The ASX200 is up 32 points in early afternoon trade (sorry I”m a bit late today. Banks are mixed after the strength yesterday. WOW reports good Q sales, JBH trading downdate and Qantas trading update with good revenue growth. AUD still under US75c #ausbiz
- China – Caixin Manufacturing PMI
- Japanese Nikkei Services PMI, Consumer Confidence
- Ex-dividend – Acorn Capital Investment Fund (ACQ) 2.7c
- European data – Markit Manufacturing PMI Final, Unemployment Rate, GDP Growth Rate
- UK – Construction PMI
- US economic data – ADP Employment Change
- FOMC Rate Decision – While there is limited expectation of a rate rise at tonight’s meeting, there are growing expectations for a 4th rate this year…almost 50% of traders expect a fourth rate increase by the end of the year.
- Woolworths (WOW) – Comparable growth in sales was 4.4%, or 3.6% adjusted for Easter. Australian Food comparable growth was 4.4% or 4.0% adjusted for Easter. (This compares with Coles 0.9% and 1.3% adjusted for Easter.) Australian Food’s Voice of Customer (VOC) scores continuing to improve with both Overall Customer Satisfaction of 81% and store-controllable VOC of 84% up on the prior year; Australian Food comparable sales growth of 4.0% (Easter-adjusted) driven by underlying transaction growth; Online sales growth remains robust in Australian Food with two new customer fulfilment centres (CFCs) commissioned during the quarter and ongoing growth of Pick up; 1Store (1POS, centralised ticketing, next generation back office software upgrades) due for completion by end of June for Woolworths Supermarkets and BWS; BWS and Dan Murphy’s driving solid growth for Endeavour Drinks with Easter-adjusted comparable sales up 3.3%; New Zealand Food’s planned investments contributing to a second consecutive quarter of strong comparable sales growth with Easter-adjusted comparable sales up 3.8%; BIG W’s turnaround still a work in progress with Easter-adjusted comparable sales declining by 1.2%, impacted by timing of New Year’s Day and school holidays in NSW; Comparable sales growth in Hotels across all key categories; Petrol sales in line with the prior year
- Genworth Mortgage Insurance (GMA) – 1Q investor presentation
- Westfield (WFD) – Presentation
- Ramsay Health Care (RHC) – JV with Ascension (largest private, tax-exempt, non-governmental health organisation in the US) to develop a new global supply chain and combine their purchasing power. The JV will begin by identifying an initial group of product categories to pursue procurement savings and will expand over time to include more product categories and explore broader business development opportunities to generate further commercial benefits for the two health systems. The joint venture will be undertaken with minimal cost to each group and the initial savings are anticipated to be slightly EPS positive to Ramsay in the short term.
- Qantas (QAN) – Trading Update. 3Q up 7.5% to $4.25bn on pcp; Expecting a FY record Underlying Profit Before Tax of $1.55-$1.60bn; 6 additional Dreamliners ordered for Qantas International and accelerated retirement of remaining 747s by end-2020.
- Evolution Mining (EVN) – Will acquire 100% of the Connors Arc exploration project (“Connors Arc”) from Orion Minerals.
ARB Corp (ARB) – Trading Update
- Rio Tinto (RIO) – AGM
- MYOB (MYO) – AGM presentation
- Smart Group (SIQ) – AMG presentation
- Independence Gold (IGO)
- Macquarie Australia Conference – Another bunch of companies are presenting today but I haven’t been through them all including Fairfax (FXJ), Bank of Queensland (BOQ), Mineral Resources (MIN), Telstra (TLS), Challenger (CGF), Wesfarmers (WES), Amcor (AMC). Some that have received focus include
- JB Hi-Fi (JBH) – Negative trading update at the Macquarie Conference today. Group NPAT now to be circa $230 million (previous guidance of $235-$240m). While it reaffirmed FY18 sales guidance of $6.85 billion (JB HI-FI $4.75 billion and The Good Guys $2.1 billion) and said the JB Hi-Fi business continues to perform strongly and in line with expectations, the key issue appears to be The Good Guys, where performance has been affected by challenging conditions in the Home Appliance market. They have blamed unfavourable weather conditions coupled with heightened price competition. This has had an adverse impact on gross margin in 2HY18 as we continue to focus on sales and market share. JBH said the issues are short term and they remain confident over the medium and longer term.
- Invocare (IVC) – Performance Update
CoreLogic House Prices – The Corelogic house price index was released yesterday. The full table is presented below.
- Overall, dwelling values were down 0.1% in the month to be down 0.3% in the quarter and +0.2% over the last year.
- Regional market outperformance continued – Capital cities prices fell 0.3% (-0.7%qoq and -0.3%yoy) while regional prices were up 0.4% (+1.3qoq and +2.4% yoy). It is the first annual decline in combined capitals since late 2012.
- More expensive properties are also underperforming the more affordable ones.
- Units outperforming houses – Nationally units +0.2% while houses -0.2%.
- Rental markets are stable – weekly rental rates are rising 2%
Overall, while values are trending lower, CoreLogic confirmed that the rate of decline has remained moderate. “Weaker housing market conditions are primarily a factor of tighter credit policies which have dampened investment activity…The slowdown in investment activity has been partially offset by an uptick in owner occupier lending, driven by a surge in first home buyer activity in New South Wales and Victoria. Annual growth in owner occupier housing credit, at 8.1% over the twelve months to March ’18, is the fastest pace of growth since late 2016.
Corleogc thinks APRA’s move to lift the 10% growth limit on investment lending may not lead to a rise in investment activity, as borrowers may face tighter lending conditions as banks focus more on debt servicing and ensuring expenses are more comprehensively assessed and adequately allowed for.”.
While credit conditions are likely to remain tight and potentially tighten further as the Royal Commission unravels, Corelogic says “Low mortgage rates are expected to help to keep a floor under housing demand.
High overseas migration is expected to support markets, particularly into New South Wales and Victoria, while strong interstate migration flows, especially into Queensland, Victoria and Tasmania will be positive there.
House Prices: Morgan Stanley – It’s a different view on house prices from Morgan Stanley, who says the outlook is continuing to slide and prices will fall 8% in 2018.
The analysts also expect housing loan growth to fall by a third, from 6% to 4% (with the risk to the downside) based on more onerous capital rules, tighter lending standards, higher mortgage rates and credit rationing.
In particular, they note that the share of interest-only and investor lending continues to decline, as macro prudential measures take effect and declining prices reduce “fear of missing out” driven demand.
While increases in net migration – 250,000 for the year to September, 2017 – has reduced the effect of apartment oversupply (particularly in Melbourne), Morgan Stanley still forecasts a surplus of 30,000 dwellings in the market.
“With national prices down 1.5% from the peak late last year, it is clear the housing market has turned. But in contrast with others in the market who view the worst as behind us, we expect prices to fall further throughout 2018, as credit availability is tightened further and a stretched consumer reassesses the outlook.
“Approvals have held up better than we expected the past few months, but we question the transmission to starts and completions given tighter developer credit, sales demand and project economics.”
Given the tightening credit conditions for developers and volatility in the market, Morgan Stanley warns that some projects could be in jeopardy.
“While the backlog of approvals not yet completed remains high, we expect some projects to be shelved given tighter credit conditions.”
AMP ($4.05) – Deutsche Bank has a Hold recommendation with a target price of $4.00 (from $5.20). Following the Royal Commission, possible civil and criminal charges, and resignation of the CEO, chair and chief legal counsel, Deutsche has reduced earnings estimates by 10% for FY20 and lowers the target price to $4.00.
- ANZ – Result yesterday 1H result. Cash profit up 4.1% but net interest margin down 7bps to 1.93%.
- Citi has a Buy recommendation with a target price of $30.50 (form $30.00). The cash result was better than the analyst expected but a large number of one-off items relating to divestments obscured the underlying trends. The CET1 ratio is growing rapidly and now at 11%. The buyback program has begun and Citi expects a combination of dividend increases and buybacks to continue from FY19.
- Credit Suisse has a Neutral recommendation with a target price of $28.50 (from $31.00). CS has downgraded FY estimates by 7% and the analyst suggests revenue growth is becoming incrementally more difficult amid intense competition. A larger underlying profit downgrade is only saved by a benign bad debt environment. While ANZ has some room to address costs and capital management, this will be more than offset by the Royal Commission outcome in the short term.
- Deutsche Bank has a Hold recommendation with a target price of $29.50. Cash profit was lower than the analyst expected. One of the main drivers of the weakness was the non-interest income line, with the market’s contribution 7% lower. Operating metrics were more positive and in line with forecasts.
- Macquarie has an Outperform recommendation with a target price of $30.00. The cash number was slightly ahead of the analysts estimates, largely supported by a lower impairment charge. While the FY19 cash earnings outlook appears weak, a capital surplus offers scope for buybacks and there longer-term value as the bank simplifies its business and manages expenses better than peers.
- Boral (BLD $6.68) – Citi has a Neutral recommendation with a target price of $7.23 (form $7.32). The analyst was disappointed with the March quarter performance – affected by poor weather and operating issues – but management has flagged a strong finish to FY18, saying operating earnings are expected to be at the high end of guidance. The analyst has raised FY18 estimates for EPS by 1% but cut FY19 estimates by -4%.
- Commonwealth Bank (CBA $73.17) – APRA released its prudential report on CBA, who has signed an enforceable undertaking to ensure remedial actions are taken. The report is critical of board and executive management and found remuneration structures to be deficient
- Citi has a Sell recommendation with a target price of $72.00. Citi believes the regulatory and profitability challenges remain larger at CBA yet it continues to trade at a premium to its peers.
- Credit Suisse has a Neutral recommendation with a target price of $75.00. The Credit Suisse thinks the outcome is relatively minor, as APRA had scope to impose materially higher capital costs and CBA is well able to manage the enforceable undertaking. The broker incorporates around $15bn of additional operating risk within forecasts.
- Corporate Travel (CTD $24.77) – UBS has a Buy recommendation with a target price of $27.50 (from $25.85). CTD issued a positive update and effectively raised FY18 earnings guidance to “approximately $125m” from a prior $120-125m range. This would represent 27% year on year growth and implies strong organic growth.
- REA Group (REA $79.86) – Citi has a Buy recommendation with a target price of $90.00. REA has acquired Hometrack Australia for $130m. The analyst thinks Hometrack is a logical fit for the business, expanding its data offering into a property-related field. Hometrack is predominantly focused on providing services to lenders and related industries but does have a product targeted real estate agents, and the broker expects REA to look for opportunities to integrate this into the realestate.com.au website.
- Medibank (MPL $2.98) – Citi has a Neutral recommendation with a target price of $3.25. The outlook statement suggests that operating momentum is slightly better than previously expected and there may be modest upside risk to forecasts. The analyst noted that for the first time in a long while policy holder numbers stayed steady throughout the quarter.
- Suncorp (SUN $13.92) – March q update
- Citi has a Buy recommendation with a target price of $15.35 (from $15.00). The analyst has upgraded estimates to reflect that impairments fell significantly in the Quarter, even though loan book growth slowed. They continue to think Suncorp is the cheaper way to play the domestic general insurance margin expansion and retains a Buy rating.
- Credit Suisse has an Outperform recommendation with a target price of $14.50. No changes, while the analyst observes a slowing in growth while impairment losses remain below the through-the-cycle operating range of 10-20 basis points. Overall lending growth was slightly weaker than expected.
- Morgans has an Add recommendation with a target price of $14.65. FY19 targets have been confirmed, including group insurance margin of at least 12%, while banking credit growth was experiencing increased headwinds from mortgage re-pricing and a lift in funding costs. Overall, Morgans though the update was fairly stable and expects a solid second half result, assisted by strong reinsurance protections
- UBS has a Buy recommendation with a target price of $14.60. The analyst thinks the business is on track and noted there are no new material developments. The numbers are tracking in line with estimates, although it is a “remarkably benign environment for credit losses”.
- Xero (XRO $38.21) – UBS has upgraded to a Neutral (from Sell) recommendation with a target price of $42.50 (from NZ$26.5). UBS has changed analysts and the new analyst has upgraded. They say Xero is towards the end of its transition from loss-making start-up to self-funding business, and offers a proven business model and significant structural growth opportunities. FY19 has the potential to be an industry-changing year in the UK due to new regulatory requirements.
SPI FUTURES +6
US EQUITIES – S&P500 +7 (+0.25%), Dow Jones -644 (-0.27%), Nasdaq +64 (+0.91%).
Main themes –
Cautious trading ahead of Apple’s result
Tariffs – The White House extended deferral of steel and aluminium tariffs for Mexico, Canada, and the EU; with permanent exemptions for Argentina, Brazil, and Australia
EUROPEAN MARKETS – Mixed with most markets closed for Labor Day. UK FTSE +0.15%
- The US dollar was up around 0.7% at 92.47.
- The Aussie dollar is half a cent lower at US74.93.
BONDS – 2-yr: +2 bps to 2.50%, 5-yr: +3 bps to 2.82%, 10-yr: +4 bps to 2.98%, 30-yr: +4 bps to 3.14%
- WTI oil futures fell US$1.32 or 1.9% to US$67.25 on the higher US dollar but prices were supported by the view that the US will pull out of the 2015 deal with Iran after claims from Israeli Prime Minister Benjamin Netanyahu of evidence showing Iran ran a secret program to produce nuclear weapons.
- Gold futures closed down US$12.40 at US$1306.80 on US dollar strength.
- Iron ore unchanged at US$67.00
- LME metals mixed – Copper -0.91%, nickel unchanged, aluminium +0.22%.
ECONOMIC DATA, NEWS & POLITICS
- US economic data – April ISM Index 57.3 (consensus 58.5; prior 59.3) and March Construction Spending -1.7% (prior 1.0%)
- US earnings – BP (+0.47%), Carlyle Group (+0.49%), Merck (-1.51%), Pfizer (-3.31%), Under Armour (+1.52%). After The Close – Apple (+2.32% and then +3.67% in after-hours trade)
- UK data – March Mortgage Lending £3.97bn (expected £3.60bn; last £3.89bn) and Mortgage Approvals 62,910 (expected 63,000; last 63,780). March M4 Money Supply -1.4% (expected 0.2%; last -0.4%). April Manufacturing PMI 53.9 (expected 54.9; last 54.9).
QUOTE OF THE DAY
“When you get older, you mature, and you start liking flowers. Although I try and keep it manly.” – David Beckham, English athlete born this day in 1972. I am totally with you and your manly flowers David. Have a great birthday.