Weekly Market Update (Issue 571) – 29 October 2019

Securities mentioned this week

  • Costa Group (CGC), Woolworths (WOW)

Key market themes

Trade tensions

  • Markets seem comfortable with the progress being made towards a ‘phase one’ deal between China and the U.S, which both sides hope will be able to be signed and sealed by Trump and Xi on the sideline to the APEC summit in Chile in mid-November
  • The deal largely addresses agricultural trade which benefits both sides, particularly the Chinese, who are being faced with skyrocketing pork prices as stocks across Asia have been decimated by the African swine fever
  • China have agreed to buy US$40-50bn of US primary exports assuming the US continues to withhold the mid-October tariff rise, however, plans for the December US tariff hike remain unknown

Economic data released

  • Australian September skilled vacancies fell again last month, taking the 12mth fall to -7% annually and marking the 9th straight month of declines.
  • US manufacturing in October has definitely flattened out, with the Richmond Fed manufacturing survey bouncing and the provisional US Manufacturing PMI similarly posting a small gain

Observations from the past week

Costa Group (CGC) shares were suspended last week pending an update to FY2019 earnings guidance.

  • A likely earnings downgrade is sure to come, which will be its 4th in the space of 12 months, and its more likely than not, that CGC will seek to repair its balance sheet by way of equity raising.
  • CGC earnings forecasts have fallen well over -20% in the past year, impacted by a variety of issues across both its local and African operations, but the group do have excellent greenfield growth ahead of them in the coming years given heavy investment since their 2015 IPO.
  • Having risen 4x-fold since its 2015 IPO to reach a share price peak above $8 during 2018, its highly likely that the impending news from CGC will see the stock back under $3.00.
  • Depending on the content of the outlook and the size of any raising, we might finally take a serious look at investing in the company for significant long term upside.

Woolworths (WOW) shares continue to defy gravity, trading at near enough to their all-time high as investors continue to place a ridiculously high premium on the stock for its perceived earnings certainty.

  • The shares are almost certain to see downside in 2020 as the group de-merge the Endeavour Drinks business from the wider WOW group – WOW shares currently trade on an eye-wateringly high 26x future earnings and a 65% premium to the local market.
  • The P/E of 26x makes the stock as highly valued as it was in the lead-up to the GFC and is far from justified given its barely single digit earnings growth nor <3% dividend yield.
  • As investors recognize that the $10bn demerger of Endeavour Drinks will surely see Endeavour trading on at best a mid-to-high-teens P/E multiple given the maturity of its business its and exposure to hotels and gaming, that will leave the remaining WOW supermarket operation on near 30x earnings for precious little underlying growth.
  • WOW shares look incredibly overvalued at current levels and shareholders would do well to take advantage and SELL them here.

What’s interesting?

Australian national auction clearance rates have rebounded back to be in the 75% range, not far off their peak recorded during the house price boom of 2015-2017.

Whilst current volume is significantly lower than in that period, the rising clearance rate augers well for rising house prices and with that, a turn in domestic construction markets.

The chart below shows the national auction clearance rate in RED and the national house price index in WHITE and suggests we should again expect to see house price growth push back up through +10% annualized in the 2H of 2019.

We remain optimistic that Australia’s economy will improve as we enter 2020 and that it will be led by, at first, a stabilization in building activity and then a bounce in residential construction volumes.

We do believe Boral (BLD) will significantly benefit from the improvement and hold it as a key equity position.

Auction Clearance Rates lead house prices

Looking ahead

  • Tuesday – US Dallas Fed Manufacturing survey (Oct), US Consumer Confidence (Oct)
  • Wednesday – AU CPI (Q3), US ADP Employment (Oct), US GDP (Q3), US FOMC Meeting
  • Thursday – AU ANZ Bank (ANZ) FY19 results, AU Building Approvals (Sep), AU Private Sector Credit (Sep), US Employment Cost Index (Sep), US Chicago Fed PMI (Oct)
  • Friday – AU Macquarie Bank (MQG) 1H FY20 results, AU AIG Manufacturing survey (Oct), AU CBA Manufacturing survey (Oct), US Employment (Oct)

Beyond ANZ and MQG’s results this week locally, markets will focus on results in the US from Alphabet (GOOG) tonight and then Apple (AAPL) and Facebook (FB) on Wednesday night.

Next week Westpac (WBC) will report on Monday, Pendal (PDL) on Wednesday, NAB (NAB) on Thursday and AMCOR (AMC) on Friday.

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 (available here)  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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