Australian Market Summary (Issue 387) – 19 February 2016

Australian Market


Every week I type, and re-type, and then type again what I want to convey to you of my thoughts and of the markets behavior and outlook.

Today is no different.

There is simply so much to say, which is understandable given the volatility and the fact its corporate reporting season.

Bear with me today, as once again, like last week and the week to come, there is a lot you need to digest.

The week that was…

We played the opposites game this week, where all the dross and garbage rallied and the boring, blue-chip equity lagged.

Much-maligned shares like Primary Healthcare (PRY +32%), Fortescue (FMG, +26%), Mesoblast (MSB, +19%), Worley (WOR, +18%), Myer (MYR, +16%) & Origin (ORG, +12%) all squeezed higher, whilst portfolio stalwarts such as CSL (CSL, -2%) & Telstra (TLS, -3%) dropped back to the pack after recent gains.

The ASX200 is up 4.5% on the week and the miners and oils led the charge again. Miners rose over 8% and the oil stocks are up 6%.

Fortunately we flagged the likelihood of upside in last week’s newsletter and it was duly forthcoming.

Assisting market sentiment this week was encouraging rhetoric in several places, notably talk of supply curbs in the oil market, confirmation of Deutsche Bank’s bond-buyback in credit markets and, lastly, further government commitments for infrastructure spend in China.

But to be sure, this rally is not the start of a material rebound.

We are going to ebb and flow.

This is not the end of the turmoil, not by a long shot.

Patience and temperance will be our watchwords words.

Results season … aye caramba.

So much to say and do, so lets just rip into it –

Telstra (TLS) – a bit of a shrug of the shoulders here. Mobile competition has begun to bite and TLS actually added fewer ‘post-paid’ subscribers than Optus in the last 6 months, meaning it lost market share for the first time in ages.

Most analysts now see Mobile sector earnings falling in 2016 and 2017, which isn’t ideal given this is the biggest contributor to group earnings.

But TLS is as much about its dividend and other bigger macro-drivers of the market (like bond yields and the AUD) so we remain very comfortable with it as a core holding for now and would need to see the stock in the high $5’s before we would be pushed to REDUCE. It’s a boring HOLD.

Insurance Australia Group (IAG) – these results were truthfully a little disappointing, but yet the stock bounced. And it bounced for the reasons we like it.

IAG handed a surprise 10c special dividend out, earlier than expected and indicated a willingness to continue returning some of the $500m+ of excess capital it holds after its Berkshire Hathaway deal and the decision to halt its Chinese investment.

Secondly, much of the disappointment in the figures relates to ongoing conservatism on behalf of IAG management in both reserving and in terms of deliberately ceding market share in competitive markets such as NSW CTP insurance (commercial third party).

This stock isn’t going to make us rich, but in the next 12 months it will pay out 7.5%+ type dividend yields with modest downside.

Woodside (WPL) – they were actually good results and demonstrated continued productivity improvements. Management should be commended.

But you can’t push water up hill, so frankly the only game in town remains the oil price for these guys.

Sadly with oil having eroded earnings so much, the dividends and balance sheet all look far less interesting than they did a year ago.

We got this one wrong and though a great company, we are definitely looking to REDUCE our holdings here at some point north of $30.

Magellan Financial (MFG) – results here led to downgrades of perhaps 5-6% simply because costs continued to grow and analysts began to recognize that it would be tougher for MFG to earn performance fees in the year ahead if share-markets are down.

This is our primary issue with a stock and company that in our heart of hearts we love.

It is a great company, but the tailwinds that have supported it so well for the past 3 years (being a weak AUD & rising global share-markets) are abating and this means we need to re-calibrate its growth outlook.

The stock would have to be back near $18 for us to feel more inclined to add it back to portfolios.

CSL (CSL) – the core plasma business remains fantastic, but the recently acquired Novartis vaccines business is losing more money than they anticipated due to a weaker ‘flu season’ in the Northern Hemisphere.

This took the shine off the figures.

When you trade on 25x P/E, you can’t see 5% downgrades like they did, so the stock fell.

I would imagine it falls more and I would have to see the stock under $90 to feel confident in buying this one fresh. Great company though.

ANZ Bank (ANZ) – the trading statement for Q1 was actually fine, but the bank warned on credit quality for the quarter ahead and this is what spooked investors.

It seems likely that conditions in Asia worsen insofar as credit quality is concerned and ANZ certainly pointed to this.

The stock is cheap on 9x, though the debate remains as to the sustainability of its current 7.8% franked yield in light of concerns for credit quality.

It looks a HOLD but is entirely a slave to the entire ‘China’ theme.

Coca Cola Amatil (CCL) – get this: ‘still’ beverage volumes declined nearly 6% in Australia this last year. This is actually water, not sugary drinks we are talking about here. Interesting hey.

CCL did a decent job in a very tough market and it makes great cash-flow, but if its battling against the tide, it has to be super-cheap to make it attractive.

And it’s not yet. Perhaps under $8.00

Origin (ORG) – yikes. We know ORG, just like SANTOS, is definitely swimming naked now the oil tide has gone out.

The company still has this $9bn+ of debt and commented that if oil prices remained low they would cut the planned 10c 2H dividend – that seems a no-brainer to go.

Its electricity markets business saw customer numbers slide (like AGL), but more broadly its electricity and gas retail businesses are performing fine.

Commonwealth Bank PERLS VIII Hybrid Issue – a positive step for the hybrid sector

The announced issue of a $1.25bn 5-year hybrid note by CBA this week was well received by investors this week.

The size, pricing and maturity all seemed in keeping with a market that seems ever more price-sensitive on these particular variable-income products.

When CBA launched its previous hybrid issue in October 2014, the 8-year $3bn+ CBAPD tranche carried with it an initial interest coupon of only 5.1%.

This week’s deal carries a running yield of over 7.5%, a shorter call maturity of 5 years and is of infinitely smaller size.

No wonder the reaction was sound.

We think in the same way the CBAPD issuance in October 2014 marked the peak of the ‘hybrid’ sector, we are hopeful that the response to this week’s CBAPE deal indicates a near term bottoming in sentiment towards an asset class that represents reasonable value to us right now.

Sonic Healthcare (SHL) … what a peach.

SHL reported profit figures this week that matched expectation and fortunately for us this was good enough for the market to take the stock higher.

The core Australian business continues to see margin compression from both falling price and volume and the ongoing cost pressure from rental charges at their nearly 2000 pathology collection centres.

However, the foreign operations were all sound and a neat foil for the near-term headwinds being experience locally.

We had the good fortune and pleasure to host the CFO of SHL, Chris Wilks, in our office yesterday and he did a terrific job of outlining the many levers SHL has at its disposal to counter the current squeeze on domestic profitability.

Our view remains emboldened after this visit and we feel this is a fantastic company to be buying at current levels in light of the fears associated with government spending cuts.

China food plays … volatile!

A further demonstration of the ongoing to and fro in equity markets is the fortunes of those Australian businesses that are seen to be plays on China’s burgeoning food demand.

Blackmores (BKL), Bellamys (BAL), A2 Milk (A2M) and Bega Cheese (BGA) have all had roller-coaster rides this past month.

As I type today, BAL is down 15% and A2M is down 10%. BKL is off 4%.

A2M was 25% higher earlier in the week.

The themes associated with each of these businesses remain sound and consistent, but the share-market has high expectations.

The huge gyrations in these highly rated shares is again a demonstration that timing and adherence to some sort of risk/reward strategy is an absolute must to minimize the risk of downside.

All of these shares are on or around our radar, but just haven’t yet reached levels where our concern of loss has been assuaged.

Next week .. more of the same

Reporting season continues next week and again offers portfolio’s the opportunity for feast or famine.

The main focus for us next week will be on Crown Resorts (CWN), since all roads continue to point towards a pending takeover bid for the group by James Packer.

The Star City results pointed to excellent growth in domestic casino operations which augers well for the local Australian Crown assets.

Fingers crossed that at next Thursday results we see some good operating results and perhaps even an update on the behind-the-scenes action insofar as the takeover.

BHP (BHP) reports on Tuesday and as you all know by now, the focus will be on the dividend – we foresee a halving in the dividend to something near 90c AUD annually.

Flight Centre (FLT) report on Wednesday and it’s our hope and expectation that trading conditions have continued soundly since the AGM statements made in late November.

With the right noises on operating conditions, we could see a real kick in FLT.

IOOF (IFL) and Wesfarmers (WES) also report Wednesday and will be quite dour.

IFL is up against it with investment markets having softened up, but is now so cheap and such a good yield that I expect nothing but a sound response to its results.

WES will do what they do, which is to highlight the strength in core Coles and Bunnings operations and distract the market from the weakness in their industrial, chemical and coal businesses.

WES is now within sights of its all-time high, in spite of the market fall and in spite of ongoing earnings downgrades this past year.

To say I have an itchy trigger finger here would be an understatement.

Let’s see how the market reacts to numbers, because any move back towards $45 is surely a level at which we should be REDUCING positions.

Rounding out the week will be Woolworths (WOW) figures.

I wouldn’t expect to hear much on the CEO search, but the state of the core food business will be closely watched, as will any additional remarks made in regards to the sale or closure process of Masters.

I repeat that we think a lot of negativity is now priced into the WOW shares and that the appointment of a solid CEO will do wonders for the underlying performance of what is still a truly excellent business.

That’s the lot.


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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