Weekly Market Update (Issue 570) – 21 October 2019

Securities mentioned this week

  • IOOF (IFL), Challenger (CGF), Afterpay (APT), Boral (BLD), BHP (BHP), Rio Tinto (RIO)

Key market themes

Trade tensions >

  • It was a quiet week on the trade front albeit the Chinese government have said they would expect the US to roll back existing tariffs for them to be able to commit to the type of agricultural buying quantities President Trump had alluded to at last week’s supposed agreement.
  • This issue will again likely escalate as we get closer to the next planned tariff implementation date by the United States, being the 15th of December 2019.

Economic data released

Australian September employment figures remained surprisingly strong, with 26,200 new full-time jobs created and an unemployment rate of 5.2%.

The data continues to defy the weakness seen in job advertising – skilled vacancies are -6% on last year and the wider ANZ job advertisement figures are down -11% on 2018.

Early October manufacturing data in the US seems to have stabilised with the Empire (New York) manufacturing sentiment bouncing modestly this month

Chinese Q3 GDP grew at an annualised rate of 6% which is the lowest figure since the data series started nearly 30 years ago in 1992.

China’s economy continues to soften as the impact of US tariff’s on US$360bn of Chinese exports to the US weighs, though we would expect to see continued, measured fiscal and monetary stimulus afforded by authorities to mitigate the significant slowing.

US housing sector trends remain positive with the October NAHB Housing Market Index jumping again in October and just shy of the record optimism we saw in the sector back at the start of 2018.

Falling mortgage interest rates continue to generate strong homebuilding activity and September Housing Starts and Building Permits rare up +12% and +8% on the previous year respectively.

Observations from the past week

IOOF (IFL) confirmed our expectations and announced last week that they were set to complete the ANZ Wealth transaction and at discounted price.

  • Having announced the planned acquisition of ANZ Wealth for $975m as far back as November 2017, the two groups finally confirmed the transaction would go ahead last week, and at a nicely discounted price of $825m.
  • IFL’s shares jumped +18% on the week and the stock is now up over 40% for the year-to-date.
  • We think the shares will settle above $8+ before the year ends now that the corporate uncertainty is beginning to lift.
  • In a highly fragmented industry where the landscape is awash with the opportunity to consolidate and rationalize cost, we think 11x 2021 earnings is simply way too cheap for a company with the industry positioning and strength of cashflows that IFL has.
  • This stock will continue higher in the years ahead.

Challenger (CGF) reported a resilient first quarter in the face of falling interest rates and the stock bounced accordingly.

  • The stock bounced over +10% last week after surprising investors with strong net annuity sales growth in the Q1, albeit via the lower margin wholesale channel and via higher risk guaranteed income products.
  • The company re-affirmed their 2020 normalized net profit target of $500-550m.
  • The market response demonstrates that investor expectations are very low for CGF and that should we see an improvement in the domestic retail channel as the post-Royal Commission advice disruption settles, then CGF shares can go a lot higher.

Afterpay (APT) shares were one of the worst performers during the week, falling -17% after UBS initiated coverage of the stock with a contrarian SELL rating.

  • The prevailing issue raised in the report was APT’s ‘no surcharge’ clause which prevents merchants from passing on the cost of APT’s platform back to the consumer in a manner such as that done by the likes of Mastercard, American Express and Visa.
  • The suggestion being that if merchants were in the position to do this, potentially the Afterpay platform might lose its appeal with customers.
  • The RBA announced last week it would conduct a review into the ‘buy now, pay later’ sector to determine whether retailers required help recovering the costs.
  • We think its quite likely that this issue will prove to be as impactful on APT as investor fears were over the Senate and ACCC reviews of predatory lending and the more recent AUSTRAC investigation of APT over money laundering issues.
  • Our recommended positions on APT have been significantly reduced in recent months as we felt the stock was beginning to price in much of the blue-sky opportunity, however we remain committed to the long-term growth story and retain a recommended holding.
  • Weakness like that seen last week opens up the opportunity in time to potentially add to holdings again.

Boral (BLD) was the subject of M&A chatter during the week with The Australian publishing an article suggesting US private equity giant, Lone Star, could be considering a bid for the company.

  • The stock bounced modestly but not with the vigour that might imply investors thought a bid was soon to arrive.
  • That said, BLD’s business is widely disparate and has the makings of a break-up for any financial or corporate bidder willing to undertake the task.
  • We think the underlying demand picture for US residential construction is strong and that expectations on BLD earnings are now quite low, which makes us feel like the risk/reward offered by BLD shares at current levels under $5 look particularly attractive.

What’s interesting?

We note, with some modest trepidation, that though the Australian share-market is +18% year-to-date and within 3% of its high, that the Australian mining sector has not only foregone its sector leadership, but in fact underperformed quite materially over the last 3 months.

As the chart below shows, the Australian mining sector does a very good job of pre-empting the performance of the wider market.

As the leading edge of the market in a cyclical earnings sense, investor appetite for miners tends to offer an early look at future risk appetite across the wider market.

In red is the ‘relative’ performance of the Australian material sector against the ASX200 benchmark, and the white line is the ASX200 share price index lagged by 6 weeks.

The underperformance of Australian miners since Q2 seems set to presage consolidation in the wider market in the weeks and months ahead.

The slowing Chinese economy is the main culprit for recent weakening in iron ore prices from their July highs at $110/ton to todays level at a touch over $80/ton.

BHP (BHP) and Rio Tinto (RIO) share prices have underperformed the market by almost -20% since their peak in April, although Fortescue (FMG) has fared marginally better.

Mining sector relative performance (in red) regularly leads the wider ASX200 index (in white)

Looking ahead

  • Monday – N/A
  • Tuesday – N/A
  • Wednesday – AU US Richmond Fed manufacturing (Oct)
  • Thursday – AU CBA Manufacturing & Service sector PMI’s (Oct), US Markit Manufacturing & Service sector PMI’s (Oct)
  • Friday – US Michigan Consumer sentiment (Oct)

Major corporate results in the US this week will come from Microsoft (MSFT) and Amazon (AMZN), and then the following week will see Apple (AAPL), Google (GOOG) and Facebook (FB) all report.

In Australia, the major banks and Pendal (PDL) will report September year end results in 2-3 weeks.

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.




Weekly Market Update (Issue 569) – 14 October 2019

Securities mentioned this week

  • Pendal (PDL), Australian major banks

Key market themes

Slowing global growth >

  • U.S. Small Business Confidence eased back to be just above a 3-year low last month, and within the release hiring and employee compensation plans also stumbled.
  • The U.S jobs market has definitely peaked with job opening numbers also falling last month, and now at an 18-month low

Trade tensions >

  • It was hard to miss the headlines from Friday night that signaled the prospect of a near-term truce between the U.S and China on trade, but the reality is far less encouraging
  • Yes, China has agreed to purchase $40-50bn of agricultural product from the U.S, and yes, the U.S have agreed not to increase tariffs in mid-October, but beyond that, the headlines made far less compelling reading
  • No progress has been made on U.S concerns for Chinese intellectual property theft nor on their desire to halt Chinese subsidies to major state-owned groups and nor does there seem to be much hope of progress in the near future
  • The tariff hikes slated for October and again mid-December could still be brought into play should the U.S perceive that China is dragging their feet on any number of issues, and that simply means that the pall of uncertainty that has been cast over the global economy, and specifically business capex intentions, has yet to lift

Economic data released

  • Australian NAB Business Confidence figures lolled around at a 5-year low last month
  • Australian Westpac Consumer Confidence collapsed to a 4-year low last month, with households concerned on future family finances

Observations from the past week

Pendal (PDL) on Friday posted another disappointing quarter of fund-flows from both its domestic (ex-Westpac) franchise and from its growth engine, global equity fund manager, J O Hambro.

  • The September quarter marked the 8th in a row of outflow and we would note that much of the J O Hambro funds continue to trade under their high watermark, and hence are ineligible for performance fees.
  • Analysts cut earnings back between 0% and 5%.
  • We weren’t surprised by the release and acknowledge that much of J O Hambro’s core European and global equity franchise continues to trail their peer group on recent year performance.
  • However, we believe that PDL is now being valued with scant expectation for a turnaround in their fund performance, meaning that any improvements have the ability to positively surprise in a highly meaningful way.
  • We would remind investors that only 2 years ago, investors were questioning Magellan’s (MFG) global equity performance and lauding that of the J O Hambro stable of funds, and that it was PDL trading on the premium rating and MFG on the discounted multiple.
  • On 12.5x earnings with significant net cash and investments ($200-300m) on its balance sheet, we think PDL is a bargain.
  • The 7% dividend yield (partially franked) should offer support on the stock at current levels.

This morning the Federal Treasurer tasked the competition authority to investigate the major banks and their inability to pass on the full 0.75% of RBA rate cuts made in the past 12 months.

  • The major banks passed on approximately 0.57% of the 3x 0.25% cuts.
  • Whilst we don’t think this inquiry will yield any major headlines of collusion nor fines of any substance, we do think this again highlights the business and regulatory pressure the sector remains under and that any easing in recent scrutiny is still some time off.
  • Three of the four major banks (excluding Commonwealth) will report full year profit figures in the coming month, with ANZ (ANZ) kicking things off on the 30th October and Westpac (WBC) and NAB (NAB) following suit in the following 10 days.
  • Earnings are unlikely to be anything but downbeat and we think, as is widely expected, that WBC will cut its annual dividend from $1.88 per share to around $1.60 or $1.70.
  • Our recommended Australian bank weightings are around 50% of their current ASX200 index weights.

Observations from the past week

Falling U.S. interest rates are having the desired effect on U.S housing markets with last month posting a spike in both building permits and housing starts to their highest level since pre-GFC (see chart below).

U.S. average 30-year mortgage rates have fallen from 4.7% to 3.7% in the last year and this has seen a wave refinancing and new purchase activity which has fueled domestic consumption and new housing activity.

Core portfolio holdings in Boral (BLD) and Reliance Worldwide (RWC) should benefit from the rising activity with both groups making around 60% of their total earnings from North American construction markets.

RWC has bounced well after its recent downgrade, but we feel BLD has significant upside potential as there remains a major mismatch between company targets for their disappointing Headwaters fly-ash acquisition and market estimates.

U.S. Housing Markets strengthening – building permits (white) and housing starts (red) at their highest level since the GFC

Looking ahead

  • Monday – N/A
  • Tuesday – AU RBA Meeting minutes, US Empire Manufacturing (Oct)
  • Wednesday – AU Westpac Leading Index (Sep), US Retail Sales (Sep), NAHB Housing Index (Oct)
  • Thursday – AU Employment (Sep), US Building Permits/Housing Starts (Sep), Philadelphia Fed Business Outlook (Oct)
  • Friday – N/A

U.S. Q3 corporate reporting commences in volume this week with many of the major banks due to report (Goldman Sachs, Citigroup, Wells Fargo, Bank of America) and industrial (Honeywell, CSX) and technology (Netflix, IBM, Microsoft) companies also.

Next week and the week after sees results from the major U.S technology platforms Alphabet, Amazon, Facebook and Apple.

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.




Weekly Market Update (Issue 568) – 7 October 2019

Securities mentioned this week

  • Nufarm (NUF), Downer (DOW), Westpac (WBC), BWX (BWX)

Key market themes

Slowing global growth >

  • U.S. Manufacturing sector activity fell to a 10-year low and U.S. Service sector activity fell to a 3-year low last week, causing rightful concern that the 18-month long trade war between China and the U.S. had finally begun to bite on U.S. business confidence.

Trade tensions >

  • China’s Vice Premier Liu He will return for the next round of talks this Thursday in the U.S. but press reports over the weekend suggest the Chinese will not be willing to discuss changes to China’s policy of government subsidies to the private economy nor reforms to their treatment of intellectual property.
  • This would indicate a hardening in China’s negotiating position, perhaps feeling emboldened by President Trump’s domestic pressures.
  • Given the tariff war was kicked off precisely because of the United States’ perceived injustice at these two key Chinese policies, this is hardly an encouraging sign.
  • Both countries need a win, but it seems like any win of substance that sees the Chinese take a backward step on the Made in China 2025 or the U.S. removing tariffs already implemented is as far off as it has been.
  • Given that it is the uncertainty surrounding tariff policy that has rattled global business confidence and industrial demand, it seems any interim deal that fails to address this issue, will similarly fail to bolster the rapidly waning global business outlook.

Economic data released

Australian Building Approvals for August showed little sign of recovery, falling month on month in absolute terms for both new houses and apartments.

  • Building Approvals remain down -20% annually, and though we feel confident these numbers will begin to look prettier by early 2020, the lack of liquidity in the local economy remains a major factor.
  • Last month’s bank lending for owner occupiers showed its slowest annual rate of growth since 2013, rising at just over +4.5%.

Private Sector credit for August rose at its slowest annual rate since 2011 and Australian broad money growth collapsed back to near its lowest level since the 1990’s recession also.

  • Private sector credit grew at +2.9% and Australian M3 money supply a measly +1.9% in the 12 months to August, highlighting that even in spite of the multiple interest rate cuts, domestic money supply remains significantly constrained.

Observations from the past week

Australian Banks came under heavy selling pressure last week following the RBA’s decision to further cut interest rates to a record low of 0.75%.

It would seem a given that domestic rates fall again, perhaps before year end, to 0.50%.

Remember of course that the RBA is cutting domestic interest rates in large part to avoid any unnecessary upward pressure on the Australian Dollar, but that it is rapidly losing firepower, particularly as it seems increasingly likely that the U.S. Federal Reserve could be forced into a more aggressive rate-cutting cycle than it currently indicates.

Though all of the major banks failed to pass the full RBA rate cut, bank profitability is being rapidly eroded both by lower rates, but also by the increasing exodus of consumer deposits from banks as households chase higher returns elsewhere.

Australian retail bank business models are premised on cheap deposit funding from households and with collapsing domestic rates, profit margins are being hit on both the asset and liability side.

Only as interest rate hedges begin to roll off in the coming 2-3 years will we see the real impact on bank profitability, but as we have highlighted before, the top-rated analysts on the sector are looking for future earnings declines and future dividend cuts from Australia’s major banks.

We remain significantly underweight in our recommended weighting to Australian major banks.

Looking ahead

  • Monday – AU Australian Industry Group Construction survey (Sep)
  • Tuesday – AU ANZ Job Advertisements (Sep), AU NAB Business Confidence (Sep), U.S. NFIB Small Business Confidence (Sep)
  • Wednesday – AU Westpac Consumer Confidence (Sep), U.S. Job Openings (Aug)
  • Thursday – U.S. Federal Reserve meeting minutes, U.S. CPI (Sep)
  • Friday –U.S. Michigan Consumer Confidence (Oct)

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.




Weekly Market Update (Issue 567) – 30 September 2019

Securities mentioned this week

  • Nufarm (NUF), Downer (DOW), Westpac (WBC), BWX (BWX)

Key market themes

Slowing global growth >

Little to add from last week as data was mixed – some softening in US consumer confidence, but little else to report

Trade tensions >

China’s Vice Premier Liu He is reported as planning to visit the United States for the next round of trade talks next week on October 10th.

Over the weekend the Trump Administration floated the idea that they could enforce restrictions on portfolio investment flows by US firms into China and potentially even restrict access to US capital markets for Chinese-controlled entities.

Whilst any imposition of such restrictions was said to be a long way off, the suggestion was enough to cause a significant scare to investors who marked down the share price of major NASDAQ-listed Chinese stocks on Friday night – Alibaba (BABA) was down -5% as an example.

DE-RISKING (a new theme)

We’d highlight increasing evidence of local investors reducing share-market risk and how we have begun to similarly move to higher cash holdings after the ASX200’s stellar year-to-date rise

In the past fortnight we have reduced exposures to Westpac (WBC) and BWX (BWX) after their strong respective rises.

We fear WBC is likely to cut its dividend come results in November, and in the case of BWX, the share price has doubled in under 2 months.

Beyond our own moves, it is worth noting that recent market high flyers such as Clinuvel (CUV), Appen (APX), Pro-Medicus (PME) and Nearmap (NEA) are down some -30% to -40% in barely a few months and on no news – indicative of a market in which investors are locking in speculative gains.

Economic data released

Chinese September manufacturing data was flat on last month with little worth mentioning.

Australian Private Sector credit for August rose at its slowest annual rate since 2011 and Australian broad money growth collapsed back to near its lowest level since the 1990’s recession also.

Private sector credit grew at +2.9% and Australian M3 money supply a measly +1.9% in the 12 months to August, highlighting that even in spite of the multiple interest rate cuts, domestic money supply remains significantly constrained.

Observations from the past week

Nufarm (NUF) this morning positively surprised the market with a left-field announcement it had sold its profitable Latin American crop protection business to major shareholder Sumitomo Chemical for almost $1.2bn.

  • As I type, the shares are +27% having opened +50% higher initially.
  • Understandably the news is extremely positive in that it alleviates NUF’s balance sheet issue in one fell swoop, but also that it involves the sale of a major business unit on roughly 2x the multiple the wider group had been previously trading on in market.
  • Whilst there are swings and roundabouts in terms of the impact on NUF going forward, the significantly de-geared nature of the business following this sale trump’s any earnings dilution felt, particularly since investors will soon begin focusing on the potential earnings growth from NUF’s omega-3 infused canola seed that today the company confirmed would begin contributing to profit in 2021.
  • The shares today stand at around 10-11x forward earnings, but on an infinitely healthier balance sheet and with material prospect for improving earnings from its seed’s operation and from the recent European patent acquisitions made in 2018.

Downer (DOW) was in the press last week with suggestions it could put the Spotless Laundries business up for sale.

  • Considering that it is widely expected to sell its contract mining business in the coming year, the additional sale of Spotless Laundries could take the potential total asset sale proceeds for DOW to well over $1bn and a likely share buyback of substance.
  • We think momentum in DOW remains strong and that the stock is well placed to push towards $9 in the coming year.

What’s interesting?

All investors should be paying close attention to US Presidential election issues even in spite of the fact the election itself is not until November next year.

This is because its impact will be felt in markets well before then, and likely as early Q1 2020 when the initial Democrat caucuses commence (Iowa is February 3rd and New Hampshire a week later).

The reason we are focused on the Democrats is because two of the leading candidates to face off against President Trump, Senators Elizabeth Warren and Bernie Sanders, support policy in favour of greater government regulation, expanded national healthcare, free college tuition and higher taxes on wealthy individuals.

With an economy and share-market hugely attuned and linked to low regulation and the significant corporate profitability this has engendered, any prospect that either of Senator Warren or Sanders could usurp President Trump will be extremely closely monitored by investors.

In fact, the surge by Elizabeth Warren in the polls over the past few months, should have investors paying attention (see the chart below from Predictit.org) as a Warren presidency would likely cause not only a significant share-market fall, but potentially even a medium term sell off in government bond markets as well.

Senator Warren is running on a platform that promises to levy a 2% ‘wealth tax’ on those whose net worth is over US$50m and to spend these funds on providing free college tuition and a concept, as yet undefined, of nationalized healthcare.

She is a fierce consumer advocate and a supporter of increased corporate regulation and is also promising to provide increased distance between vested interests (corporate lobbyists) and US policymaking.

U.S. Democratic Candidate ‘market movements’ – Warren surging ahead of Biden

Looking ahead

  • Monday – AU Private Sector Credit (Aug), CH Manufacturing & Non-Manufacturing PMI (Sep), US MNI Chicago PMI (Sep)
  • Tuesday – AU Australian Industry Group Manufacturing survey (Sep), AU CBA Manufacturing survey (Sep), AU Building Approvals (Aug), AU RBA Meeting, US ISM (Sep)
  • Wednesday – US ADP Employment (Sep)
  • Thursday – AU Australian Industry Group Services survey (Sep), AU CBA Services survey, AU Trade Balance (Aug), US Markit Services PMI (Sep)
  • Friday – AU Retail Sales (Aug), US Employment (Sep)

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.




Weekly Market Update (Issue 566) – 23 September 2019

Securities mentioned this week

  • IOOF (IFL), Webjet (WEB)

Key market themes

Slowing global growth >

Little to add

Trade tensions >

Markets still anticipating talks in October

Economic data released

Chinese industrial output for August fell to its lowest annual rate in 17 years, up only +4.4% on August last year.

Australian August employment figures showed the largest loss of full-time jobs since Q2 2018 and an uptick in the unemployment rate to 5.3%.

  • That said, the local economy saw a surge of part-time work created (50,000+ jobs) and the highest domestic participation rate on record, which offset some of the headline softness.
  • All the same, the local employment picture is darkening as we have highlighted time and again for 6 months.
  • Local job advertisements are running down over -10% year-on-year and point to ongoing full-time job losses.
  • Moreover, the domestic ‘underemployment rate’ is creeping higher again and back up to 8.6% and just below its 8.8% peak, indicating that though people might be working, increasingly more of them are not working to the capacity they would like.
  • This hints at ongoing wage pressure, and to our mind, likely suggests the Morrison Government will be pressured to bring forward the 2022-23 income tax cuts perhaps as early as next year.

ANZ Weekly Consumer Confidence dropped to equal a 4-year low last week

US Federal Reserve cut interest rates by 0.25% as expected last week and gave little further indication of any growing consensus amongst the board of the need for more aggressive rate cuts.

  • We believe the Fed, like much of the corporate world, are waiting to see the outcome of next month’s trade talks before being forced into any future path on US rates.

Observations from the past week

IOOF (IFL) had some good news late last week that we hope is the start of improving investor sentiment towards the company.

  • On Friday it was announced that the Federal Court had ruled in favour of IOOF senior management in APRA’s case alleging 5 members of IOOF’s senior management had been in breach of the SIS Act.
  • This is a major victory for IFL and I would note that in spite of the unfavourable ruling to it, APRA’s Deputy Chairman Helen Rowell noted the significant efforts IFL had taken to redress corporate governance deficiencies the regulator had highlighted in recent years.
  • These remarks are significant because they go to understanding the mindset of APRA in relation to IFL since the regulator will have to approve IFL’s acquisition of ANZ Wealth should both buyer and seller confirm their intent to proceed with the transaction before the October 17th deadline.
  • We think a successful acquisition of ANZ Wealth, potentially at a reduced price to the $975m IFL agreed to pay ANZ (ANZ) way back in October 2017, will provide tremendous scale to IFL and the platform to further consolidate the Australian financial advisory industry in the wake of fallout from the Royal Commission.
  • IFL has rallied almost +35% since late August and we are pleased we had the chance to buy more stock under $5.00 in the days following results.
  • In the near term, we think a successful deal for ANZ Wealth will put the IFL share price nearer to $7.50, which is still +15% higher than todays price even after having risen +20% since the court outcome was made public on Friday morning.

Webjet (WEB) this morning announced that the impact of Thomas Cook’s liquidation on group targets would be to the tune of up to $7m in EBITDA terms from the loss of Thomas Cook wholesale revenues, and the loss of almost $50m in outstanding receivables owed to them.

  • Whilst this isn’t ideal, particularly given the time spent cultivating Thomas Cook as a potential user of the group’s blockchain initiative, the $7m of potential lost EBITDA is around 5% of group profit, and the $50m in unsecured cash owed a further 3% of group enterprise value.
  • WEB’s shares have fallen over -30% since May which we think more than accounts for the impact of Thomas Cook, and we believe the medium-term outlook for the bed-bank business remains highly compelling.
  • At $11 WEB is on <15x adjusted earnings and the group seem to have every chance of delivering multiple years of double-digit earnings growth even after adjusting for this one off hit from Thomas Cook, so we are more likely than not to consider adding to holdings on the weakness.
  • Next news-flow from WEB will be at their November 20th AGM trading statement.

What’s interesting?

Concerningly, Australia’s key leading indicator for economic activity continues to soften, reaching its lowest level in 2 years in August.

This is in spite of multiple interest rate cuts, the low-middle income tax offset one-off, bouncing auction clearance rates, new stock-market highs and the supportive impact of a soft Australian Dollar.

Slowing construction activity is definitely a major hinderance, including its impact on national employment.

Australian job advertisement volumes are down -11% annually and signal the prospect of full-time job losses in the lead up to Christmas – something we have flagged for several months but are yet to formally witness in the data.

We think Australia’s economy will bottom before the end of the year and expect a stabilization in building activity to be a catalyst for bottoming confidence.

We also think the Federal Government will be forced into upping fiscal expenditure as we move through 2020, potentially bringing forward the income tax cuts planned for 2022-23 as suggested by the Labor Opposition.

Westpac Australia Leading Index

Looking ahead

  • Monday – AU CBA Manufacturing PMI (Sep), AU CBA Services PMI (Sep), US Chicago Fed Activity Index (AUG), US Markit Manufacturing PMI (Sep), US Markit Services PMI (Sep)
  • Tuesday – AU RBA Meeting Minutes, US Richmond Fed Manufacturing (Sep), US Consumer Confidence (Sep)
  • Wednesday – AU Skilled Vacancies (Aug), US New Home Sales (Aug)
  • Thursday – AU Job Vacancies (Aug), US GDP (Q2), US Durable Goods (Aug)
  • Friday – N/A

Next Monday will be earnings from Nufarm (NUF) and investors should be mindful that November sees both Australian Annual Report season and a swathe of trading statements from companies, but also earnings from 3 of Australia’s major 4 banks (excluding CBA).

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.