power.

”It would add much more clout to the act if companies knew there was a prospect of divestiture,” Professor Fels said.

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Euro threat precipitates flight of capital from Cypriot banks

Capital flight from Cyprus has accelerated since eurozone politicians began threatening losses for bank depositors, and may have reached 12 per cent of the country’s GDP over the past month.
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Sources say lenders haemorrhaged €1 billion ($A1.3 billion) in deposits over the first two weeks of February, heightening fears that even talk of ”haircuts” is deepening the banking crisis as rescue talks drag on between the European Union and the International Monetary Fund and the island’s new leaders. The Bank of Cyprus reported deposit losses of €1.7 billion in January.

Brussels has warned against haircuts for depositors, a drastic move avoided in bailouts for Greece, Ireland, and Portugal.

Cypriot Finance Minister Michael Sarris told eurozone colleagues this week that such action would shatter confidence and set off a fresh round of the debt crisis.

”There is no way we can entertain the idea of any kind of haircut to any kind of deposits. This would be an accident in the eurozone not caused by markets, but a self-inflicted wound, a self-inflicted catastrophe, not only for Cyprus, but for the eurozone and perhaps even beyond.”

The crisis in Cyprus is now deepening on every front. The jobless rate hit 22 per cent in February. The country will run out of money to pay its bills in May. An internal report by Brussels says the bank rescue costs may push public debt to 145 per cent of GDP, implying that debt relief will be needed.

Since European leaders have vowed not to repeat the mistake made in Greece where they set off a broader crisis by imposing wipe-out losses on investors, this means that the burden may fall on taxpayers in Germany and the European Monetary Union core.

The Cypriot crisis has been neuralgic in Germany ever since a leaked report alleged that the island was a haven for Russian organised crime. Nicosia agreed this week to a money-laundering probe but it is unclear whether this will placate critics in the Bundestag. Sigmar Gabriel of the Social Democrats said the business model of Cyprus was based on ”Russian oligarchs, Serb mafias, and tax evaders”.

Bankers say the attacks on Cyprus are deeply confused. Most of the Russian money is in Cypriot branches of Russian banks that are solid, or in large British banks.

”There is no chance that they will go after these banks because it would be illegal and amount to expropriating the Russian state,” one banker said.

The Cyprus Mail says the outgoing Communist government whipped up hysteria against the banks to divert blame from its own mismanagement.

Telegraph, London

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Administrators query on Retail Adventures’ solvency

Administrators appointed to Retail Adventures are investigating whether the failed discount retailer – which is being sold back to Kathmandu founder Jan Cameron this week – was insolvent more than a year before its collapse.
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A meeting of the company’s creditors committee was told last month that the administrators, led by Deloitte’s Vaughan Strawbridge, are investigating ”whether or not the company was insolvent” at the time charges over the company’s assets were granted to Ms Cameron in July 2011. The company went into administration in October 2012.

The administrators are also investigating two payments to ”related creditors” the month Retail Adventures collapsed, according to documents lodged with the Australian Securities and Investments Commission.

”The administrators’ investigations continue, particularly in relation to recoveries that could be available in respect of preference payments that may have been made,” the report said. The administrators’ investigations would be critical in determining whether there is legal action worth pursuing – in liquidation – on behalf of 1700 creditors owed $270 million.

Ms Cameron is expected to offer a deed of company arrangement as an alternative to liquidation.

She bought the Retail Adventures business out of receivership for $80 million in 2009, and has secured loans totalling $77 million from funding she provided as the business lost $110 million in the three years she ran it. She is using part of her $77 million secured debt to acquire the business back from the administrators for $59 million. Unsecured creditors, owed $165 million, stand to receive nothing from the sale.

Another company owned by Ms Cameron, DSG has run the business on behalf of the administrators. It will now own and run the restructured operation.

Administrators have said there might be grounds to reduce Ms Cameron’s secured debt from $77 million to $27 million, in which case the balance of what DSG owes on the transaction would be paid in cash.

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Victoria out to ice finals berth

After a season of squandered success in both the Twenty20 and one-day competitions, Victoria is desperate to all but guarantee a Sheffield Shield final berth with victory against arch rival NSW.
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The Bushrangers lead the shield ladder with two rounds remaining, although their recent record could make such a position a liability, given they lost the one-day Cup final they hosted, and their Big Bash League affiliates – the first-placed Victorian Renegades and third-placed Victorian Stars – were both eliminated in the semi-finals.

Victoria has the smoothest run to the shield final.

It boasts a four-point buffer and its last two opponents – NSW and Tasmania – occupy the bottom two rungs.

An outright win against the Blues in the match starting at the MCG on Thursday would mean the only way it could miss the final would be if South Australia and Queensland, ranked second and third respectively, each win their last two matches outright and the Bushrangers do not get any points against Tasmania.

Furthermore, the Bushrangers go into the match against NSW with the most formidable head-to-head home record in the shield over the past 20 years. NSW has only won once at the MCG in that period, in 1995-96.

But Victorian coach Greg Shipperd said he was wary of the “strong rivalry” between the teams. “The game is very important for us to take points out of it to secure a final position, which may give us some breathing space going into the back-end of the season,” he said.

“We certainly want to build on our outright win of last game [against Queensland]. We thought that was a really positive response after the two games against South Australia.”

The Bushrangers go into the match with a squad of 13, recalling all-rounder John Hastings after Australia A duty and preferring fit-again paceman Jayde Herrick to Scott Boland.

The Blues have been bolstered by the return of Ben Rohrer and Josh Hazlewood, also from Australia A duty, as replacements for Tim Cruickshank and Chris Tremain.

They will also feature a new captain, with the respected Rohrer leading in place of Steve O’Keefe, who cited a desire to focus on an international recall as the trigger for his resignation.

VICTORIA (from): White (c), Ahmed, Handscomb, Hastings, Herrick, Hill, D Hussey, Mckay, Quiney, Rogers, Rose, Sheridan, Stoinis.

NSW (from): Rohrer (c), Bollinger, Copeland, Dawson, Haddin, Hazlewood, Henry, Maddinson, Nevill, O’Keefe, Sandhu, Zampa.

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CRICKET: Clubs reveal NDCA vision

STOCKTON-Raymond Terrace and University have publicly issued their own draft plans on the future structure of Newcastle district cricket.
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Stockton’s proposal is to introduce all 40-over one-day cricket for third and fourth grade, while Uni have proposed a regional premier league that includes clubs from the Central Coast, Maitland and Hunter Valley.

The two clubs join Toronto Workers, which issued an alternative plan to the Newcastle District Cricket Association’s vision for an eight-team premier league last month.

Stockton believe the shorter format of the game appeals more to increasingly time-poor younger cricketers and will slow the exodus of players to City and Suburban cricket.

While Stockton have been supporters of the NDCA’s premier league in first grade, president Ron Hancock said attention first needed to be placed on the lower grades.

‘‘We believe the NDCA should start at the bottom and work upwards, not at the top and work down,’’ Hancock wrote. ‘‘The formation of a premier league will not be successful unless we get our house in order first, and in fact we might improve the existing 12-team structure and there may not be a need for an eight-team format.’’

Uni held a meeting of 30members and have proposed a more radical approach.

The club supports an eight-team premier league, but to maintain the strength of the underpinning first division Uni believe sides from Maitland, the Hunter Valley and Central Coast should be introduced.

Those sides would be eligible for promotion to the premier league.

The NDCA has sought interest from Maitland and Central Coast about joining the competition without success.

‘‘We don’t think the structure proposed by the NDCA is a workable solution, but that doesn’t mean we’re just going to say no to any sort of reform and not be constructive,’’ Uni president Ben Smee said.

‘‘The idea we have circulated is not the club’s formal position. It’s certainly not designed to be a grand solution to all our problems.

‘‘It’s an idea that came from our meeting that is designed to generate some discussion about how to improve cricket in the long term.’’

Meanwhile, a meeting organised by Western Suburbs lower-grader Ross Declerck on Monday night at Cardiff RSL Club was poorly attended.

Eight people from five clubs – Wests, Newcastle City, Waratah-Mayfield, Toronto Workers and Cardiff-Boolaroo – attended the meeting, which focused on keeping predominantly two-day cricket in all grades. Declerck hopes to meet with the NDCA.

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KNIGHTS: Gidley delighted with placement program 

DURING his countless hours as a Western Suburbs junior kicking a footy around Kentish Oval, Kurt Gidley often dreamed of playing ‘‘across the road’’ at Hunter Stadium.
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Now in his 13th NRL season, the Knights captain is planning on making regular trips back ‘‘across the road’’ to Harker Oval as the Rosellas’ club ambassador.

The Knights player placement program with the Newcastle Rugby League was launched yesterday at No.2 Sportsground.

While it will not be a return to the structure of 2009 when the Knights did not field a NSW Cup side and instead filtered their reserve-graders back into the local league, it is hoped the program will give the grassroots league a boost.

All of the Knights’ NRL squad have been made ambassadors of the nine local clubs.

Gidley, who first played rugby league in the Wests under6s, said he remained a proud Rosella today.

‘‘I don’t think I’ve ever lost touch where my junior club is, and what I got out of playing for Wests as a young junior coming through for the Knights,’’ Gidley said. ‘‘It’s just across the road and they’re a great club and have done a lot for me.’’

While the top Knights like Gidley and fellow Wests junior Jarrod Mullen will not spend time in the local league this season, a host of NSW Cup or National Youth League players could make appearances in the ‘‘Real NRL’’.

Gidley said it was important those players used it as a launching pad.

‘‘It’s up to the attitude of the guys going back and playing in the local comp,’’ he said.

‘‘They need to go back and train and play well to prove to coaches at the Knights that they want to be back at the Knights in first grade or NYC.’’

Most local club bosses were at yesterday’s launch and have been urged by Newcastle Rugby League general manager John Fahey to build relationships with their ambassadors to capitalise on the program.

Wests president Wayne Hore said he hoped to benefit from Gidley’s profile and rugby league ability in junior development.

‘‘Kurt is willing to come back and do clinics with our schoolboys and we’ve got a 17s and 18s, so they’re always welcome to come back and the kids look forward to seeing them,’’ Hore said.

The Rosellas won all three grades last year and will be expected to dominate again.

However, the strugglers like Port Stephens Sharks have recruited strongly and Lakes United have signed an astute coach in former Knights NSW Cup mentor Rip Taylor.

‘‘Some of the other clubs have built up, which is good,’’ Hore said. ‘‘I think the top five will be fairly close, but the others might struggle.’’

CLUB LINK: Kurt Gidley with Wests president Wayne Hore at yesterday’s launch. Picture: Jonathan Carroll

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