MID MORNING 4-4-18

The ASX 200 is down 13 points in mid morning trade, depsite the very positive leads from US markets overnight. Most sectors weaker, led by Disc and Industrials. Lots of  news. BLA back online, GEM downgrade and AAC market update. Retail sales later today. #ausbiz

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TODAY

  • Economic data – Retail sales and building permits

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  • Chinese data – Caixin Services and composite PMI
  • Japanese – Nikkei services PMI

TONIGHT

  • European inflation and unemployment
  • US data – ADP employment chance, factory orders, ISM services index

COMPANY NEWS

  • Blue Sky (BLA) – Responds to report from Glaucus, pointing out various errors in the rport. Shares remain under pressure however
  • MG Unit Trust (MGC) – Australian ACC allows Saputo acquisition of Murray Goulburn
  • IRESS (IRE) – IRESS will acquire regtech and data analytics provider Lucsan, after last year making a minority investment. Since making the investment six months ago, IRE has been able to assess Lucsan’s potential, including product and operational synergies. “Lucsan has a solid product proposition and is experiencing quality demand from the industry. At this stage of Lucsan’s development, there is significant opportunity for its clients to benefit from the breadth of our combined capabilities.” The purchase price is not material.
  • Resolute Gold (RSG) – Will acquire a 27% interest in Loncor Resources Inc, via 51,000,000 common shares of via a CAD $2.6m subscription in a placement of new Loncor shares and a ‘share swap’ of CAD $2.5m of Resolute shares for 25,000,000 existing Loncor shares. Loncor is a Canadian gold exploration and development company and holds gold prospects and resources in north-eastern Democratic Republic of Congo (DRC) which include exclusive gold rights to an area covering 2,087km2 located along the Ngayu Archaean greenstone belt in the Orientale province.
  • James Hardie (JHX) – Has completed the acquisition of Fermacell
  • Bapcor (BAP) – Chairman Robert McEniry has resigned due to a serious health issue. Andrew Harrison has been appointed Chairman. Andrew has been a Non-Executive, Independent Director of Bapcor since its listing on the ASX in April 2014
  • AGL – Under pressure to sell Liddell assets.
  • Lovisa (LOV) – Trading update yesterday and exit of CEO. The update seemed to be generally positive but the change in management seems to have generated some profit taking

BROKER NEWS

  • Santos (STO $5.89) – Harbour Energy has made a takeover offer at A$6.501 a share, representing a premium of 28% to the last closing price or 30% to the one month VWAP. The indicative offer price includes a cash offer price of A$6.131 plus a special dividend of A$0.371 which is expected to be fully franked. Santos has agreed to allow Harbour the opportunity to undertake confirmatory due diligence, although there was no certainty the proposal would result in a firm offer. Santos rejected an earlier offer (at $4.55) and this is the 4th takeover offer.
    • Citi has a Neutral recommendation with a target price of $5.31. Harbour’s initial offer last August was $4.55. The broker sees the board as approving the deal and the ACCC as not having a problem, but the sensitive matter of energy supply may mean FIRB has issues. The question then would be whether shareholders are happy with the price or would they prefer to hold on for future upside growth.
    • Morgans has a Reduce recommendation with a target price of $4.31. Morgans suggests Harbour Energy’s plan to invest heavily in this capital-starved business is likely to result in a materially higher valuation than currently estimated. But FIRB approval could be difficult, given the national significance of GLNG and the Cooper Basin.
    • UBS has a Neutral recommendation with a target price of $6.00 (from $5.20. UBS envisages risks around due diligence and remains cautious about the prospect of a firm bid emerging. To justify the offer the broker would need to de-risk the company’s growth projects and assume an oil price of US$75/bbl.
  • Newcrest Mining (NCM $20.01) – Newcrest recommenced processing at Cadia over the Easter weekend with associated tailings being deposited into the southern tailings facility. Processing is currently at a run rate of approximately 8mtpa due to limitations in infrastructure to the southern tailings facility.
    • Macquarie has an Underperform recommendation with a target price of $19.00. The analyst is encouraged by the development, noting Newcrest plans to utilise the old Cadia Hill pit as an alternative tailings disposal, which could mean full-scale production re-starts in coming weeks.
    • UBS has a Sell recommendation with a target price of $14.70. Newcrest is continuing to evaluate the cause of the dam failure at Cadia but is resuming processing at a limited 8mtpa rate because of the available infrastructure in the southern tailings dam. NCM expects to return to full mining rates within coming weeks and this suggests to UBS the permit for tailings disposal in the Cadia Hill open pit is closer to fruition than previously expected.
  • CSL ($156) – UBS has upgraded to a Buy (from Neutral) recommendation with a target price of $175 (from $155). UBS has had a change of analyst and has re-modelled earnings, shifting to a DCF-based valuation methodology. The analyst forecasts a 16% compound EPS growth rate. The valuation implies a premium to the company’s historical average relative to the market but UBS believes current plasma industry conditions are favourable.
  • G8 Education (GEM $2.60)) – Morgan Stanley has downgraded to an Equal-weight (from Overweight) recommendation with a target price of $2.80 (from $4.25). The analyst has lowered has reduced occupancy forecasts for 2018 to 77.7% from 78.8% and for 2019 to 79.0% from 80.5%, resulting in a -4-5% reduction to revenue forecasts. While the valuation remains undemanding, they see few catalysts in 2018.
  • GWA Group (GWA $3.33) – Morgans has downgraded to a Hold (from Add) recommendation with a target price of $3.30. GWA intends to divest its door and access systems business which the analyst values at $45-65m. The analyst notes the strong balance sheet which could provide capital management initiatives such as a share buyback or special dividend. While earnings growth is expected to be broadly flat over the next few years, GWA offers a 5.2% fully franked yield with upside from capital management initiatives post the sale of this business.
  • Amcor (AMC $13.97) – Citi has a Neutral recommendation with a target price of $15.00. Following industry activity (acquisition of a US flexibles business for a 7% return on funds engaged) Citi notes that Amcor’s M&A hurdle rate is 20% after three years. Amcor’s last key acquisition was in 2016, and this latest activity highlights that patience will be required, and an easing of valuations, before Amcor can make its next key move.
  • BHP Billiton (BHP $28.71- Macquarie has an Outperform recommendation with a target price of $35.70. Macquarie has looked at the proposed shale asset exit. The analyst expects BHP to receive US$8-10bn and although there will likely result be a final write-down in book value, the resultant earnings upgrade and likely cash return to shareholders should provide positive catalysts for share price performance. They estimate BHP is trading at an FY19 free cash flow yield of 8% on forecasts and 11% at spot prices.
  • CSR ($5.10) – Macquarie has an Outperform recommendation with a target price of $5.60 (from $5.15). The analyst still supports the CSR investment case, suspecting that earnings visibility is better than consensus evaluations suggest. After taking account of the latest property sale and some settlement delays to estimates, FY18 is revised down -1.7% while FY19 is revised up 10.4%.
  • Rio Tinto (RIO $74.19) –CSR yesterday sold the first tranche of surplus land at Horsley Park, NSW. The sale of the 10-hectare site is expected to generate Property EBIT of approximately $30m. It’s the first tranche of a total 30 hectares of surplus land available for sale at Horsley Park. Macquarie has an Outperform recommendation with a target price of $93.00. The sales of Hail Creek and Kestrel were completed at a 40% premium to the analyst’s valuations, and this will facilitate the complete exit from coal by late 2018. They have reduced forecasts for 2018 and 2019 earnings by -1% and -5% respectively. US$4.15bn in cash is expected in the second half, which Macquarie believes will enable the company to move to a net cash position at the end of 2018.
  • Super Retail Group (SUL $6.69) – UBS has a Buy recommendation with a target price of $8.70. UBS believes concerns around the company are overdone, with underperformance of 15% since the first half results. Weakness has resulted from reduced confidence in the ability to meet long-term margin targets and increased exposure to the troubled leisure division, as well as slowing consumer cash flow. UBS notes the key catalyst will be a trading update in May.

OVERNIGHT

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SPI FUTURES +19

US EQUITIES – S&P500 +33 (+1.26%), Dow Jones +389 (+1.65%), Nasdaq +71 (+1.04%).

Main themes –

  • S&P 500 initially struggled with its 200-day simple moving average (2590) before making a clean “break”
  • Technology sector underperformed as Trump continued to attack Amazon. While arguing that Amazon is hurting “tax paying retailers” and jobs are being lost, Amazon CEO Jeff Bezos owns The Washington Post – the “fake news” generator that is often critical of the Trump administration. There are concerns Trump will take action on Amazon’s

EUROPEAN MARKETS – Generally lower, catching up with US market movements and following manufacturing PMI readings (ex-UK) tilted toward a deceleration in March  . STOXX 600 -0.49%, UK FTSE -0.37%, German DAX -0.78%, French CAC -0.29%.

CURRENCIES

  • The US dollar is stronger at 90.18.
  • The Aussie dollar is weaker at US76.86.

BONDS – Significantly weaker. 2-yr: +5 bps to 2.29%, 5-yr: +5 bps to 2.60%, 10-yr: +5 bps to 2.78%, 30-yr: +5 bps to 3.02%

COMMODITIES

  • WTI oil closed up US50c or 0.79% at US$63.51 on mixed factors including technical support and strength in equity markets
  • Gold futures fell US$9.60 or 0.7% to US$1,337.30 as the equity market stabilised.
  • Iron ore was up US$1.00 at US$66.00
  • LME metals were mostly stronger – Copper +1.22%, nickel +1.24%, aluminium -1.32% the exception

ECONOMIC DATA, NEWS & POLITICS

  • FOMC – San Francisco Fed President John Williams will replace William Dudley (retiring) at the Federal Reserve Bank of New York
  • In oil news, Russian Energy Minister Alexander Novak’s said that a joint organisation for cooperation between OPEC and non-OPEC countries may be set up once the current deal on oil output curbs expires at the end of this year.
  • European data – Eurozone March Manufacturing PMI 56.6, as expected (last 56.6); Germany’s March Manufacturing PMI 58.2 (expected 58.4; last 58.4). February Retail Sales -0.7% (expected 0.7%; last -0.3%) to be +1.3%yoy (expected 2.2%; last 2.5%); France’s March Manufacturing PMI 53.7 (expected 53.6; last 53.6)
  • UK March Manufacturing PMI 55.1 (expected 54.8; last 55.0)
  • RBA left interest rates on hold for a record 18 meetings (20 months). The tone continues to be upbeat in relation to global growth. Mention of markets, including short term interest rates and bank funding. Growth to pick up from 2.4%, employment growth strong but still low wages. Explanation of shift in the participation rate (women and older workers). Expecting gradual pick-up in inflation. No change to housing commentary, as focus moves to other issues.
  • Trump goes quiet on the stock market, with White House official quoted as saying “We’re focused on long term fundamentals. We’re not really reacting to market fluctuations”v

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QUOTE OF THE DAY

“We all come from our own little planets. That’s why we’re all different. That’s what makes life interesting.” – Robert E. Sherwood, American playright born this day in 1896. Died 14 November 1955.

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