Weekly Market Update – 20 September 2021

Markets marginally higher despite falling iron ore prices and disappointing employment data

A broad-based rally by the energy sector ultimately drove markets higher last week. The MSCI World Index rallied +0.6% in AUD terms bolstered by a weaker AUD which fell -1%.

Iron ore once again fell heavily (-19%) to trade at US$105/tonne and has now slid for eight of the last nine weeks. Given RIO, BHP and Fortescue (FMG) make up over 9% of the ASX200 it is pleasing that the index has managed to trade steadily over the same time frame.

We finally received some evidence that inflation in the US may indeed prove to be transitory. US CPI rose by less than forecast in August (+0.3%) and +5.3% annually. This means inflation grew at its slowest pace in six months suggesting inflation may have peaked.

The Federal Reserve has consistently stated that recent inflationary spikes were unlikely to be sustained so the latest data eases pressure to hike rates.

Locally, employment data for August fell to a 12-year low of 4.5%. The drop in unemployment was directly correlated to a drop in the participation rate which disappointingly fell a further -0.8% as the number of people giving up looking for work increased due to COVID lockdowns in VIC, NSW and the ACT.

We would strongly caution against relying on the headline unemployment number as a sign of labour strength in any capacity. A reduction in the participation rate is far more telling than a reduction in the unemployment rate and the fact that underemployment climbed to 9.3% really highlights the weakness in these numbers.    

FY22 Outlook

The growing headwinds of extended lockdowns and continued supply chain constraints remain a clear negative for earnings visibility in FY22.

Earnings expectations are likely to moderate with the delta variant further weighing on economic activity and disrupting supply chains. A critical milestone for government restrictions to ease is for the eligible Australian population to reach vaccine rates of 70%-80% in the coming months.

With government restrictions set to ease as the vaccine rates reach 70%+ in Australia, reopening is a vital part in the restoration of the economy.

The level of heightened uncertainty posed by the pandemic has further underlined the importance of owning stocks that are industry leaders in the defensive sectors of consumer & industrial staples and healthcare sectors.

We firmly believe that earnings resilience, industry leadership and strong balance sheets remain valuable attributes of the PRIME Australian Equity Growth SMA in delivering high quality earnings and dividends to our investors.

While earnings momentum is expected to slow in the coming quarter, earnings growth is still expected to be in the vicinity of ~10% in FY22, supported by accommodative policy settings and the expectation that higher vaccine rates will ultimately lead to profit momentum returning.

Thoughts following investor days – Brambles (BXB)

Key portfolio holdings Brambles (BXB) and Telstra (TLS) both held investor days last week.

Of the two BXB fared worst falling -9% for the week after providing guidance for revenue growth in FY22-25 to be in the 5-7% range.

Whilst this was slightly ahead of current market expectations, FY22 profit growth is expected to lag at around 1-2% after US$50m of investment costs whilst FY23 profit is likely to be impacted by an additional US$20m of transformational costs.

We are encouraged by management’s decision to reinvest back in the business and think the selloff in BXB shares was overly harsh.

As investors, we understand the importance of allocating capital and reinvesting back into the business drives longer term growth. Whilst the focus on reinvesting back into the business in FY22 has the potential to see some short term downgrades, we prefer to look out longer given our long term investment horizon.

We believe BXB could become a structurally better business following the reinvestment through better asset efficiency. With BXB having previously flagged that the ongoing share buy-back program will recommence which will further drive EPS growth, we were encouraged by the BXB investor day.

In our view, shares were weaker due to the rather benign outlook for FY22 but we believe investors have focused too heavily on the short term and as a result may look to add to holdings upon any further weakness.

Telstra (TLS)

Telstra shares ended the week +1% higher after its investor day revealed it was targeting a further $500m cost reduction from FY23 through FY25.

Telstra’s T25 strategy highlights that earnings headwinds following years of sustained NBN pressures and more recently the impacts of COVID-19 appear to be subsiding.

We believe TLS can deliver on its plans to grow EBITDA by mid-single digits through FY25 which would support management in its aim to increase the dividend and return excess cash to shareholders.

Markets like certainty or at least some degree of guidance so when TLS stated it is “confident in maintaining a minimum 16 cents per share fully franked dividend, subject to no unexpected material events” investors were natural buyers of the stock.

At current levels, this implies a 4% dividend before franking credits.

TLS has guided to $7.5–8b of EBITDA in FY23 on top of the $7.0-$7.3b guidance in FY22. If you apply a “mid-single digit growth” (our base case is 5%) then we forecast TLS could generate approximately $8.5b in EBITDA by FY25.

Factoring in some one-off costs and depreciation expenses we believe earnings per share (EPS) could then rise to closer to 20c (currently 15.6c) which at an estimated 90% payout ratio would equate to a 18c FY dividend.

Portfolio Consideration

Endeavour Group (EDV) is one stock that recently made its way into the portfolio by virtue of being spun out of Woolworths Group (WOW).

EDV is Australia’s largest retail drinks and hospitality business, with 1,643 retail stores (BWS & Dan Murphy) and 339 hotels.

EDV’s retail drinks division has been a clear beneficiary of the shift to off-premise liquor consumption with online sales growing strongly throughout the COVID pandemic. Off-premise liquor sales grew strongly +8.6% in FY21, and sales continue to track strongly for FY22.

Whilst off premise consumption patterns should moderate as the economy reopens, the retail division remains well placed to benefit from greater penetration of its own label brands (Pinnacle Drinks) and the trends in the premiumization of liquor consumption.

EDV remains very much on our radar with the view to adding to our existing holding when the share price presents an attractive opportunity to do so. 

ASX Weekly Wrap

The ASX200 was flat last week. 

Small caps and mid-caps outperformed the broader market rising +0.3% and +0.1% respectively whilst large caps lagged with the ASX50 falling -0.1%.

Energy stocks led the way rising +3.4% with the oil price rallying +3.3% after US crude oil stockpiles fell to their lowest level September 2019. The primary reason for this drawdown was Hurricane Ida which hit the US in late August causing refineries to shut down and offshore drilling to halt.

Tech stocks advanced +2% with software solutions company WiseTech Global (WTC) climbing +8% and data centre operator Nextdc (NXT) adding +3%.

Weighing on performance were the miners which fell -3.7% on the back of weaker iron ore prices.

Utilities were also dragged lower (-1.7%) after AGL Energy (AGL) warned earnings would be lower than initially forecast. AGL’s profit downgrade is primarily a function of lower wholesale electricity prices and higher wholesale gas costs.

Looking ahead

Monday 20th September 2021 – Friday 24th September 2021

  • Monday: N/A
  • Tuesday: AU RBA Meeting Minutes, US Building Permits (AUG)
  • Wednesday: AU Westpac Leading Index (AUG), CN Loan Prime Rate
  • Thursday: US Federal Reserve Interest Rate Decision, UK BoE Interest Rate decision
  • Friday: UK Consumer Confidence

Friday 17th September, 5pm values

 IndexChange%
All Ordinaries 7703-3-0.0%
S&P / ASX 2007404-3-0.0%
Property Trust Index1665+42+2.6%
Utilities Index5802-104-1.8%
Financials Index6729+32+0.5%
Materials Index15424-590-3.7%

Friday 17th September, closing values

 IndexChange%
U.S. S&P 5004433-26-0.6%
London’s FTSE6964-65-0.9%
Japan’s Nikkei30500+118+0.4%
Hang Seng24921-1285-4.9%
China’s Shanghai3614-89-2.4%

Key dividends

Monday 20th September 2021 – Friday 24th September 2021

  • Monday: Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), ANZPI (ANZPI), NABPE (NABPE), WBCPI (WBCPI)
  • Tuesday: Div Ex-Date – Qube Holdings (QUB)
    Div Pay-Date – BHP (BHP), Oil Search (OSH), Santos Limited (STO)
  • Wednesday: Div Ex-Date – Adbri Limited (ABC)
    Div Pay-Date – Challenger (CGF), Endeavour Group (EDV), Insurance Australia Group (IAG), IOOF Holdings (IFL), Sonic Healthcare (SHL)
  • Thursday: Div Ex-Date – Cochlear Limited (COH)
    Div Pay-Date – RIO (RIO), ResMed Inc (RMD), Telstra (TLS)  
  • Friday: Div Pay-Date – ANZPE (ANZPE),  ANZPF (ANZPF), Woodside Petroleum (WPL)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729Gina McIntoshT: (07) 3557 2557

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 (www.primefinancial.com.au/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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