Australian Market Summary (Issue 433) – 27 January 2017

 A somewhat quieter trading week given the Australia Day public holiday yesterday, yet still plenty of news to cover!

Interestingly, the fact that Australia Day occurred on a Thursday is likely to cost employers between $50-$60M with thousands of Australians expected to call in sick on Friday and take advantage of the long weekend…astonishing numbers!

Our market is up 0.7% for the week anchored by the miners (+3%.) Rio Tinto (RIO), BHP Billiton (BHP) and Fortescue (FMG) all posted weekly gains in excess of 4% following further gains in the price of iron ore which trades above US$80/tonne.

The banks also managed to regain half of last week’s losses adding 1.40%. We maintain the banks look fully valued at these levels and with a lower outlook for earnings growth recommend clients discuss their bank sector weights with advisers.

We are now just 2 weeks away from results season so profit warning season is most certainly upon us.

Mad Monday – Profit Warnings

Logistics company Brambles (BXB) surprised the market on Monday when it announced profit growth was likely to fall short of expectations given increased headwinds in its North American pallets business.

On account of US retailer destocking which impacted volumes and resulted in increased transport and plant costs, management forecasts for FY17 underlying profit growth of 9-11% and revenue growth of 7-9% were lowered.

Given sales revenue and underlying profit were reaffirmed at its AGM in only mid-November this latest announcement certainly disappointed the market, with the shares sold off nearly 16%.

Village Roadshow (VRL) also disappointed the market on Monday and was punished, with its shares losing 9.50%.

Ticket sales at its theme parks lagged significantly during the December and January holiday period following the tragedy that occurred at Dreamworld last October.

Attendances by the local Queensland market which previously represented 60% of total attendances at its QLD theme parks declined by 12% whilst its Wet’n’Wild theme park in Sydney has likewise been negatively impacted.

The flow on effect from this is that food and beverage, retail and other in-park revenues declined materially for VRL.

It was a shaky start to the week but neither of these companies will be the last to disappoint as we approach reporting season!

Positive news & an upgrade!

Developer and Manufacturer of sleep apnea products Resmed (RMD) announced positive Q2 results gaining 10% for the week.

Revenues increased 17% compared to the prior corresponding period whilst earnings per share were in line.

The acquisition of health IT group Brightree strengthened sales but it’s RMDs work in progress that makes the outlook somewhat interesting. It recently received FDA clearance for its ‘AirMini’ portable devices to be launched by June this year.

RMD was only a year ago a core holding in our portfolio and we continue to monitor its performance.

Bluescope Steel (BSL) share prices surged this week following an earnings upgrade.

Better than expected earnings on account of stronger steel and iron ore prices as well as productivity improvements meant underlying EBIT was revised upwards to $600M ahead of prior guidance of $510M.

The announcement of a likely impairment charge of around $65M to account for revisions across its China and India business did little to thwart the optimism of investors who sent the stock up 9% for the week.

Other significant events…

Rio Tinto (RIO) announced it will sell its NSW coalmining division to China’s Yancoal for up to $2.45B, with an initial payment of $1.95B and a further $500M over 5 years.

The deal makes strategic sense for RIO to take advantage of a bull market for coal with prices rising in 2016 following a cutback in Chinese production and increased demand as a result of boosts to economic stimulus in China.

The sale represents 60% of RIOs coal production and disposes of nearly all of its thermal coal production, however it will continue to produce significant amounts of metallurgical coal.

BHP Billiton (BHP) increased its iron ore output in the first half of FY17 in order to take full advantage of surging iron ore prices but was a little light on its petroleum production.

Qube Holdings (QUB) finally reached financial close with Moorebank Intermodal Company for the development and operation of the Moorebank Intermodal Terminal Precinct.

The freight terminal will link one of the nation’s busiest ports by rail to an inland facility and with the location and scale of the precinct is set to deliver long term benefits to business and consumers.

The precinct will also deliver significant benefits to the NSW economy with an estimated 1,300 jobs likely to be created from the construction phase and nearly 7,000 people employed at the site once operations are at full capacity.

Woolworths (WOW) continues to gain momentum as has added 3.5% for the week following reports WOW traded better over the Christmas period than Wesfarmers-owned Coles.

Reduced prices and refurbished stores continue to see WOW take ground off Coles. An analyst note published this week suggested the pace of improvements at WOW could see sales and margins recover more quickly than first thought.

This is music to our ears as we continue to hold WOW in our portfolios and follow its turnaround story closely!

Economic Data

Inflation data came in a shade light, but more or less in line with forecasts. Quarter-on-quarter CPI was +0.5% compared to forecasts of +0.7% whilst year-on-year CPI data was 1.5% vs consensus estimates of 1.6%

Despite the fact that year on year inflation is running well and truly below the RBAs target of

2-3%, the fact that the data was more or less in line means the RBA are not forced to cut rates at its next meeting.

The inflation data reinforces the idea of subdued growth in the Australian economy and following the negative GDP figures released in December continues to point towards a more troubled year ahead for the Australian economy.

Whilst the RBA still has levers to pull in order to stimulate the economy, it will be hoping continued strength in the US economy will force the AUD lower.

The AUD fell 50 basis points following the CPI data before finding some support at the 75.40c which is where it currently trades.

A reminder to all of you following our note last week on asset allocation changes and our expectation for international equities to outperform Australian equities to please speak to your adviser should you have any questions.

That’s it from us this week! Have a great weekend everyone and enjoy what’s left of the tennis!

Regards, Guy & Jono


All Ordinaries5762+52+0.9%
S&P / ASX 2005710+55+1.0%
Property Trust Index1337+15+1.1%
Utilities Index7974-90-1.1%
Financials Index6516+87+1.4%
Materials Index10433+348+3.5%
Energy Index9307-28-0.3%


Key Dates: Australian Companies

Mon 30th JanuaryN/A
Tue 31st JanuaryEarnings: Navitas (NVT) 

AGM: Clydesdale Bank (CYB)

Wed 1st FebruaryN/A
Thu 2nd FebruaryEarnings: Downer (DOW)

Fri 3rd February


Earnings: James Hardie Industries (JHX)


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