Australian Market Summary (Issue 432) – 20 January 2017

This week was pretty uninteresting for the most part.

Share-markets consolidated modestly lower, ahead of Trump’s inauguration and the Chinese 4th Quarter GDP figures just released.

Within the market itself, Australia’s banks finally began to give up some of their extraordinary gains. The sector fell -4% on the week, and there was notable selling on Friday after a large investment bank downgraded the likes of Commonwealth Bank (CBA) and Westpac (WBC) to SELL.

We continue to argue these banks all look very fully-valued now, and have advocated for trimming positions constructively for well over a month now.

CSL (CSL) – upgrade profit expectations

Within the major stocks, the single biggest story of the week was CSL’s (CSL) announcement that they were increasing forward profit guidance by as much as 9% after ‘atypical’ activity in the 4th quarter.

What this means is that CSL benefited from a supply-shortage in certain specialty products during the December quarter, and that this is likely to assist profits for the remainder of the year.

CSL has suffered relative to banks and miners in recent months and had actually underperformed the broader ASX200 by over 20% in 2016.

The stock rose a whopping +15% for the week, and has incredibly recouped well over half of last years underperformance this week alone.

CSL is a terrific company and this week’s upgrade of guidance typifies its quality. Some of the reason for CSL’s upgraded guidance this week relates to heavy investment spend on plasma collection centre’s in recent years, and hence market share gains CSL has made on account of this.

The trouble we have found with CSL is that it just rarely looks cheap enough to buy.

The stock after upgrading guidance is now on 28x P/E for 2017 and still 24x 2018, but on cash earnings is on more like 50x.

It’s a brilliant company, but I just can’t quite make the leap of faith on current valuation grounds.

Elsewhere in the market this week we had confirmation of Cheung Kong’s bid for utility company, DUET Group (DUE), owners of United Energy and Multinet gas distribution in Victoria.

The $3.03 bid price is subject to regulatory approvals (notably the FIRB), so there remains some risk the deal still stumbles at the final hurdle.

Equally there is also some risk that the current $3.03 bid is trumped by another player, perhaps even a consortium of infrastructure investors, and for this reason we are advocating DUE owners to HOLD on for the time being.

Transurban (TCL) was in the news this week with the suggestion from one credible investment bank that TCL might seek to raise $1bn in new shares to fund its potential growth pipeline.

We think this is potentially viable and we would welcome the chance to add to TCL’s positions at a modest discount to current prices (perhaps $10.00).

TCL is in the enviable position of having several potential growth opportunities from which it can draw upon, which given the extremely tight opportunity set for infrastructure investors makes this stock a standout for us.

TCL is likely to announce a final agreement on the Western Distributor in Victoria around Feb/Mar time, and the suggestion is this positive news could coincide with plans to raise further shares.

We remain very comfortable and optimistic in our outlook for TCL, and would encourage investors to look to add to positions again under $10.00 given the chance.

Economic Data this week

The economic data this week didn’t give us much of a guide, although I must admit that the lack of bounce in the Westpac Consumer Confidence figure was a surprise given the uptick seen in the Service sector data from December.

We now enter 2017 with a lower rate of consumer confidence than we did 2016 in spite of the interest rate cuts and rising house prices.

Mmm.

December employment data was released and was little to write home about. The unemployment rate is 5.8% and we had 13,000 or so new jobs added in the month.

With the year ended I thought it interesting to flag that our economy only added 32,000 new full-time jobs in 2016 – a paltry +0.4% growth rate.

Part time jobs grew by +125,000 and a more credible +3.4% annually.

I still have real concerns as to Australian economic growth in 2017 and 2018, but I have fleshed these out in greater detail in today’s separate 2017 Outlook piece.

Have a terrific weekend all.

 IndexChange%
All Ordinaries5710-78-1.3%
S&P / ASX 2005655-77-1.3%
Property Trust Index1322-25-1.9%
Utilities Index8064+119+1.5%
Financials Index6429-205-3.1%
Materials Index10085-55-0.5%
Energy Index9335+6+0.1%

 

Key Dates: Australian Companies

Mon 23rd JanuaryN/A
Tue 24th JanuaryEarnings: RESMED (RMD)
Wed 25N/A
Thu 26th JanuaryAUSTRALIA DAY
Fri 27h JanuaryDiv Pay Date: Ishares Asia (IAA)

 

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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