Australian Market Summary (Issue 374) – 23 October 2015

Australian Market Wrap Up

Its 3pm and I am getting death stares from the lovely Jelena – I should have done this by 12pm.

It’s totally my fault. Yikes.

So today we are up over 100pts, and it is this move entirely today that puts us up the 1.7% on the week we now are.

Whilst there was really no particular catalyst for the strong move in share prices overseas on Thursday night, often it’s the simple fact that when there is nothing negative to justify still pessimistic positioning, share prices then melt up.

After the significant falls experienced during August and September, many large funds and investors adopted a defensive or negative tone. But in the last few weeks, with no fresh negatives out of China or the US arising, many investors have been forced to question their pessimism and so to share prices have ground higher.

I have to say, that whilst we made the right call by loudly shouting there was no need to panic when the market breached 5000 a month or two back, I am actually genuinely disappointed with my conservatism in not being more aggressive with some recommended buying.

I apologize for that, and I do think we missed more than a few wonderful opportunities in names outside the top-10 shares.

The PRIME Australian Equity managed accounts have suffered for that decision in recent months, and though we may be a shade ahead of the index recently, we are more broadly only in-line with the  Accumulation benchmark this past 6 months – and this annoys me enormously.

Anyways, enough of the mea culpa.

We had quite a few items of interest this week, so I will endeavor to do them justice in spite of being rushed.

SANTOS bid ….

SANTOS (STO) this week received a conditional cash bid at a whopping 26% premium to its last traded price from a newly formed merchant bank, backed in large part by the Brunei royal family.
It actually surprised me somewhat that the STO board were so quick to reject the deal out of hand as being ‘low’ and ‘opportunistic’ given the cash terms seemed so high. Perhaps the conditions on the deal were more complicated than we in the market know.

Either way, the bid is significant for many reasons.

Undeniably this is a bid that were it successful (and it still may be pending a higher priced offer), would involve the break-up and sale of the STO assets – PNGLNG, Gladstone LNG, Moomba and related Cooper Basin gas assets.

As a business, STO is entirely saleable – any combination of global oil majors, private equity and global infrastructure players would readily purchase the individual STO assets given the chance.

The bid demonstrates that in some of Australia’s larger corporates, particularly those that have fallen on harder recent times, there is value to be found to the right player.

Remember only 6 months ago, Toll Holdings (TOL) was bought by Japan Post at a near 50% premium to its last traded price. For cash.

TOL was hardly a market darling.

To round out on STO, we are hopeful that the machinations surrounding a potential bid for the assets might shine an even more favourable light on Oil Search (OSH) given the superior quality of its broader asset base, and the fact STO owns a smaller stake in the blue-chip PNGLNG export facility.


The other big news this week came in the form of a rise in Australian mortgage rates from each of Westpac (WBC), Commonwealth Bank (CBA) and National Australia (NAB).

Given recent Australian interest rate cuts, these rises are considered ‘out of cycle’, and would certainly be a surprise to the vast majority of Australian home-owners.

The 15-20bp rise in rates won’t break most budgets, but it will add 5-6% to most monthly payments.
But it is just another small link in a bigger chain that points to ongoing pressure on Australian house prices.

Cost of borrowing is going up, but availability of funding is also diminishing (be it restrictions on investor lending, or curtailment of interest-free lending).

Incremental buyers of Australian residential housing are getting thinner on the ground – Sydney clearance rates last weekend were the lowest since mid-2013.

This matters to us for the obvious fact that many Australians most significant financial asset (and liability) is the daily home (mortgage). But it also matters because the health of Australian housing makes a big difference to the profitability of Australian banks, which as we have discussed comprise a third of the ASX200.

The repricing higher of mortgage loans is a positive for profitability initially, but in the medium term we should expect to see slower growth and higher credit loss emerging.

My view on the banks really hasn’t changed a lot.

They remain in a sideways range, lacking in much growth, and so for those of you holding significant overweight positions I would encourage you to use periods of strength to lighten the load, and then to look to periods not unlike August, to build positions back up.

Now for the fast minute round (because I think Jelena is going to kill me soon…) –

  • RBA meeting minutes were released this week and gave no indication of any additional easing to come. If anything the RBA spoke of the improvement in growth through Q3.
  • Woolworths (WOW) is said to have received interest from private equity for the sale of its discount merchandise chain, Big W. This would be a positive, albeit a modest one.
  • Wesfarmers (WES) posted another excellent set of quarterly numbers – Coles continues to outperform the competition, and Bunnings posted its 10th consecutive quarter of 10%+ sales growth. It’s a rich stock, but a quality one no doubt.
  • Oil Search (OSH) posted another excellent set of production figures, and again demonstrated that the PNGLNG project continues to run well ahead of nameplate capacity.
  • RESMED (RMD) delivered quarterly profits that were OK – again we saw strong sales growth (masks in particular saw a jump in sales growth quarter on quarter), but a diminished margin.

Anyways, I have to run – I apologise for doing this again. Hopefully, I can be a little more organized with next week’s summary!

Have a great weekend.

Key Dates: Australian Companies

Mon 26th Oct
Dividend Pay Date:
Tue 27th Oct
AGM: Challenger (CGF), Chorus (CNU), Corporate Travel (CTD), Stockland (SGP), Worley Parsons (WOR)
Dividend Ex-Date: NABHA
Wed 28th Oct
Earnings: National Australia Bank (NAB)
Dividend Ex-Date: Harvey Norman (HVN)
Dividend Pay-Date: Vanguard All-World ex US (VEU) & Vanguard Total US Shares (VTS)
Thu 29th Oct
AGM: Newcrest (NCM), TabCorp (TAH)
Fri 30th Oct
AGM: Tatts (TTS)
Earnings: ANZ Bank (ANZ), Macquarie Group (MQG)

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.


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