Weekly Market Update (Issue 487) – 23rd February, 2018
23rd February 2018, 13:20pm
Rounding out this week sees Australian corporate reporting season largely done.
Across our portfolio of holding’s we probably came out somewhere in the middle, which as a value-styled investor, is a win in my books – buying ‘value’ is rarely rewarded during results season.
POSITIVE RESULTS FROM SEEK (SEK), CROWN (CWN) and REGIS (REG)
On the positive we had a net upgrade to SEEK’s (SEK) earnings guidance for the current year (the second in 3 months), and we also had some well-received news from Crown Resorts (CWN) in relation to the return of VIP gamblers in particular at its Melbourne property.
CWN also flattered investors with confirmation it would re-start its $400m share buyback.
At $13.60 CWN is looming large as a potential TAKE PROFIT too – stay vigilant to our correspondence in the coming weeks.
Regis Healthcare (REG) was also a pleasant surprise (many of you will say ‘about time’), and has seen a reasonable response from the market today in relation to their profit figures and confirmation of both 2018 forecast profit targets and a continuation of the group’s excellent growth profile.
THE MIDDLE GROUND – IOOF (IFL), DOWNER (DOW), OIL SEARCH (OSH), TELSTRA (TLS)
In the middle-ground we have had results from IOOF (IFL), Downer (DOW), Oil Search (OSH) and Telstra (TLS) which failed to cause much of a stir – and there is nothing wrong with that.
We love IFL in the low $10’s given the simplicity of its earnings story (internal cost out) and would encourage those of you yet to re-add it to portfolios to do so.
We also love the momentum in DOW, and though the result was mixed (higher debt, cashflow conversion at Spotless average), we think the fact that 90% of its revenue base is leveraged to an improving domestic Australian economy, and in particular infrastructure spend, augers well for future profitability.
The OSH results this week were notable not for the profit outcome (solid), but more so for the increasing consensus being formed by each of the partners as to how they will develop the massive Elk-Antelope and P’nyang gas fields in PNG.
OSH pointed to a likely development of 3 new LNG trains and the prospect of basic engineering plans being agreed before the November 2018 APEC meeting in Port Moresby.
WOODSIDE (WPL) IS THE MAIN DISAPPOINTMENT, BUT AMCOR (AMC), WOOLWORTHS (WOW), APN OUTDOOR (APO) AND QUBE (QUB) MIXED
Whilst far from problematic, we would throw each of AMCOR (AMC), QUBE (QUB), APN Outdoor (APO) and Woolworths (WOW) in the underwhelming basket.
For most of these names we felt that the reasons for slightly tawdry results were well understood by the market, however in the case of WOW we felt a little underwhelmed by the lack of operational leverage in the food business despite continued strength of sales.
We elected to TAKE PROFIT on Woolworths (WOW) ahead of today’s figures simply because we felt that the stock had virtually reached our $28 target price. We had little view for today’s numbers, but in hindsight our call makes sense as the profit figures lacked any operational ‘oomph’.
WOW is doing fine as a company, but at $27-28 it is at a rather full-rating, and to my mind, offers little to investors for the coming 12 -months.
On the slightly disappointing side for us over the past few weeks, there is little doubt Woodside’s (WPL) surprise $2.5bn rights issue has to be top of the list.
Whilst WPL management had alluded to an interest in increasing their Scarborough stake in the past year, I think few of us fully understood that this was very much a ‘chips in’ strategy that would involve not only the $2.5bn raised by way of the rights issue, but a further 5 years or more of annual free-cash to develop the resource and tie it back in to existing LNG infrastructure at Pluto.
The move is a long-term strategic tick we expect, but the operative word is ‘long’, meaning shareholder returns will be diluted in the near term. The dividends from WPL should remain underpinned with oil in the $60’s (5% fully-franked currently), but we aren’t owning WPL for its dividend capabilities.
I think it’s fair to say WPL is now in the naughty corner for us as a stock, not as a company, and we are being forced to re-think the role the stock plays in portfolios now, particularly given our long-term preference for Oil Search (OSH).
If anything, the WPL news casts an even more favourable light on what OSH and its JV partners Exxon Mobil (XOM) and Total (TOTF) have in terms of incremental resources and the ability to tie these into brownfield developments on the Papua New Guinean coast.
PORTFOLIO SHIFTS – IMPORTANT CONTEXT
A small aside today, particularly as markets are higher, relates to some small tinkering we have been making to some of the discretionary portfolio’s that you ought be aware of.
Beyond taking profit in our Woolworths (WOW) position in the Australian Equity Growth SMA, we have also lightened up very modestly on our SEEK (SEK) position given its 30% rise.
We love SEK and feel like it will go higher in the coming years, but its impressive run allows us the chance to let a little bit go with a view to re-purchasing those shares sold in the event of a price consolidation.
We do this a lot in the Separately Managed Account’s (SMA’s).
Perhaps of more significance, we have moderately reduced our market exposure to international equities in our International SMA, by lowering ever so slightly our weighting to the Vanguard International Share (VAN0003AU) fund (from 15% to 10%) and putting the money to cash.
We have suggested on several occasions that we would likely make this move, and it certainly won’t be the last.
Make no mistake, we still prefer International Equities relative to their Australian counterparts, but we are slowly raising cash in this portfolio in a not dissimilar fashion to what we are ever so slightly doing in our Australian equity portfolios.
If there is one slow moving, but pervasive, trend you will see from us over the coming months, it is to reduce our outright market exposure either by way of raising cash and awaiting new opportunities, or alternately by shifting assets from outright market bets such as exchange-traded funds (ETF’s) to long-short funds who have the ability to prosper at best or protect at worse when markets see heavy selling.
We recommended VGI Global Investments (VG1) and Antipodes Global Fund (IOF0045AU or APL) last year as global long/short fund managers, and this week we have recommended to you the upcoming L1 Capital Long Short Fund (LSF) for precisely the same reason.
This theme is ongoing.
I cannot stress enough that we need to be pre-emptive in our portfolio moves since as the year goes on I fully expect to see more bouts of greater volatility, not unlike what we saw earlier this month.
It will happen again, and it might even be bigger in impact.
Global central banks are taking away the monetary punch-bowl, and as much as you have heard me talk about this as a risk, the risk is only growing larger and drawing closer as the days go by.
I don’t want us to be taken by surprise again when the inevitable volatility returns over the winter period (northern summer), and so we need to keep taking baby-steps in our portfolio moves
If you want to chat about this with me at any point, do please drop me a line or contact your advisor with the view to arranging an appointment.
Again, I would encourage all investors to consider the pro’s and con’s of our discretionary management service (separately managed accounts) since we have every intention of being pre-emptive with these portfolios where best we can.
For now, that’s it. Have a great weekend.
Jono & Guy
Interest Rate Commentary & Update
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Australian Market Index
Friday 12pm values
|S&P / ASX 200||5982||+73||+1.2|
|Property Trust Index||1300||+18||+1.4|
Key Dates: Australian Companies
|Mon 26th February||Div Ex-Date – Wesfarmers (WES)|
|Tue 27th February||Earnings – Costa Group (CGC)Div Ex-Date – AGLHA, AMCOR (AMC), Challenger (CGF), WBCPD|
|Wed 28th February||Div Ex-Date – Telstra (TLS)Div Pay Date – Scentre Group (SCG), Westfield Group (WFD), Vicinity Centre (VCX)|
|Thu 1st March||Div Ex-Date – Healthscope (HSO), Rio Tinto (RIO)Div Pay Date – ANZPC|
|Fri 2nd March||Div Ex Date – NABPA, SUNPE, SUNPF, SUNPG, WBCPC|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2703||-28||-1.0|
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This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.