Australian Market Summary (Issue 375) – 30 October 2015

Australian Market Summary – Weekly Wrap Up

Let’s have some fun this week.

It helps that I am running to schedule today for a change. And that simply means I could be more wordy than usual!

But forgive me, because there’s some great stuff to look at and think through.

A couple of initial remarks

  • Woolworths (WOW) is a problem-child short term, but a peach of a business in the longer term.
  • The RBA WILL NOT CUT INTEREST rates on Melbourne Cup day. It has no interest in bailing out you/me/we out of the bank mortgage rate rises from last week
  • The Australian Federal Government are going to unleash even more infrastructure spend in the years ahead – that’s a good thing for our Adelaide Brighton (ABC) bet, and has me looking a little closer at Boral (BLD) after its significant share price fall
  • Lastly, this week was hugely compelling in demonstrating precisely the problems with the ASX200 and its composition. As I have said until I’m blue in the face, nearly 50% of the market is miners, banks, Telstra and supermarkets. This week saw miners under the pump, TLS drifting on rising competition, WOW & Wesfarmers (WES) dusted on WOW’s price cuts and the banks soft after indifferent ANZ (ANZ) and National Australia Bank (NAB) results.


WOOLWORTHS – OPPORTUNITY KNOCKS

Let’s start here because it’s a name everyone knows and many of you hold.

On Thursday WOW surprised the market with a significant profit downgrade to 2016 earnings numbers, driven by the material cost of reinvesting in its food & liquor business to re-ignite customer traffic.

The shares fell 10% and are down again today.

Wesfarmers (WES) shares took a 5% tumble too on the simple, and arguably correct, assessment that Australian supermarkets might well see a price war emerge.

The WOW move was less significant in its size than its speed, with the decision to re-invest some $700-1bn in price and initiatives front-end loaded into 2016.

It was notable too in that the move comes ahead of the appointment of a new CEO.

Earnings forecasts for WOW were dramatically cut across the board (10-20%), and even some analysts took their forecast for dividends down too.

I have to say, this is precisely the opportunity we were waiting for, and in some small way we feel a little vindicated in holding off on turning more positive on WOW.

Simply put, WOW are now doing precisely what they should do to attract customers back to their stores and to stem the negative sales growth.

Supermarkets have to grow like-for-like sales in the 2-3% range annually simply to cover inflation in ‘cost of doing business’ (rent, wages etc) – they did -1% in the first quarter.

To do grow sales again, the firm must invest in price and service, and it is here that the earnings downgrade comes.

However, let’s not lose the wood for the trees here – WOW HAS 20% MORE MARKET SHARE THAN COLES ALREADY, AND IS THE DOMINANT AUSTRALIAN SUPER-MARKET GROUP.

It is infinitely capable of turning the ship around and the share price is increasingly attractive.

If WOW management jettison the Big W discount brand and exit the disastrous foray into home-improvement (Masters), they get over $250m of losses back, and maybe more in free-cash flow back.

This is going to happen. Soon.

And then, we get a 10-20% EPS upgrade that does a pretty good job of negating the downgrades we saw to the core supermarket business yesterday.

If I’m a betting man (and we know I am), I think in the $22-24 range, we are buying WOW in 13-14x 2017 P/E with only very little debt.

You can consider me on notice in WOW, and I would suggest in the days ahead you may hear more from us on this topic.

BANK RESULTS – DISAPPOINTING

ANZ saw modest EPS cuts after releasing its FY16 profit figures. Bad debts in its Asian institutional business picked up and trading activity in its Global Markets division also drifted.

NAB similarly disappointed at a core result level in its annual profit release, with sub-par lending growth and a contraction in margins within its business bank.

On the positive front, it did execute a good sale for the majority of its MLC Life Insurance business, swapping out a poorly performing asset for some much needed equity capital ($2.4bn).

INVESTOR DAYS – NAVITAS (NVT) & TELSTRA (TLS)

Guy and I attended the NVT investor day on Tuesday and were suitably impressed by the story at NVT.

This is most definitely a stock on our radar, simply because it is a global leader in a business that will continue to demonstrate growth well in excess of GDP.

Education is Australia’s biggest service export and is, simply speaking, a massive industry bet on the effects of globalization and human mobility.

It has been knocked down over the last 12 months from what was a really silly valuation, but is increasingly now looking better value.

We loved the presentation and will be looking to better update you guys in the weeks ahead – potentially!

TLS conducted its investor day, and the simple takeaway here is that TLS is seeing just a shade more competition in mobile than analysts had forecast. Not only had subscriber growth slowed as Optus and Vodafone finally get their act together, but revenues were also a shade lower than last year on a per user basis, indicating a little more price competition.

TLS is fine down here at $5.50 but just like the banks, don’t expect it back near its highs anytime soon in the coming few years. It is now in a dull range and it will be here for some time.

INTEREST RATES & THE ECONOMY

As I said above, and on numerous occasions in the past, I think Australian interest rates are on hold.

Though it’s a neat excuse to say the RBA can and will cut interest rates next Tuesday because of the bank mortgage rate hikes, it won’t happen.

The RBA Governor Glenn Stevens has been increasingly explicit in his comments that monetary policy had done its bit for the economy and that fiscal policy needed to come to the party – Turnbull is now increasingly looking likely to drive this via infrastructure.

Moreover, the housing market has finally started to show signs of consolidating and the RBA will be far from desirous of stoking housing prices again by way of surprise rate cut.

Lastly, it just isn’t bad enough to warrant another rate cut!

We don’t need it!

Australian service sector conditions are at an 8-year high.

Gerry Harvey from Harvey Norman (HVN) made direct reference to consumer confidence this week after HVN delivered some exceptional sales growth in its Australian business last quarter.

LAST BUT NOT LEAST, QUICK COMMENTS

  • Oil Search (OSH) has today surged through $8.00 (yay!) after the rhetoric out of both Woodside (WPL) and OSH’s CEO’s seemed to infer the merger deal was far from dead
  • QUBE Holdings (QUB) launched a surprise raid after-market Thursday for a 20% stake in port and rail competitor Asciano (AIO). It feels like the horse has bolted for us on QUB sadly, but I remain watchful for opportunity here as they simply are a class act with potentially excellent, long-lived and dominant assets

I hope you have a great weekend, and I have to say, I am increasingly excited by the possibility of a few new portfolio changes in the next month.
Key Dates: Australian Companies

Mon 2nd Nov 
Earnings: Westpac (WBC)
Tue 3rd Nov 
N/A
Wed 4th Nov  
AGM: Echo Entertainment (EGP)
Thu 5th Nov 
AGM: Platinum Funds Management (PTM), Boral (BLD), Perpetual (PPT)
Dividend Ex-Date: National Australia Bank (NAB)
Fri 6th Nov 
Dividend Pay Date: QANTAS (QAN)

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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