Australian Market Summary (Issue 446) – April 28th, 2017

Lots and lots this week.

And more to come next week too with the Australian banks reporting interim profit figures and Woolworths (WOW) due to post quarterly sales figures too.

In spite of more disappointment on Trump policy, this time on tax, the U.S. economy continues to rage for now.

Consumer confidence in the U.S remains as strong as its been in 15 years, employment is strong and corporate earnings in the stocks that matter (Google and Amazon in particular) are coming in above expectations.

Locally as I have said time and again we have our issues insofar as consumer indebtedness and absent employment growth and this will hobble us and our market more so as the year progresses, however on a positive note this week we finally saw politicians on either side of the fence offering some genuine leadership.

The Treasurer’s plan to underwrite significant infrastructure spend in the coming years is a genuinely positive move and his decision to articulate the differences in government debt (good and bad) is the first time in a long time I feel like a politician has spoken to the electorate as adults.

Equally, there is real merit in the Labor opposition’s emerging policy on housing, including the curtailment of negative gearing, capital gains tax relief and borrowing inside superannuation funds.

Another component relating to increased penalties on property owners that leave their property dormant, and higher stamp charges on foreign investment also have merit.

Whichever side you are on, finally we seem to be getting some policy leadership in this country, and not before time.

Stocks in the news this week

Blackmores (BKL) post quarterly sales which were OK, but not the positive surprise I had hoped for.

BKL has done a good job at reducing inventory but this has come at a cost to margin in some respects. Similarly the business invested heavily to accommodate the spike in sales during 2016, and this has now become a drag on profitability until such time as sales play catch-up again.

We continue to like BKL a lot because we feel the trend of strong sales into Asian markets will be a long one, and will ultimately drop into BKL’s bottom line sooner than later.

IOOF (IFL) were a positive this week and even saw several brokers upgrade the stock to a BUY having seen excellent quarterly fund flows to March.

Encouragingly IFL saw assets grow across all three divisions (advice, platforms and investment management), proving IFL is indeed benefiting from stronger markets, fund flows into superannuation ahead of the end of the financial year and perhaps even market share gains from other listed advice businesses.

We have long liked IFL for its excellent management, acquisition strategy, balance sheet and dividend and are encouraged by this week’s good news flow and upgrades.

Wesfarmers (WES) reported quarterly sales, which as the headlines said, showed the Coles supermarket chain to be growing at its slowest rate since late 2007.

WOW have clearly regained the ascendancy from WES within food, so it will be interesting to see how Coles responds, if at all, during the remainder of 2017. Elsewhere in the WES business Bunnings continues to trade well (+6% comparative sales growth), whilst Target remains a basket-case (-16% sales).

Though WOW now have the momentum (quarterly sales for WOW due next Tuesday), all is not lost for WES since the spike in coal prices this year has provided an unexpected but sizeable boon for cashflows.

WES are currently looking at selling off the volatile coal division, and though this would be earnings dilutive, it opens up the possibility for WES for a return of capital.

As many of you know, I have had my doubts over WES as a share for much of the last 4 years given its extended valuation, however with the help of the coal price rally, this concern is slowly diminishing.

WES has underperformed WOW by 20% in the past year, and is currently at a near 5-year relative low to the market, so in large part my caution has been vindicated.

But I would say that I am becoming more favourably disposed to WES shares given the improved valuation metrics, and I would say that you shouldn’t let the Coles slow down concern you.

For now we are on the sidelines.

Bunnings sales growth will surely slow dramatically alongside house prices in the coming 12 months, so this will soon be a drag.

But with the stock now at $43 and with a 5%+ sustainable dividend, I would think somewhere nearer $40 could be an interesting entry point.

Let’s see.

Though Crown Resorts (CWN) weren’t in the news this week, I did want to take the time to proffer a few words on the share since it is now back at prices where the vast majority of our clients bought the stock back in 2014 (adjusting for the 80c capital return).

Though CWN has been in large part a disappointing position for us, in recent months the share has been a material outperformer, buoyed by a strategic decision to sell off foreign assets and focus on their domestic cash-cows in Melbourne and Perth.

The $750m capital return made in March and $500m share buyback has sparked fresh life into the stock.

Going through the numbers this week, feel there is still plenty more to play for, so do hang on.

Australia in a global context

We have spoken at length about our concerns for the performance of investment portfolio’s too heavily skewed towards Australian shares, and this week were interested to see comments from Vanguard (worlds largest fund manager) that they would be reducing the allocation to Australian shares by 10% for their diversified fund portfolios.

Vanguard intend to raise their allocation to international shares at the expense of Australia.

Interesting stuff.

That’s it from us. Fingers crossed for WOW and the bank results next week.

Jono & Guy

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Thursday 11am Values

All Ordinaries5930+44+0.7%
S&P / ASX 2005907+52+0.9%
Property Trust Index1416-20-1.4%
Utilities Index8934-7-0.1%
Financials Index6996+161+2.4%
Materials Index9684-144-1.5%
Energy Index9137-60-0.7%

Key Dates: Australian Companies

Mon 1st MayN/A
Tue 2nd MayResults – ANZ (ANZ), Woolworths (WOW)
Wed 3rd MayAGM – QBE (QBE)
Thu 4th AprilResults – National Australia Bank (NAB)
Investor Day – Transurban (TCL)
AGM – Rio Tinto (RIO)
Fri 5th AprilResults – Macquarie Bank (MQG)
AGM – Woodside (WPL)

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