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Securities mentioned this week

• Afterpay (APT), Boral (BLD)

Economic data released

U.S employment figures surprised strongly in November rising a whopping 266,000 for the month and taking the U.S unemployment rate to its equal lowest level since the 1950’s.

The figure was a surprise given other data points to a slowing in job openings.

Further encouragement in U.S data last week came from the Michigan Consumer Sentiment release for December which also showed a jump following recent weakness.

Australian Service sector activity continued to improve in November and the new order index encouragingly jumped to its highest level since mid-2018, providing us with a degree of confidence that local consumption was trying to bottom out.

Australian construction sector activity however remains subdued in November, with residential activity weak but stabilising, but perhaps more concerningly, new orders for engineering and commercial construction activity falling to 6 to 7-year lows.

We address the softening in non-residential construction below.

Observations from the past week

Afterpay (APT) shares ended the week down -5%, and still around -20% lower than their all-time highs made in September.

This is in spite of again another blockbuster trading update in which the group confirmed November had seen a record $1bn in underlying sales and a staggering 500,000 new users to the platform.

Almost exclusively this growth was in the newer American and British markets, with the U.S business now the same size as the Australian/New Zealand operation within only 18 months of launch.

Remember of course that only a month ago, APT signed a deal to partner in providing ‘buy now, pay later’ services to Ebay’s Australian merchant base in calendar 2020 in a move that has the potential to double the number of merchants on the APT platform locally.

On top of that, the group conducted a $200m private placement to well-regarded technology investor Coatue Management at $28.50 to facilitate the expansion of APT services into new markets.

There is still plenty of road to run on APT and it would surprise us if the share didn’t breach $40 during 2020.

Remains a key and core Australian equity position.

Boral (BLD) shares were disappointing last week, falling -10% after they announced the discovery of financial irregularities within their North American windows division.

Whilst its unknown if the initial $44m cost impost will be the end of it, the announcement just adds to investor discomfort with BLD, their North American acquisitions and the CEO Mike Kane who made these deals.

The Windows acquisition was made by Headwaters before BLD acquired the Headwaters fly-ash operation, the latter having failed to hit internal targets in every year since acquisition.

U.S housing markets are booming right now, but BLD continues to get stuck in the mud, which has proven a material frustration to domestic Australian investors.

We suggest investors await further clarity on the situation, however we do believe BLD shares look attractive in the medium term at current levels.

What’s interesting?

We have had the view in recent months that we would see the Australian household emerge from its post-Federal Election slump in 2020 with increased vim and vigour as the combined impacts of multiple stimuli and rising house prices helped Australian households to see the brighter side of life.

Further compounding this glass half full attitude to the domestic economy was our belief that the Federal Government would bring forward significant personal income cuts from their 2022-2024 schedule, perhaps as early as the coming 2021 financial year.

We still feel this is likely, but we would be remiss not to address the dramatic slowing seen beyond residential construction in the engineering and commercial construction spheres over the last 6 months.

The chart below shows new order momentum in engineering (white) and commercial (red) construction according to the monthly Australian Industry Group Construction data released on Friday.

Numbers above 50 represent improving conditions on the prior month and numbers below the opposite.

You can see from the chart that the fall below 50 has only worsened, making the deterioration on a month on month basis through the 2H of 2019 all the more concerning.

The government needs to nip this in the bud sooner than the May Federal Budget proclamation or we risk 2020 being a lost year for growth, and my willingness to embrace a more optimistic economic narrative a forlorn hope.

One to watch.

Worrying deterioration in Australian non-residential construction activity

Looking ahead

• Monday – CH Monetary Aggregates – new loans, money supply etc (Nov)
• Tuesday – AU NAB Business Confidence (Nov), AU House Price Index (Q3), US NFIB Small Business Confidence (Nov)
• Wednesday – AU Westpac Consumer Confidence (Dec),US Federal Reserve (Thu morning AEST), US CPI (Nov)
• Thursday – AU Retail Sales (Oct), AU Westpac (WBC) AGM, UK National Election
• Friday – AU Pendal (PDL) AGM

Beyond the economic data and AGM’s this week, the US Federal Reserve meeting Thursday morning AEST and the UK Election on Thursday night AEST will clearly gain some attention.

However, of more importance will be the Sunday December 15^th due date for the United States to add 15% tariffs to a further $150 billion of Chinese-produced goods bound for the United States

Friday 5pm values

Friday closing values

Key Dividends

Regards,
Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Securities mentioned this week

• Telstra (TLS), Westpac (WBC)

Key market themes

Australian economic data remains very soft and has given us precious little to hang our hat on insofar as our confidence in a 2020 economic rebound.

Today’s ANZ Job Advertisements for November fell again and are down -12.6% on last year, and the November Building Permit figures for private houses also fell, this time to their lowest absolute figure in almost 7-years.

Being this deep into the year, it seems likely we will have to wait until the new year for tangible signs of a bottoming, however we still feel confident its likely.

Rising Australian house prices will help perceptions of household wealth – house prices for Australia’s 5 capital cities have now risen 15-week on the trot – and an increasing likelihood that the Federal Government could bring forward personal income tax cuts at the May Budget will likely spur a turning point during 1H 2020.

Economic data released

November Chinese manufacturing continued to improve with the official data coming in at its best level since Q1 and the unofficial Caixin manufacturing index further rising on last month’s level to its highest rate since early 2017.

Conditions in China remain tight, but this data reminds us that impacts on industrial demand from the trade war have been ongoing for over 18 months and not news.

Australian November Job Advertisements continued to fall and are now -12.6% YoY.

Employment is likely to remain a soft spot until deep into 2020.

Australian November Building Permits failed to fire, falling again on the month to be down -23.6%.

The absolute number of private house permits fell to its lowest level since 2013 and the figure for apartments is similarly soft.

Given the typical delay between permitting and construction of 3-6 months, these figures put any prospect of rebounding domestic residential construction before winter next year as slim.

Observations from the past week

Westpac (WBC) shares remained under pressure last week as analysts tried to gauge the likely level of civil penalties the bank would be forced to pay as compensation for their alleged contraventions of Anti-Money Laundering legislation.

• The best guess seems to point to a figure of $1bn to $2bn in total, which unfortunately cancels out the benefit of the group’s earlier $2.5bn capital raise and leaves the bank in the likely position of once again being capital constrained under the new regulations, both here and in New Zealand.
• WBC shares have underperformed their peer group by -5-7% over the past 3 months and it would seem unlikely to expect this to turn anytime soon. However, with the stock under $25 and offering a forward yield of around 6% its quite likely the stock will find absolute support from yield-hungry domestic investors the closer it trades towards $21-23.

Telstra (TLS) shares were one of the strongest performers last week, with the share rising +8% after a well-received investor day that saw both 2019 operational guidance confirmed and a ray of hope that mobile division profitability was set to improve.

• Several major investment banks upgraded the stock to BUY, though notably, target prices barely reached $4.00 indicating that perhaps the rally says as much about the dearth of absolute opportunity elsewhere in the market as it does about TLS.
• Whilst we remain HOLDERS of TLS in portfolio’s we have long held the view that the stock is worth somewhere in the $4.00 to $4.50 range depending on a variety of assumptions.
• We think this target will be reached, but caution against extrapolating last weeks share price jump, particularly given the risks of a Federal Court overturning the ACCC’s decision to block the merger of mobile players TPG Telecom (TPM) and Vodafone in the new year

What’s interesting?

For the second month in a row we have seen a positive surprise in Chinese manufacturing data, with this month’s official PMI surprising with a jump back into positive month-on-month activity and supporting the jump in unofficial figures released a month ago for October activity.

The chart below shows in red the official China Purchasing Manager data for manufacturing businesses with the jump above 50 in November a move to positive monthly performance.

The white chart is the so-called Le Keqiang index, named after the current Chinese Premier who once famously told a US Ambassador that he didn’t trust the official GDP figures and hence followed rail cargo volumes, electricity consumption and bank lending.

The white chart is a clever index of those three indicators.

China industrial activity showing signs of a bottom

Looking ahead

• Monday – AU AIG Manufacturing Index (Nov), CBA Manufacturing Index (Nov), ANZ Job Adverts (Nov), AU Building Approvals (Oct), CH China Caixin PMI (Nov), US Manufacturing PMI (Nov), US ISM Manufacturing (Nov)
• Tuesday – AU RBA Meeting
• Wednesday – AU AIG Services Index (Nov), CBA Services Index (Nov), AU GBP (Q3), US ADP Employment (Nov), US ISM Non-manufacturing (Nov)
• Thursday – AU Retail Sales (Oct)
• Friday – AU AIG Construction Index (Nov), US Employment Report (Nov), US Michigan Consumer Sentiment (Dec)

A very quiet week on the corporate front this week with only Nufarm (NUF) of note holding their AGM this week.

The following week however expect fireworks at Westpac’s (WBC) AGM, and Pendal (PDL) will also hold theirs next Friday.

On the international front, the UK election is scheduled for December 12^th and the first Democratic caucus is penciled in for February 3^rd 2020.

Friday 5pm values

Friday closing values

Key Dividends

Regards,
Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

October was another positive month for global equity markets as represented by the MSCI World Index adding +2.5%.

Optimism surrounding US-China trade negotiations bolstered equity markets with the announcement of the ‘first phase’ of a trade deal.

Providing further support and investor confidence was the reduced risk of a no-deal Brexit.

US equities advanced 2% following another 0.25% rate cut from the Federal Reserve in spite of slowing jobs growth. The unemployment rate ticked higher from 3.5% to 3.6% largely as expected.

Interesting to note was McDonalds missing profit estimates for the first time in 2 years having remodelled 14,000 US restaurants and partnering with Uber Eats. Shares fell -8%.

Asian share markets performed best with Japan +5% and Hong Kong +3% as a result of the improved US-China deal.

The ASX200 Accumulation Index underperformed falling -0.4% as the RBA followed the Federal Reserve 0.25% lower.

Australian bond yields widened further with 10-year Government bonds yielding 1.14% at month end.

Oil was broadly flat during October. Iron ore fell -10% to trade $83/tonne as demand falls along with construction during the winter months in northern China.

Contributors were IOOF (IFL) and Regis Healthcare (REG) which added +15% and +11% respectively. IFL rallied after announcing a $125m reduction in the purchase price of the ANZ Wealth business.

Afterpay (APT) was the major detractor falling -20% after broker UBS initiated coverage on the stock with a sell rating. Given APTs recent strength we view this correction as a buying opportunity.

The Growth SMA added to Boral (BLD), as did the Diversified Income SMA which also sold the remainder of its Westpac (WBC) holding ahead of its FY19 results. The Defensive Income and International Growth SMA went unchanged. On a risk profile performance basis our 5-year numbers continue to perform well against their respective benchmarks.

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 31 October 2019

Prime SMA – Model Portfolio Performance Figures as at 31 October 2019

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

Prime Capital is delighted to announce we have led the sale of one of Australia’s last privately held accounting & payroll software businesses, Attaché Software.

Attaché is a leading provider of accounting, payroll, asset and document management products, servicing medium businesses throughout Australia, New Zealand and the South Pacific. Attaché provides all the features most medium businesses need, typically used across a multi-user, multi-entity environment, as a hybrid solution, providing a cloud based and on-premise product suite. The local business software market is typically serviced by either entry level cloud-based packages (Xero/MYOB etc.) or full enterprise resource planning (ERP) applications (Oracle/SAP). Attaché is one of the few providers that services this significant gap in the market.

Prime was recently engaged by the shareholders of Attaché to provide advice on succession planning and sale of the business. The engagement consisted of Prime Capital designing the sale strategy, market mapping exercises, meeting and shortlisting potential acquirers and subsequently negotiating a deal with the preferred bidder.

At the end of October, Prime Capital and Attaché closed the deal, resulting in Attaché being acquired by The Access Group, the UK-based leading mid-market software provider.

Securities mentioned this week

• Afterpay (APT), Nufarm (NUF), Webjet (WEB)

Trade tensions >

Economic data released

Australian October Skilled Vacancies continued to fall and are now -8.6% YoY.

These numbers point to ongoing full-time job losses, particularly in more highly skilled categories.

The Westpac Australian Leading Indicator for October came in at a 2-year low.

US October Building Permit figures jumped 5% on the month to reach their highest level since 2007.

This is terrific news for companies exposed to US residential housing construction such as Boral (BLD), James Hardie (JHX) and Reliance Worldwide (RWC) as it suggests a strong backlog of work ahead in the sector.

Observations from the past week

Afterpay (APT) shares surged +7% this morning on news that the independent auditors report for AUSTRAC found APT to have robust procedures in place to combat potential money laundering and a strong risk culture sufficient to warrant the company being reclassified as ‘low risk’ by AUSTRAC.

Admittedly, we didn’t expect the AUSTRAC report to provide any negative news, but we are still pleased to see the market respond with a strong share price bounce.

Having posted a strong operational update only a week or so ago, APT is now in a great position to close out the year with a strong trading performance over this weekend’s monster Black Friday and Thanksgiving sales in the United States.

We remain optimistic for significantly higher share prices from APT in 2020.

Webjet (WEB) posted a strong operational update at the company AGM last week, pointing to underlying EBITDA of between $157m and $167m in FY2020.

This guidance is in line or even slightly ahead of most analyst forecasts and comes in spite of ongoing softness in both domestic Australian and European consumer activity.

WEB remain confident in the organic growth trajectory of their wholesale Webbeds offering, as do we.

For the 10%+ type ongoing earnings growth WEB should deliver over the coming 3 years, which is probably too conservative, we think a market multiple of 16x earnings is simply too low.

We hope to add to positions should the opportunity arise.

Nufarm (NUF) today warned that 1H 2020 earnings would be significantly lower than those delivered in the already drought-affected 2019 period.

The shares have fallen -18% on the news this morning, leading the share price to have given up almost 80% of the gain made post the surprisingly positive September announcement that the group had sold their Latin American division to Sumitomo Chemical.

Whilst the underlying earnings outlook for NUF remains significantly cloudy, todays reason for downgrade came in large part from both a $9m one-off sales rebate payment, previously unknown to management in the European business, and disappointing sales in the North American market leading to higher inventory.

‘Phase One’ of the U.S/China trade deal, if announced, could aid earnings from the North American division in the coming years, meaning that current earnings are likely near a low point from this division.

Whilst climate change is wreaking havoc with agricultural industries, we do believe that NUF looks increasingly good value at $5 or less, particularly when you consider that Sumitomo Chemical valued NUF’s Latin American division at 11x EBITDA.

At todays $5 share price, NUF trades on around 5x forward EBITDA even in spite of the likely future earnings stream yet to be booked from the group’s leading omega-3 infused canola seed technology.

I would expect strong support for NUF in the $4.50 to $5.00 range and we will likely add to positions in that region.

What’s interesting?

Though very well known, the chart below leaves it in no doubt that the rally in Australian share prices during 2019 has had precious little to do with corporate earnings.

Australian aggregated forward earnings per share, for the companies in the ASX200, has fallen to an 18-month low and approximately -5% in total.

The ongoing decay in Australian bank sector earnings would have contributed significantly, as would the deterioration in domestic cyclical earnings.

Had the Australian Dollar not weakened modestly, the aggregate figure could have been even worse.

The falling earnings momentum leaves the foundations on which the +23% year-to-date rally in the ASX200 has been built on shifting sands.

The collapse in global bond yields remains the key driver for equity market strength and means that any sharp turn higher in bond yields, perhaps in response to early personal income tax cuts locally, could in fact perversely lead to equity market weakness.

It’s a curious backdrop for investors as we enter 2020.

Australian Service Sector Sales activity rebounded to near 18-month high last month

Looking ahead

• Monday – US Chicago Fed National Activity Index (Oct)
• Tuesday – US Richmond Fed Manufacturing (Nov), US Conference Board Consumer Confidence (Nov)
• Wednesday – US GDP (3Q), US Durable Goods (Oct), US Chicago PMI (Nov)
• Thursday – US Philly Fed Business Outlook (Nov) Friday – AU Private Sector (Oct)
• Friday – AU Private Sector (Oct)

The Telstra (TLS) investor day Wednesday will be a feature as will be the IOOF (IFL) AGM on Thursday.

Regards,
Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.