Australian Market Summary (Issue 423) – 28 October 2016

 It was a weaker market this week with banks and resources continuing to outperform whilst energy stocks dragged our market lower. Meanwhile interest rate sensitives remained pressured despite no major changes in bond yields.

Having endured a broad based sell-off in January followed by a steady rally in the middle of the year, our market now sits at the exact same level it did on January 1…how theatric?

On the economic front we had CPI data come in a shade higher than forecasts with a 0.7% rise in the September quarter and leaving the year-on-year increase at 1.3%, but this didn’t make a huge impact on anything other than the AUD which pushed stubbornly higher again towards 77c

As I have said time and time before, this is somewhat frustrating. Our economy needs to transition itself away from what was once a mining-based economy to a service-based economy. In order for our economy to prosper we need a weaker dollar.

I do believe the AUD heads lower in the longer term and it is for this reason that that I am optimistic on the future of the domestic economy and certain sectors set to benefit from this such as tourism.

CPI data figures also all but rule out any rate cuts in the short-term.

Also of interest to me this week was the drop away in weekly consumer confidence, and though one swallow does not make a summer (certainly on weekly data), it echoes data from recent service sector industry surveys and coincides with the softer tone to employment we saw in last week’s September jobs report.

With AGM season in full swing, we had the chance to hear from several companies as to their forward outlook and their update on Q1 performance.

Wesfarmers (WES) were a disappointment with their Q1 update showing a significant weakening in Coles food and liquor sales which rose 2.9%, with like for like sales coming in at 1.8% – their slowest rate of growth since Q1 2009. Further concerning on this trend was that fresh food deflation managed to ease during the period, inferring that Coles in fact had seen a marked step lower in the rate of growth in supermarket volumes.

It would seem Woolworths (WOW) has made a genuine market share impact with its revamped food offer.

WES also disappointed on the DIY front with Bunnings suffering from the ongoing sale of Masters stock into the market, and this slowing sales growth.

Kmart and Officeworks were a positive, however Target continued to worsen with like for like sales off 20% and clearly showing the difficulties in turning that format around.

WES fell 8.5% for the week.

Blackmores (BKL) The headwinds now behind us…?

Blackmores (BKL) also announced a fall in Q1 sales of 8% and guided that 2017 profits would be down on the previous year.

Whilst acknowledging that trading conditions have been challenging and would continue to be so, BKL finished the quarter with improving sales and profitability momentum.

Despite softer Q1 sales in Australia which impacted EBIT, sales growth in China were encouraging with the BKL China business up more than 200% compared to the previous corresponding period.

Having guided the market to increased challenges likely to impact sales as a result of overstocking and changes in market dynamics, consumer demand remains robust with Q2 sales anticipated to be stronger.

Whilst we didn’t hold high hopes for the Q1, we did expect it to be the low point on sales after the dramatic destocking witnessed since the middle of the year.

We feel pretty strongly that the pervasive trend for higher growth into Asia in the year ahead will continue and deliver the share to materially higher levels in the months ahead.

Nice to see such positive sales data come from Woolworths…

WOW has and continues to be one of our favoured stocks in the portfolios. Having played second fiddle to Coles for some time now as a previous ploy to increase profitability by simply raising prices in its supermarkets backfired, it is particularly nice to see WOW win back customers by reducing prices, adding staff and refurbishing its stores.

WOWs strategy to win back market share appears to be working with Q1 sales up 1%, underpinned by a 1.7% increase across its Australian food division, a near 4% increase in its liquor sales and strong growth in New Zealand food sales (8%.)

Importantly, customer growth as measured by the number of transactions taking place in Woolworths stores was up 0.7%.

Additionally, discount sales of inventories at the Master Home Improvements stores is progressing well. However, sales in WOWs petrol division were down because of weaker fuel prices with Woolworths having announced last month it was considering selling it.

Of note, WOW said its trading performance over the coming Christmas holiday season would be crucial to the groups FY17 performance.

We continue to hold WOW and feel exceptionally comfortable with its turnaround strategy. Having traded near $26 this morning, we are happy owning the stock and are looking towards $30 in the coming 12 months.

Momentum in the banks?

National Australia Bank (NAB) was a pleasant surprise in a sector that remains beset by revenue pressures.

Bad and doubtful debts were well below forecasts, and credit quality on the whole looked resilient. Importantly internal cash generation surprised favourably and core tier 1 capital came in above analyst forecasts. This made the knock on effect for NABs dividend a positive one, since the CEO affirmed his comfort with the current dividend rate of 99c, or $1.98 for the full year. This is a fully franked yield of 7% and gives us renewed confidence in NAB remaining our preferred bank exposure.

On the negative front in NAB, net interest margins remain under pressure and auger cautiously for Australia’s two largest mortgage banks in CBA and Westpac.

CBA in particular saw weakness in its full year results on the net interest margin side, and given its increased reliance on third party mortgage distributors could see yet more pressure.

Watch this space.

ANZ report next Thursday and Westpac the following Monday. We think ANZ has run ahead of itself and at $28.50-$29 is a stock to trim.

IOOF (IFL) announced funds administration of 107.1b which was a near 3% increase. IOOF has been a longstanding yield play for us and remains so. The stock yields 6.5% fully franked and the company has no debt, so again whilst a pretty boring stock, we think it remains cheap and worth well over $9.

Outside of the commentary from corporates, we also found notable the softer price action continuing in many expensive ‘favourites’, a trend that has been evident for much of the last three months. We have referred to the interest rate sensitive sectors such as property trusts, utilities and infrastructure in recent weeks and they remain pressured, but ‘story’ stocks such as Mayne Pharma, REA Group, Carsales, Aconex, Dominos, Healthscope and Ramsay Healthcare continue to see selling and related de-rating.

Opportunities will surely emerge, such as in Transurban (TCL) last week, so we remain cashed up and ready to move.

It’s been a tricky year for my stock calls I’ll freely but disappointingly admit. That said, we feel confident that things will turn – certainly in my experiences it’s often when you feel most at sea. After the Crown arrests I’ll assure you I have felt as hapless as it gets, so fingers crossed we are reaching a turning point from which to make some serious outperformance gains.

For those of you taking a “sick” day on Monday ahead of Tuesday’s Melbourne Cup, have a great long weekend.

To everyone else, enjoy the weekend and see you all next week.

All Ordinaries5361-136-2.5%
S&P / ASX 2005275-137-2.5%
Property Trust Index1298-43-3.2%
Utilities Index6999-105-1.5%
Financials Index5933-91-1.5%
Materials Index9058-59-0.6%
Energy Index8179-427-5.0%


Key Dates: Australian Companies

Mon 31st October      Div-Ex Date: Freedom Foods (FNP), Harvey Norman (HVN)

Tue 1st November      AGM: Chorus Limited (CNU)

Wed 2nd November   N/A

Thu 3rd November     AGM: Boral Limited (BLD), Downer EDI Limited (DOW), Fairfax Media Limited (FXJ), Perpetual Limited (PPT)

Fri 4th November       AGM: Templeton Global Growth Fund (TGG)


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