MID MORNING MARKETS 23-04-18

The ASX200 is 23 points despite SPI futures suggesting a negative opening. Market Map tells he story – Financials and Resources both leading the way. ISU hit after downgrade and CEO exit. BLA’s CEO also resigns. AUD at 76.65c #ausbiz

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TODAY

  • Ex-dividend – Ridley Corp (RIC) 1.5c
  • Japan – Nikkei Manufacturing PMI Flash

TONIGHT

  • European data – Markit PMIs (flash)
  • US economic data  – Existing Home Sales

COMPANY NEWS

  • Bank Royal Commission – Focus will continue to be on inappropriate advice. New AMP executive added to the list. Hearing from NAB today.
  • AGL Energy (AGL) – Will sell a portfolio of small generation and compressed natural gas refuelling assets, known to AGL as the National Assets, to Sustainable Energy Infrastructure, a consortium led by Whitehelm Capital. The National Assets have a carrying value of $74 million. The portfolio comprises 18 small generation operations located throughout Australia with a combined capacity of 81 MW, including landfill gas, biogas and biomass generation and cogeneration, in addition to compressed natural gas refuelling. The sale is consistent with AGL’s strategy of divesting non-core assets.
  • Newcrest Mining (NCM) – Has received approval from the NSW Department of Planning and Environment to use the first 200m of the old Cadia Hill open pit as a tailings storage facility. NCM is currently installing the pipeline infrastructure and expects to start using the in the first week of May 2018. The permit will create sufficient storage capacity for 16 months full production. NCM will “look to define and commence the optimal repair solution for the Northern Tailings Facility (NTF)” and also work on permitting the remaining 300m of the Cadia Hill open pit for tailings storage.
  • Syrah Resources (SYR) – The fines graphite circuit dryer repair at the Balama Operation has been completed ahead of schedule. Total repair cost was approximately US$0.3 million.
  • BHP Billiton (BHP) – The Federal Court of Brazil has approved an additional 66 days for Samarco to continue discussions on the negotiation of the framework for the settlement related to the Samarco dam failure. The extension will end on 25 June 2018.
  • Galaxy Resources (GXY) – Q production report. Total mining volumes increased significantly by 32% over the previous quarter resulting in increased total mining costs included in production cash costs. Ore volume treated increased by 4% to 430,398 wmt, with ore feed grade of 1.11% achieved in line with expectations for the quarter. Spodumene produced was slightly above expectation for the quarter.

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  • Macquarie Atlas Roads (MQA) – Has appointed Graeme Bevans as Chief Executive Officer (CEO) elect to start 1 May 2018. It’s part of the internalisation process.
  • Mirvac Group (MGR) – 3Q operational update. MGR has reaffirmed operating earnings guidance of 15.3-15.6c and distributions of 11.0x. MGR also initiated an on-market buy-back program for up to 2.6 per cent of its securities on issue. “During the quarter, Mirvac also became the first property development group in Australia to receive White Ribbon accreditation, demonstrating the steps it’s taking to stop violence against women.”
  • iSelect (ISU) – Trading Update. Trading conditions below expectations. Downgraded its guidance for FY18 underlying EBIT to be in the range between $8 million to $12 million (previously $26 million to $29 million). CEO Scott Wilson has resigned. Brodie Arnhold (currently Independent non-executive director and Chair of the Audit & Risk Committee) has been appointed Acting-CEO during the search process. The last 12 months haven’t been kind for ISU shareholders. From a high of $2.26, shares are now just $1.00. Expect them to trade lower today (insightful, right!)

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  • Bluesky (BLA) – Management and Board changes. CEO Rob Shand has resigned. Kim Morison is interim Managing Director. Kim has been Managing Director of Blue Sky Water Partners and Head of Blue Sky’s Real Assets business since 2010, he is a current executive director of Blue Sky. Executive directors, Ms Elaine Stead and Mr Nicholas Dignam, will step down from the Board (both will continue in their executive roles).
  • Asaleo Care (AHY) – AGM. “Faced with significant cost increases in pulp and energy we are forecasting full year EBITDA to be in the range of $113m to $119m. The timing and effective execution of our initiatives in the areas of continued innovation, quality improvements, cost savings and go-to-market strategies is critical to delivering on our outlook. On the basis this guidance is achieved it is intended that the current dividend is retained.”
  • Kogan (KGN) – Quarterly Cash flow and trading update. Net operating cashflow was -$625,000End cashflow was $19.3m. Transaction value growth was 49.8%, revenue growth was 46.1%. Active customers was 1,288,000. “The business is poised to continue its growth trajectory into the seasonally strong end-of-financial year quarter”.

BROKER CHANGES

  • AMP ($4.30) – CEO Craig Meller will be stepping down immediately
    • Morgan Stanley has an Equal-weight recommendation with a target price of $5.75. The analyst thinks the earnings impact from the Royal Commission is likely to be negligible, while markets are likely to be the bigger driver. They noterisks to the outlook include future flows via the planner network and the potential for further regulatory intervention affecting fees.
    • Morgans has an Add recommendation with a target price of $4.94 (from $5.82). The analyst sees the increase regulatory risk. Interim CEO Mike Wilkins is considered a safe pair of hands and the analyst doesn’t rule out further board changes.
  • Australian Pharmaceuticals (API $1.42) Credit Suisse has a Neutral recommendation with a target price of $1.50 (from $1.62). The 1H results were in line with guidance. The analyst thinks the short-term outlook remains challenging and that PBS revenue will remain under pressure as some manufacturers choose to by-pass wholesale distributors and go direct to pharmacies. While the conversion of independent pharmacies to the Priceline model should increase operating leverage, the analyst remains cautious.
  • Bank of Queensland (BOQ $10.35) – Citi has reinstated coverage with a Neutral recommendation with a target price of $11.00 (from $13.00). 1H results were weaker than the analyst expected and justifies the 17% fall in the share price. They have reduced the earnings trajectory to reflect the challenges from lower revenue and higher growth in costs.
  • Fletcher Building (FBU $5.77) – UBS has downgraded to a Neutral (for Buy) recommendation with a target price of NZ$6.30 (from NZ$7.60). The analyst sees less upside following the $750m capital raising, primarily reflecting the increase in share count but also the lower operating earnings estimates (down 2-4%). They note the capital increase was an expensive, but probably necessary, move to improve the negotiating stance with USPP debt holders.
  • G8 Education (GEM $2.31) – AGM last Friday noting continue supply pressure (supply growth of 3-3.5% and demand growth of only 2%). Occupancy levels have been down 2.5-3.0% over the last year. Supply growth is easing as a result of tighter lending conditions in relation to developer funding, and we expect supply growth to continue to slow during 2018. Also going forward, the new Child Care Funding package. 95% of their families will be better off – with a significant proportion of these families having substantial reductions in their out-of-pocket costs
    • Macquarie has a Neutral recommendation with a target price of $3.30. The analyst expects the occupancy trend towards quality centres will continue. They note the significant de-rating but need evidence of a sustained improvement in market conditions to be more comfortable with the earnings outlook.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $2.80. The analyst thinks that GEM is soundly positioned and at some point operating leverage and trading multiples will turn positive. The notes the EPS target of 40c per share by the end of 2019 has been abandoned.
    • UBS has a Buy recommendation with a target price of $2.75 (from $3.95). Occupancy remains under pressure, counter to former expectations. While the downgrades are disappointing, the analyst thinks the valuation is undemanding and the share price reaction is overdone. They have revised forecasts to allow for softer occupancy in FY18 and incorporates no organic growth.
  • ResMed ($12.95) – Morgan Stanley has an Overweight recommendation with a target price of US$99.50 (from US$92.50). The analyst notes back order and manufacturing issues have been resolved and they expect a continuation of the robust re-supply sales of F20/N20, which has stabilised the margin and assisted positive revisions to earnings per share. Upside is expected from improving operating leverage.
  • Telstra (TLS $3.08) – Morgan Stanley has an Underweight recommendation with a target price of $3.00 (from $3.40). The analysts is negative based on competition that is putting downward pressure on earnings and returns. They have updating estimates to reflect changes to mobile forecasts, reducing EPS forecasts by 3-5% for FY18-20. The main area of risk is mobile, the company’s most profitable business and worth around $2 in the current share price

OVERNIGHT

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SPI FUTURES -15

US EQUITIES – S&P500 -23 (-0.85%), Dow Jones -202 (-0.82%), Nasdaq -92 (-1.27%).

Main themes –

  • Apple (-4.10%) came under more pressure following cautious commentary from Morgan Stanley. It comes after disappointing Q1 results and forecasts from supplier Taiwan Semiconductor Manufacturing due to weak iPhone demand
  • Wells Fargo (+1.98%) rallies after agreeing to pay $1 billion to settle loan abuse allegations
  • General Electric (+3.93%) – beat earnings and revenue expectations and reaffirmed guidance

EUROPEAN MARKETS – Mixed. STOXX 600 -0.03%, UK FTSE +0.54%, French CAC +0.39%, German DAX -0.21%,

CURRENCIES

  • The US dollar was up 0.4% at 90.27.
  • The Aussie dollar is significantly weaker, currently trading at US76.71.

BONDS – 2-yr: +2 bps to 2.44%, 5-yr: +3 bps to 2.79%, 10-yr: +4 bps to 2.95%, 30-yr: +3 bps to 3.14%

COMMODITIES

  • WTI oil futures settled up 9c at US$68.38 after recovering from lows of $67.50 after US President Donald Trump used twitter the attack OPEC, accusing it of manipulating oil prices higher. Saudi Energy Minister Khalid al-Falih responded to the tweet by saying “Markets should determine price.” In other oil news, the Baker Hughes rig count rose by 5 to 820.
  • Gold futures finished 0.75% lower at US$1,338.60 on easing geopolitical risks and the view that the Fed will raise interest rates to limit any inflationary pressure.
  • Iron ore was up US$3.00 at US$68.50
  • LME metals were mixed – Copper +0.11%, nickel -1.63%, aluminium -0.64%.

ECONOMIC DATA, NEWS & POLITICS

  • US earnings – About 16 % of the S&P 500 have released quarterly results, with 81.5% of those beating expectations (FactSet). Next week will be the busiest week of the season, with more than a third of S&P 500 set to report. Major  names include Alphabet (parent of Google), Intel and Microsoft.
  • Earnings Friday – Baker Hughes (BHGE), Ericsson (ERIC), General Electric (GE), Honeywell (HON), Manpower (MAN), Procter & Gamble (PG), Stanley Black & Decker (SWK), State Street (STT), Steven Madden (SHOO)
  • Fed speak – Federal Reserve Governor Lael Brainard said further trade tensions could raise worries about the global economic recovery. She added that the US economy appears capable of handling tighter monetary policy. Chicago Fed President Charles Evans (alternate voter) said that higher deficits should lead to a steeper yield curve. This caused some debate, considering the Chicago Fed President is arguing that a negative development like a flattening yield curve, will be outweighed by an even bigger negative like a rapidly-deteriorating fiscal position. San Francisco Fed President (and incoming NY Fed President) John Williams said he believes the “new normal” level for the Fed’s balance sheet is around $3 trillion. Mr. Williams added that he is not concerned with a flatter yield curve, echoing remarks made by other Fed officials.
  • Ahead of this week’s ECB meeting – ECB President Mario Draghi acknowledged that the growth cycle in the eurozone may have peaked already. It follows disappointing regional PMI readings and inflation and industrial production data. After dropping the reference to an easing bias at the March meeting, it is unlikely that the ECB will now begin any discussion regarding future policy tightening.
  • European data – Eurozone Preliminary April Consumer Confidence 0.4 (expected -0.2; last 0.1); German March PPI +0.1% (expected 0.2%; last -0.1%) to be +1.9% year-over-year (consensus 2.0%; last 1.8%)

THIS WEEK – A short week for Aussie investors will see both US and UK GDP released, meetings by the Bank of Japan and ECB, and domestic inflation data.

  • Not a lot of data domestically, but what there is – inflation and producer prices – will be very important in terms of expectations for RBA monetary policy. ANZAC Day holiday on Wednesday…and my mum’s birthday on Thursday.
  • Corporate news includes Fortescue Metals Group (FMG Q on Tuesday, Newcrest Mining (NCM) and Wesfarmers (WES) Q reports on Friday. AGMs for Iluka (ILU) and Oz Mineral (OZL) are on Tuesday
  • Things are quiet in China too, with industrial profits on Friday the key release.
  • Things are quiet in China too, with industrial profits on Friday the key release.
  • Lots happening in Japan – The manufacturing PMI is Monday but most of the key data is on Friday, with unemployment, retail sales, industrial production, and housing starts. Oh…and don’t forget a Bank of Japan meeting thrown in for good measure.
  • The ECB also meets this week on Thursday. Other data includes the Markit PMI numbers on Monday and consumer confidence on Friday.
  • UK GDP on Friday is the main release.
  • US GDP is also out next week. Consensus is for (annualised) growth of 2.9%. Keep in mind the US has a weird way or reporting GDP – they annualised the quarterly number. It’s the same as saying “if the economy grew at this quarterly rate for another 3 quarters (highly unlikely of course), this would be the annual rate”. Meaningless number but it’s what the give us…Japan is the same. Other data includes existing and new home sales, consumer confidence, durable good orders and the Uni of Michigan sentiment index.

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US Earnings

  • Monday 23 April – Bank of Hawaii (BOH), Halliburton (HAL), Hasbro (HAS), InSteel Industries (IIIN), Kimberly-Clark (KMB), Philips (PHG). After The Close – Alphabet (GOOG), Barrick Gold (ABX), Sallie Mae (SLM), Whirlpool (WHR)
  • Tuesday 24 April – Caterpillar (CAT), Coca-Cola (KO), Freeport-McMoRan (FCX), Harley-Davidson ()HOG), Lockheed Martin (LMT), Verizon (VZ), After The Close – Carlisle Cos (CSL), Chubb (CB), Cree (CREE), Texas Instruments (TXN)
  • Wednesday 25 April – Boeing (BA), Dr Pepper Snapple (DPS), Goodyear Tire (GT), NASDAQ (NDAQ), Peabody Energy (BTU), T. Rowe Price (TROW), Tupperware (TUP), Twitter (TWTR), Xerox (XRX). After The Close – AT&T (T), Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG), CoreLogic (CLGX), eBay (EBAY), Facebook (FB), Ford Motor (F), Legg Mason (LM), NETGEAR (NTGR), PayPal (PYPL), Visa (V)
  • Thursday 26 April – American Airlines (AAL), Bristol-Myers (BMY), ConocoPhillips (COP), Domino’s Pizza (DPZ), DR Horton (DHI), Fiat Chrysler (FCAU), Franklin Resources (BEN), General Motors (GM), Hilton (HLT), KKR, Newmont Mining (NEM), PepsiCo (PEP), Royal Dutch Shell (RDS.A), Time Warner (TWX), Union Pacific (UNP), UPS. After The Close – Amazon (AMZN), Amgen (AMGN), Intel (INTC), Mattel (MAT), Microsoft (MSFT), ResMed (RMD), Starbucks (SBUX), U.S. Steel (X), Western Digital (WDC),
  • Friday 27 April – Cabot Oil & Gas (COG), Chevron (CVX), Colgate-Palmolive (CL), Dominion Energy (D), Exxon Mobil (XOM), Honda Motor (HMC), Moody’s (MCO), Sony (SNE)

LAST WEEK

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QUOTE OF THE DAY

“Time is money. Wasted time means wasted money means trouble.” – Shirley Temple, American actress, singer, dancer, businesswoman, and diplomat, born this day in 1928. Died 10 February 2014

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