Weekly Market Update – 17 February 2020

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Securities mentioned this week

  • Commonwealth Bank (CBA)       
  • CSL (CSL)                    
  • Challenger (CGF)
  • Telstra (TLS)
  • Downer (DOW)
  • IOOF (IFL)

Key market themes

Update on the coronavirus

  • Despite the numbers for infection continuing to rise and ongoing delays to ‘business as usual’ in China, mainland Chinese investment markets have recouped all of their losses since the Chinese New Year holiday commenced on January 23rd which is quite astounding
  • Businesses are slowly re-starting outside of Wuhan (however Wuhan has business suspended for another week until February 20th at the earliest), with auto production re-commencing this week in several cities and retail shops re-opening in part around the country
  • Apple manufacturer Foxconn are yet to re-commence production, but the timing here will be closely watched
  • This Friday sees the first February global activity report that will include the impact of the virus on the world economy

Australia and the coronavirus impact

  • Beyond the obvious impact on tourism and education sectors, the Australian commodity sector looks set to be negatively impacted
  • The Bloomberg industrial commodity price index has fallen -10% since the virus was discovered and several major Chinese purchasers of Australian LNG and copper exports have declared force majeure (their intention to not take delivery of contracted shipments)
  • Iron ore export volumes out of Port Hedland plummeted by half in the first week of February and point to significant lost export volume for the major iron ore companies should the situation persist
  • Anecdotal evidence suggests that nothing is going in or out of Chinese ports at present which suggests that at present the major miners are facing a 2-3% volume hit already, but that this will likely rise the longer the inactivity persists
  • Australia’s trade balance and fiscal revenue looks set to be impacted and for that reason we continue to favour the view that the Australian Dollar will make fresh lows in the coming months

U.S. Politics

  • Little to add ahead of the Nevada Democrat caucus early next week and then onto the Super Tuesday date for multiple state primaries on Tuesday a fortnight away (March 3rd)

Economic data released

Australian housing market off to the races (again)

  • As the one bright spark in the domestic Australian economy, housing saw further positive news last week with the monthly rise for home lending in December to the highest since 2016
  • Australian house price momentum is in a resurgent phase buoyed by competition amongst major banks and rising auction clearance rates (highest national clearance rate ever achieved last weekend according to Corelogic data)
  • The RP-data Sydney house price index has bounced +10% since its mid-2019 low and is now barely -4% from its previous high achieved in mid-2017

U.S. economic data mixed

  • A sound bounce in US small-business optimism last month was encouraging, as was the continued rebound in domestic consumer confidence with the February provisional Michigan Consumer Confidence figure just off its highest level since 2003
  • Potentially more unnerving on a 12-month view was the continued fall in job openings in the U.S
  • Job openings for December fell to a 2-year low and are now about -18% from their highest point in last 2018.
  • Job openings tend to lead future employment trends, although clearly there is nothing but strength in the current US jobs market as of today

Company News

Commonwealth Bank (CBA) capital position stronger

  • CBA results were modestly better than forecast, but markets were particularly encouraged by the strong Tier 1 capital position of the bank which makes it highly likely we see a share buyback announcement at the next results in August
  • To be fair, much of the net interest margin beat in the last half will be unwound by the impact of interest rate cuts already announced by the RBA, so the +8% jump last week looks overdone
  • CBA is now on a +40% premium to its Australian banking peer group, its highest premium, and is on 18x forward earnings making it the most expensive major banking group globally right now

CSL (CSL) results were excellent

  • CSL results were excellent and the company was fortunately in a position to moderately upgrade earnings guidance
  • Having outmanoeuvred the competition on blood collection centre growth in the US particularly, CSL was in the enviable position of being able to post strong +17% volume growth in IG and, along with price rises, blood products sales growth pf +26%
  • CSL is a great company, but much like CBA, it now trades on its highest forward earnings multiple and premium to the ASX200

Telstra (TLS) results were sound

  • TLS results were fine with mobile subscriber growth good, but average revenues a little light
  • Fixed line division revenues and profits continue to implode at a faster rate than expected, but encouragingly data and network access services (NAS) are both doing well as an offset
  • The stock fell last week more so because of the ACCC approval of the TPG/Vodafone merger, but that shouldn’t be a point of concern and we continue to view TLS favourably at current levels

Challenger (CGF) results were solid

  • CGF results were a pleasant surprise and the company was able to point with confidence to a profit for the full year at the top end of their $500-550m pre-tax profit guidance
  • Whilst retail annuity sales remained pressured by low returns and ongoing advice industry disruption, CGF were successful in selling significant volumes into the Japanese market and in generating several large scale wholesale contracts for guaranteed returns which not only has underpinned current results, but augers well for the likely demand for their investment skillsets as demand increases for guaranteed income products from June 2021 as part of new government legislation
  • As happy as we were with the results, we do think CGF shares are now quite fully valued, having bounced +65% from their lows and our last entry point
  • We would consider lightening holdings in the mid $10’s

AMCOR (AMC) results were uneventful

  • Though AMC upgraded full year profit guidance, the upgrade was largely driven by non-operational factors and hence the shares gave back some recently achieved ground
  • The flexible division continues to do well and is benefiting from increased cost synergies born of the recent BEMIS acquisition however the rigid plastics business remains stagnant
  • Though an unexciting stock for now, we like the defensive nature of AMC’s business, and on a de-rated 15x earnings and 7%+ free cash flow yield we think the stock remains good value for patient investors.

Downer (DOW) results were disappointing

  • Cashflows were poor in the interim result ad consequentially DOW net debt was materially higher than analyst expectations
  • That said, DOW expect cashflow conversion to improve to normal in the second half, and coupled with the likely asset sales expected imminently, we should expect to see a significantly de-geared DOW balance sheet by June year end
  • The simplification of DOW’s business to transport, utility and facilities management services is a good thing and will reduce capital intensity of the business and likely see a re-rating from its current valuation
  • We expect a successful sale of both Mining and Spotless Laundries to yield around $1bn in proceeds and for the stock to rebound back into the mid-high $7’s
  • In the mid $6’s we think the stock looks increasingly good value

IOOF (IFL) results are due this Tuesday

  • IFL have already largely pre-announced their interim profit figures, however investors have sold IFL down -15% from its highs on concerns relating to provisions made against ‘no advice’ following industry revelations at last year’s Royal Commission
  • Whilst we wouldn’t rule out a rise in potential provisions in the order of $100-150m, we would note that the sell-off has taken some $400m off the market value of IFL, leaving the stock now back on <12 2021 earnings and with a 6%+ fully-franked dividend yield
  • We believe that pending Tuesday’s results, IFL could be looking good value again in the mid-high $6 range

Observations from the past week

Port Hedland Iron Ore Exports plummet

The chart below shows the weekly iron ore export tonnage from major Pilbara port, Port Hedland in the 7 days up until last Monday.

Source: Bloomberg

The next data release is Tuesday this week for the previous 7 days.

You can see how export volumes collapsed to half their typical weekly volumes in early February in clear response to the major industrial restrictions in China post the outbreak of COVID-19 in late December.

Port Hedland is the major iron ore export port alongside Dampier and Cape Lambert and has a capacity of ~500mt – over half of Australia’s near 900mt of iron ore exported each year.

BHP, Fortescue (FMG) and Hancock Prospecting (Roy Hill mine) are the major exporters from Port Hedland.

Should the virus impact continue to hamper typical Chinese construction activity then it is quite apparent that Australia’s iron ore companies, the country’s trade balance and ultimately, Australia’s long touted fiscal surplus seem at risk.

Looking ahead

  • Monday: Earnings from Brambles (BXB), QBE (QBE)
  • Tuesday: AU RBA Meeting minutes, US Empire Manufacturing (FEB), NAHB Housing Index (FEB), Earnings from BHP (BHP), IOOF (IFL), Coles (COL), APA (APA), Cochlear (COH)
  • Wednesday: AU Westpac Leading Index (JAN), AU Skilled Vacancies (JAN), Wage Price Index (Q$), US Housing Starts/Building Permits (JAN), Earnings from Stockland (SGP), Crown (CWN), Fortescue (FMG), Dominoes (DMP), Tabcorp (TAH), Webjet (WEB), Vocus (VOC), Wesfarmers (WES)
  • Thursday: AU Employment (JAN), US FOMC Meeting Minutes, US Philadelphia Fed Business Outlook (FEB), Earnings from Origin (ORG), QANTAS (QAN), Medibank (MPL), Domain (DG), Sydney Airport (SYD), Coca Cola Amatil (CCL), SANTOS (STO)
  • Friday: AU CBA Manufacturing & Service Sector PMI (FEB), US Markit Manufacturing & Service Sector PMI (FEB), Earnings from Link (LNK), Platinum (PTM), BWX (BWX)

Australian corporate reporting remains the domestic market focus with BHP leading the charge in what will again be a busy week.

Markets are equally looking for signs of a return to business as usual in China, though as of this weekend there is scant evidence in support of this.

I would suggest watching major China manufacturing play Foxconn as a good guide for the progress or not of returning back to business as usual since the company is the largest non-domestic private employer in China and a major manufacturer of Apple product.

Also, the flash February purchasing manager activity to be released globally on Friday will be the first sign investors get to see from companies as to their forward purchase intentions in the wake of COVID-19.

Australian employment numbers on Thursday will be scrutinised also.

Friday 5pm values

All Ordinaries 7082+110+1.6%
S&P / ASX 2007130+108+1.5%
Property Trust Index1706+26+1.5%
Utilities Index8345+257+3.2%
Financials Index6487+227+3.6%
Materials Index13830-111-0.8%

Friday closing values

U.S. S&P 5003380+53+1.6%
London’s FTSE7409-57-0.8%
Japan’s Nikkei23687-140-0.6%
Hang Seng27815+411+1.5%
China’s Shanghai2917+42+1.5%

Key dividends

  • Monday 17th February 2020: Div Pay Date – NABHA, Qualitas Real Income (QRI)
  • Tuesday 18th February 2020: Div Ex-Date – Computershare (CPU), Insurance Australia (IAG), Magellan (MFG)
  • Wednesday 19th February 2020: Div Ex-Date – Commonwealth Bank (CBA), Suncorp (SUN)
  • Thursday 20th February 2020: Div Ex-Date – ANZPD, JB Hi Fi (JBH)
  • Friday 21st February 2020: N/A

The information in this video and 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. 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.


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