Australian Market Summary (Issue 413) – 19 August 2016

Firstly, a big invitation to all to our presentation on Tuesday week by Magellan Financial Group.

Many of you would have seen the invitation to attend our lunchtime presentation on Tuesday 30th August, I have attached the link to sign up below.

It would be great to see you all over canapés and coffee, to hear Damian Craven from Magellan explain why investors need to consider foreign shares in a suitably diversified portfolio.

Please click on the link below to sign up to come along, if you are free at lunchtime on Tuesday week!

Onto markets …

This week was another busy one, but an interesting one all the same.

Though we were flat on the week, it became quite apparent as the week dragged on that the financials really are proving a hindrance to broader market performance.

Banks … a drag

National Australia Bank (NAB) followed the prevailing trend and reported a pretty dismal trading statement on Monday.

Revenue trends are tricky, bad debts are climbing moderately and with this ongoing pressure on core profits, yet more analysts are coming out now in expecting NAB to LOWER ITS DIVIDEND in 2017 by some 10% (like ANZ).

I know that banks form a large part of most portfolio’s and will likely always do so given their weight in the market and their dividend payments, but these stocks are not going up for the next 2-3 years and will be barely lucky to tread water.

You cannot escape this trend.

Bank profitability is being assaulted by the economy, competition and global re-regulation and it is not about to go away anytime soon.

This is again another warning sign to portfolio’s (of which there are many) that still rely too heavily on the bank shares for performance.

BHP … so what?

Elsewhere in the market this week BHP (BHP) continued to careen back to our SELLING level at $21, oil stocks took comfort from the rebounding oil price and the consumer staples (Woolworths and Wesfarmers).

BHP results were ho-hum, but it seems analysts are focused on the underlying cash generation of BHP (which is undoubtedly good this year ahead) and this has helped BHP rebound back to our ideal SELLING level.

To re-cap on BHP, we think it is entirely appropriate to focus on BHP’s underlying cash generation, but we think this is now being well and truly priced into the shares here. We remain highly cautious on the prospects for Chinese steel production in the coming 12 months and the likely impact this will have on iron ore prices (falling).

Furthermore, BHP is a company that digs stuff out of the ground. It is a company that needs to spend capital to continue doing this or the resource runs out.

It’s well and good to like the recent capital discipline at BHP, but it will only last a year lest BHP fancy running their assets into the ground.

We remain advocates for SELLING BHP here at $21 (as per the recommendation in April).

The highlights for the week …

Sonic Healthcare (SHL) were sound as a pound and now +35% on our recommendation to BUY it in February.

The results were in-line with analyst expectations and the profit guidance for 2017 was also similarly in-line, however the stock jumped on the news and remarks to suggest the company felt the negative ‘clouds’ surrounding their core pathology business (government regulation notably) were lifting.

SHL has run a long way and is near fair value, but in a market that looks fully valued or rich elsewhere, this is a stock to hold onto for now.

Crown Resorts (CWN) were pleasing in the sense that the group remains on track to de-merge its assets. Part of the restructuring announcement made several months ago, was the intent to pay out 100% of underlying profits as dividends and in this full-year result it seems the company surprised analysts and the market by delivering on this promise AHEAD of the restructure.

CWN announced a 39.5c dividend for the 2H, which is more than double the previous years FULL YEAR dividend.

We have been patient with CWN and think it looks good into the mid-$14’s before we might look to reduce positions here.

Woodside (WPL) was also a good stock, however the results today were really only OK.

WPL is up 6% on the week largely due to the oil price rise.

Again we have been patient here, believing the oil price would recover into the $50-60 range and we maintain that view.

On that basis, we think WPL looks a fairer value above $30 and so for now we will hold on for more upside.

The low-lights …

Of the main stocks we have recommended, only Mantra Group (MTR) looks disappointing and even then, the only disappointment is the share price fall of 5% post its results today.

The reality is that the MTR profit figures looked sound across the board and we feel today’s share price move is an aberration.

To back this view up, we added to our position in the PRIME Australian Equity Growth portfolio to take advantage of the better buying prices. Fortunately beyond MTR, the lowlights were felt in shares we haven’t had much to do with.

CSL (CSL) is undeniably the most important given its size and weight in the market.

It fell 7% on the week. Much of the disappointment came from larger than anticipated losses at the Seqirus flu-vaccine business CSL bought from Novartis in early 2015. A slower than expected flu-season was blamed, but the truth of the matter is this business is clearly taking longer to restructure than CSL management had envisaged.

The core Behring blood franchise performed exceptionally well (as always), raising profits 10%, but the reality is such that on 30x earnings, a stock cannot sustain a total 10% earnings DOWNGRADE like CSL did this week without seeing its share price suffer.

In fact, I would go so far as to say it hasn’t fallen enough.

CSL is a great business and we believe they will be successful with the acquired flu business, but think there is no value to play for above $90-95.

Lastly on QBE (QBE).

This has been a deeply frustrating stock for many and fortunately we called a SELL on it early last year at $13.00.

It is under $10 today.

QBE sadly is operating in a deeply difficult insurance market, where revenue pressures are manifold. QBE are cutting costs to standstill, but can’t keep up.

It’s very unlikely we will recommend QBE as a BUY again given the difficult industry trends, but I would say I am convinced QBE will be a take over the longer these trends persist. QBE would make a neat consolidation target for a large commercial lines player given its substantial offshore exposures and in an industry witnessing heavy competition, the cost synergies QBE would offer a foreign buyer would be material.

Just saying.

Conclusion …

Next week we have more companies reporting and for us the focus will be on QUBE Holdings (QUB), Flight Centre (FLT) and Woolworths (WOW).

QUB will be indifferent, so I would not hold out high hopes. The economy is struggling and the Asciano deal is too early to learn new information on.

WOW will be the most important next Wednesday and we are hopeful the company announce plans to divest not only Masters, but the profitable liquor business ALH also.

Touch wood.

Reporting season itself thus far has been quite disappointing in terms of the analyst revisions to earnings expectations and only vindicates my/our continued market caution.

We feel there will be several companies in the weeks ahead that we will be advocating SELLING/TAKING PROFIT, so please watch this space.

Do not worry if you end up holding a little more cash than normal if this proves to be the case. Holding cash at the peak of the market is no bad thing and sure as night follows day, new BUY ideas will emerge that offer genuine risk/reward to the patient investor.

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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