Australian Market Summary (Issue 436) – 17 February 2017

 As expected it was a busy and frustrating week again.

There a few big picture items to cover for context, so I’ll address them first before we jump into the ins and outs of company results.

On the domestic economy, we had continued mixed news.

On the positive, the NAB Business Confidence survey recorded the best conditions since the GFC during January, describing a surprising uptick in summer business activity that certainly suggests some of the post-Trump US economic confidence has made its way to our shores.

The strength of the rebound is big, and to be honest, difficult to comprehend. But it is what it is, and we should be thankful even if a touch cynical, that businesses are more optimistic as they enter the new year.

On the consumer confidence side, things continue to prove indifferent. Not helping matters here is the continued hollowing out of Australia’s labour force which in January shed a further 45,000 full-time jobs.

In the last 13-months Australia has shed 70,000 full-time workers and added 180,000 part-time jobs.

This is problem for consumption going forward, and when added to my firm expectations for both a slowing in construction activity and for a topping out in eastern-seaboard house prices, it does continue to pile the pressure on households.

This week’s Westpac Consumer Confidence survey showed respondents to be about as negative on residential home purchases as they have been in 6 years. This sentiment will definitely begin to weigh on auction clearance rates in the coming months, and with that, so too will home price momentum ease.

I was fortunate to be invited to present on our broader economic and investment thoughts this week by a partner of ours, and perhaps many of you may have even been in attendance (thanks Mark, Peter, Brad and Josh). However, for those of you interested in the slide presentation I gave here, do please just ask and I will forward them on.

As for corporate results this week it was a mixed bag.

There are a lot, so I will endeavor to be succinct.

Telstra (TLS) were disappointing. Competitive pressures in mobile were the standout negative, and reflect resurgent activity from both Optus and Vodafone, and an inability by the operators to recover revenue from surging data usage.

The NBN threat remains for broadband margins, so TLS will simply be forced to pedal harder to standstill.

The dividend yield remains well over 6% and the company will announce news on their capital management program at the full-year results in August (potential monetization of the NBN revenue stream). For that reason we think now is not the ideal time to be a seller of TLS, but all things considered, the underlying profit generation of TLS is under increasing pressure and it will be right to lighten positions in the name at some point going forward.

Commonwealth Bank (CBA) results and ANZ’s (ANZ) trading statement both were constructive.

Like NAB, CBA and ANZ pointed to better bad debt experience and a moderate improvement in credit quality. This is encouraging.

Mortgage re-pricing (investor mortgage & fixed-rate rate rises late in 2016) will help margins going forward. But both stocks look more than up with events at these levels, and with a clouded employment and housing outlook ahead of us in 2017, Australian banks look fully valued here again.

Sonic Healthcare (SHL) numbers were sound, and demonstrated the success of their European acquisitions with growth there the pleasing part of the results. We continue to feel SHL is an excellent stock to have in portfolios for 2017.

Wesfarmers (WES) results were ahead of expectation at the group level, and these were good enough to push the stock up off its lows. In the detail, Bunnings was a lot better than expected whereas the Coles supermarket business was a fair bit worse. The latter seemed to have stepped up promotional activity in order to combat the recent resurgence in Woolworths (WOW), and many analysts saw this as a harbinger for further competition between the two grocers.

Interestingly WES announced the potential IPO of its Officeworks business, in a clever move to jettison this asset ahead of potential competition from Amazon expected later in 2017 and more fully into 2018.

WES is and remains a high quality company, but with the margin deterioration in Coles surprising negatively in these numbers, it would seem likely that any interest we have in buying the shares will come at lower levels.

We look forward to the WOW results next week to see confirmation of the impact of their sales improvement on profits.

IOOF (IFL) were another frustration this week with the stock giving up -8% on the week after missing profit figures. The key problem in IFL is the margin it receives on use of its administration platform, which continues to decline.

This isn’t new news, but the deterioration was a little worse than analysts expected and the stock deserved to fall. Once again it is back at cheap levels, and we would expect to see the market welcome the prospect of any bid for ANZ Wealth’s advisory business, even if it required equity to fund it.

With a 6%+ yield and a continued strong balance sheet, much like TLS, we think the stock is too low to be selling and would continue to hold for better levels before re-appraising our positions.

On Mantra (MTR), results today were a touch weaker than expected, but yet the stock has reversed much of its recent improvement. Again it was a tale of two segments with Resorts continuing to shine, but CBD hotel assets in Brisbane, Darwin and Perth dragging on results.

MTR looks well placed to benefit from not only ongoing tourism strength, but also the potential for an uptick in business tourism if the aforementioned improvement in Australian business confidence is anything to go by.

The stock is very cheap relative to its growth outlook and global hotel peer stock, so we are hopeful of improved share price performance in the weeks ahead.

Oil Search (OSH) was a nice positive surprise this week too since it announced it had upgraded its PNG reserve base significantly. Proven gas reserves within the PNG LNG project had improved by 50%, again making it increasingly likely that OSH would seek to extend the size of its LNG operations there by adding further production.

On a final, and ever-more frustrating point, our recommendation overnight to BUY SEEK (SEK) was impacted by the announcement this morning of SEK’s agreement to purchase the minorities on its rapidly growing Chinese employment portal business, Zhaopin.

We had felt there was a chance of some news on Zhaopin at Tuesday’s results, but SEK chose to release information today, forcing the share price up 6% and beyond the reach of many of our buyers.

This is hugely frustrating, but we like the SEK story a lot and we think you should be looking to buy the share again next week if we were to get even a modest pull back to the mid $15.00s.

Have a great weekend.

Jono & Guy.

All Ordinaries5855+97+1.7%
S&P / ASX 2005809+104+1.8%
Property Trust Index1373+9+0.7%
Utilities Index8295+51+0.6%
Financials Index6712+193+3.0%
Materials Index10418+303+3.0%
Energy Index9126-5-0.1%

Key Dates: Australian Companies

Mon 20th February  Earnings: Bluescope (BSL), Brambles (BXB) Div Ex-Date: ANZPD, Wesfarmers (WES)

Tue 21st February  Earnings: SEEK (SEK), Oil Search (OSH), QBE (QBE) Div Pay-Date: Boral (BLD), Dominos Pizza (DMP), Magellan (MFG), Suncorp (SUN)

Wed 22nd February  Earnings: QUBE (QUB), Woolworths (WOW), Healthscope (HSO) Div Pay-Date: SUNPD, WBCHB Div Ex-Date: AMP (AMP, Commonwealth Bank (CBA)

Thu 23rd February  Earnings: Crown Resorts (CWN), Flight Centre (FLT), Platinum (PTM), QANTAS (QAN), Adelaide Brighton (ABC) Div Pay Date: WBCHA Div Ex-Date: AGL Energy (AGL), JB Hi Fi (JBH), Rio Tinto (RIO)

Fri 24th February  Earnings:  Div Ex-Date: AMCOR (AMC), Computershare (CPU) Div Pay-Date: James Hardie (JHX)

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