Australian Market Summary (Issue 445) – April 21st, 2017

Good afternoon.

It was a mixed week in investments this week.

On the positive front, fears over a North Korean missile launch literally fell flat over the Easter weekend, so I guess we have that to be thankful for.

But on share-markets, things were decidedly indifferent.

The market fell a shade over 1%.

I can be reasonably brief for a change this week.

Telstra (TLS) – oversold and now bouncing.

We flagged TLS as extremely oversold and due a bounce in last week’s update, and fortunately that managed to play out.

TLS bounced about 5-6% from its lows this week, and personally I feel there is a lot further to go.

Yes, the threat of TPG (TPM) as a 4th mobile telecom operator is a real risk to mobile-sector profit margins in the medium-to-long-term, however investment markets (as they do) shot first and left the questions to later.

In the low $4.00 range we saw several broking houses upgrade TLS to a BUY, noting that not only is the prospect of competition in mobile from TPM unlikely before 3 years, but that Vodafone is most likely to be impacted by what will surely be an attack on the low-end, price sensitive customer segment from TPM.

Furthermore, several analysts noted that the move by TPM could very well be a bargaining ploy (and a lucrative one at that) to lure Vodafone to the table with a view to combining their mobile operation with those of TPM, thus leaving the Australian mobile landscape unchanged as a 3-player market.

Much ado about nothing then?

Not quite.

TPM are the real deal, and it is undeniable that TLS face stiffer competition in the years to come both on fixed and mobile operations, but at $4.00-$4.20 much of that is now reflected in the share price in my eyes.

TLS is currently undertaking a review of its NBN subsidy stream, and the potential for it to be securitized and potentially returned in some form to shareholders.

That means TLS have the potential for a capital return in the months to come.

On my rather rough estimates, I figure that TLS trades on perhaps 12-13x core earnings (ex NBN payments and likely securitization of what was deemed to be a $14bn stream of payments from the Government when confirmed back in 2014 by the new Liberal Government).

TLS should likely pay a dividend per share of perhaps 25c from 30c in cash earnings, and all of this after perhaps as much as a 40-50c special return – it’s important to look at cash earnings because by the early 2020’s TLS will see capital expenditures fall by over $500m.

This simply means that TLS shares post NBN and without a further massive cut to mobile margins still look very cheap and very yield-worthy (25c on $3.80 shares if you strip out a 40c capital return) with a 6.5% fully-franked dividend yield.

We added more TLS shares in our PRIME Australian Equity managed funds (SMA’s) and thus far have been well-rewarded in doing so.


Transurban (TCL) – booking some profit at $12.

As you would all have seen, we called temporary time on our position in TCL at $12 earlier this week.

There is absolutely nothing wrong with TCL, indeed we would love to re-add the stock to portfolio’s again at lower levels, but at $12 we think much of the good news is now again being priced into the stock.

TCL has rebounded from a low of $9.43 late in 2016 and is now 27% off those lows in only a few months.

Investors who followed our call have made 12-13% plus a 2.5% interim dividend in 6 months, and with the stock now only yielding 4.7% unfranked for the coming 12 months, we think it now looks full.

Should the stock pull back under $11 again (as we think it will), we will consider adding it back to client portfolio’s.

Blackmores (BKL) – quarterly sales update due Thursday and I think it will be good

BKL report their quarterly sales figures to the end of March next Thursday, and I have the sneaking suspicion things will look more optimistic.

Firstly, the December quarter sales and profits certainly steadied when reported back in February and it was only cash-flows that caused consternation back then.

Since then we have seen a volte-face from Chinese authorities on the tax-treatment of vitamin and healthcare supplement imports into China by way of cross-border e-commerce channels, and this should kick-start sales again into China for BKL.

The stock powered up +20% on this news in mid-March, but has since eased back almost all of the gains, which is interesting, but also a terrific opportunity to my mind.

You see, on Thursday this week Shaver Shop (SSG) upgraded their 2017 profit guidance by over 10% on account of a surge in demand from customers purchasing SSG products for re-sale into the Asian market.

SSG specifically noted that sales kicked in March, which coincidentally coincided with the changes I alluded to above on Chinese imports on personal products.

I think BKL will be a positive event next Thursday and I urge those of you yet to BUY BKL to consider doing so (please call your adviser to determine its suitability), and for those with the ability to add to positions to similarly do so.

As a guide, we own about 4% in our equity portfolios in BKL.

A heads-up for the weeks to come

Just as a heads-up for the weeks ahead, not only do we have BKL sales next Thursday, but we also have Woolworths (WOW) sales figures the following week, along with interim profit reports from each of ANZ (ANZ), National Australia Bank (NAB) and Westpac (WBC) in the first two weeks of May too.

It will get busier.

Have a terrific weekend.

For Tuesday. Lest we forget.

Jono & Guy

Financial Services Guide Update

Our Financial Services Guide has been updated, please click here to download the most recent version.

Thursday 11am Values

All Ordinaries5886-37-0.6%
S&P / ASX 2005855-31-0.5%
Property Trust Index1436-4-0.3%
Utilities Index8941+27+0.3%
Financials Index6835-22-0.3%
Materials Index9828-60-0.6%
Energy Index9197-308-3.2%


Key Dates: Australian Companies

Mon 24th AprilN/A
Tue 25th AprilANZAC Day
Wed 26th AprilDiv Pay-Date: Vanguard ETF (VEU, VTS)
Thu 27th AprilDiv Ex-Date: NABHA
Quarterly Sales: Blackmores (BKL)
Fri 28th AprilN/A


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