MID MORNING MARKETS 9-5-18

The ASX 200 is up 11 points in mid morning trade. Banks weighing after CBA update and BBSW admission (taking 13 points off the market). Budget good for CGF, CSR and IPL result. GXL downdate and JBH downgrade.  #ausbiz

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TODAY

  • Economic data – Westpac Consumer Confidence Index
  • Corporate eventsCSR FY earnings, Incitec Pivot (IPL) earnings, Goodman Group (GMG) quarterly report, Janus Henderson (JHG) Q earnings, WorleyParsons (WOR) investor day
  • Ex-dividend – ResMed (RMD) – US35c
  • Japanese data – Average Cash Earnings, Coincident Index, Leading Economic Index

TONIGHT

  • US economic data – PPI, Core PPI, Wholesale Inventories
  • Fed Speak – Atlanta Fed President (FOMC voter) Raphael Bostic

 


BUDGET

Not a huge issue for the equity market, although there will be some impact on those in the superannuation sector (good for Challenger but may be negative for platform providers and those providing insurance to super). Retailers, infrastructure and health care may also see some slight focus. The ratings agencies have confirmed their ratings and outlook so no big implications there

Here’s a link to a post I made earlier today about why the richest are the ones who get the biggest tax cuts. https://runningmoneysite.com/2018/05/09/why-the-richest-get-the-biggest-tax-cut-using-beer/


COMPANY NEWS

  • WorleyParsons (WOR) – Investor Day.
  • Commonwealth Bank (CBA) – March Q Trading update. Cash profit down 9% on revenue which fell 4% (2 fewer days and lower “other banking” income) and expenses up 3% (increased provisions for regulatory/compliance project spend). Loan impairment expenses of 14bp of gross laons (down from 16bp) but “There has been an uptick in home loan arrears, influenced by a small number of customers experiencing difficulties with rising essential costs and limited income growth”, while “troublesome and impaired assets” increased to $6.6bn. A small number of credits drove the increase in troublesome exposures over the quarter, with impaired assets stable. CET1 ratio 10.1% (down from 10.4%). CBA has also settled with ASIC in relation to the BBSW case, acknowledging that it attempted to engage in unconscionable conduct. There will be a $5m penalty, a $15m a payment to a financial consumer protection fund and a $5 million payment towards ASIC’s costs of the litigation and its investigation. The impact of this settlement will be reflected in CBA’s 2018 Financial Year results.

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  • Incitec Pivot (IPL) 1H results. Underlying NPAT down 3% to $147.1. Dyno Nobel Americas EBIT up 0.9% to US$101.7m. (Explosives – Earnings up 2.7% to US$54.0m underpinned by higher volumes from sustained Quarry and Construction growth, Base & Precious Metals activity and Coal market share growth, partially offset by lower production at Cheyenne; Waggaman – Earnings up 4.6% to US$48.0m versus pcp, reflecting the ramp up of the Waggaman, Louisiana plant (WALA) and absence of the 1H17 construction delay compensation payment of US$35.1m; Agriculture and Industrial Chemicals – Earnings were down to a (US$0.3m) loss due to a turnaround at St Helens. ) Dyno Nobel Asia Pacific EBIT up 9.3% to $100.1m due to robust demand in Coal and Base & Precious Metals, and strong operational performance at Moranbah. Fertilisers Asia Pacific: EBIT down 11.7% to $23.3m reflecting delayed sales of ammonium phosphates into the winter crop due to dry weather across the east coast of Australia and the higher A$:US$ exchange rate. These factors were partially offset by higher global fertiliser prices. Dividend 4.5c unfranked.
  • Greencross (GXL) – Trading update. FY2018 EBITDA now expected to be $97-$100m and a non-cash impairment charge of $16-20m will be reflected in the FY2018 full year statutory result (impairment for projects, investments store assets etc; provisions for slow moving inventory and restructuring including redundancies). The retail division is performing well but veterinary business is not in-line with budget due to poor visit numbers, resulting on a $2.7m shortfall in EBITDA in FY18

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  • A2 Milk (A2M) Dr Andrew Clarke will step down from his current executive role as Chief Scientific Officer , and assume a new part time role as Chief Scientific Advisor to the CEO for an initial term of three years, effective  from 1 August 2018
  • Challenger (CGF) – Says it welcomes the Federal Government’s moves to transform the retirement phase of superannuation, namely the income covenant requiring trustees to offer Comprehensive Income Products for Retirement (CIPRs) that provide individuals with income for life, no matter how long they live. New means test rules will enable the development of new retirement income products, including deferred lifetime annuities, to give retirees more choice and flexibility. These products are an essential building block for CIPRs
  • CSR – Net profit up 16% to $212.7m (before significant items (or +6% to $188.8 after). Trading revenue up 6.0% to $2.6bn

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BROKER CHANGES

  • Costa Group (CGC $7.31) – Morgans has initiated coverage with a Hold recommendation with a target price of $7.57. The analyst notes CGC a portfolio of high-value produce leveraged to strong consumer demand. With potential volatility in produce yields and prices, they think ongoing capital projects are fundamental to ongoing earnings growth. While guidance may be conservative considering the strong track record, shares are well-priced considering the inherent risks.

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  • Challenger (CGF $11.90) – Changes in the budget mean the age pension suggest test requirements for retirement products are more favourable, as the way in which lifetime annuities interact with the age pension by altering the amount to be included in means test calculations. From July 1, 2019 lifetime annuities will carry a fixed asset value equal to 60% of the purchase price until aged 84, and 30% thereafter. Legislation will also require trustees to offer products that provide individuals income for life no matter how long they live.
    • Citi has upgraded to a Buy (from Neutral) recommendation with a target price of $13.60 (from $11.20). They think aged care changes may also be favourable for CGF’s CarePlus product. Partly offsetting this, the analyst thinks Japan may not be as strong a growth option as previously thought.
    • Morgan Stanley has an Underweight recommendation with a target price of $11.00. The analyst notes the 60/30 rule is an improved outcome versus the original 70/35 proposed in the consultation paper back in February.

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  • JB Hi-Fi (JBH $22.99) – Deutsche has downgrade to a Hold (from Buy) recommendation with a target price of $24.00. The analyst says that while competition has been an issue for The Good Guys in terms of margins, the sales mix has been a larger problem. The takeover has meant a lack of skilled sales staff and incentive structures which would enable an “up-sell” of high margin premium appliances. They think margins might stay weak for some time. Despite downgrading, they don’t see the valuation as demanding.

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  • Link Administration (LNK $8.30) – Credit Suisse has a Neutral recommendation with a target price of $9.00. The CS analyst thinks the budget will be negative for LNK’s fund administration business and could reduce earnings by as much as 4%. All inactive superannuation accounts with balances below $6000 will be transferred to the ATO to be reunited with the member’s active account by using a data matching process. If successful, they estimate it could mean a 10% reduction in its account numbers. There also could be some pressure on industry funds, which are Link’s key clients, to consolidate low-balance inactive accounts and thereby indirectly affect Link.

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ROYAL COMMISSION – Round 3 starts next Monday. This round considers the conduct of financial services entities in respect of their dealings with small and medium enterprises, in particular in providing credit to businesses. The hearings will also explore the current legal and regulatory regimes, as well as self-regulation.

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OVERNIGHTMMM10

SPI FUTURES +5

US EQUITIES – S&P500 -1 (-0.03%), Dow Jones +3 (+0.01%), Nasdaq +2 (+0.02%).

Main themes –

US President Trump announced that the US will withdraw from the Iran nuclear deal and will reimpose the “highest level” of economic sanctions. French President Macron says “France, Germany, and the UK regret the US decision to leave” the Iran nuclear deal, as “the nuclear non-proliferation regime is at stake.”

EUROPEAN MARKETS – Mixed. STOXX 600 +0.13%, UK FTSE -0.2%, German DAX -0.28%, French CAC -0.17%

CURRENCIES

  • The US dollar is 0.4% higher at 93.08.
  • The Aussie dollar is a lower at US74.55.

BONDS – 2-yr: +2 bps to 2.52%, 5-yr: +3 bps to 2.81%, 10-yr: +2 bps to 2.97%, 30-yr: +1 bp to 3.13%

COMMODITIES

  • WTI oil futures pared earlier losses to close down US$1.67 or 2.4% at US$69.06 (was earlier down 4.4%) after President Donald Trump said the US would restore sanctions on Iran, and plans to wind down the deal over 90 and 180 day periods.
  • Gold futures fell US40c to US$1313.70.
  • Iron ore was down US$1.00 to US$66.00
  • LME metals – Prices were mixed. Cu -1.19%, Ni -1.00%, Al +0.32%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – April NFIB Small Business Optimism Index 104.8 (consensus 104.7; prior 104.7); March JOLTS – Job Openings 6.550m (prior 6.078m)
  • Fed Speak – Chair Jerome Powell spoke at the Swiss National Bank and IMF, saying the Fed’s interest rate hikes may not end up having as great of a risk on emerging market economies and stock markets as many had initially thought, adding the Fed would continue to communicate its policies clearly, to avoid market disruptions.
  • European data – German trade surplus €22.00bn (expected €19.90bn; last €19.40bn). March Imports -0.9% (expected 0.9%; last -1.4%) and March Exports +1.7% (expected 1.8%; last -3.1%). March Industrial Production +1.0% (expected 0.8%; last -1.7%)
  • UK Halifax House Price Index -3.1% (expected -0.3%; last 1.6%) to be +2.2%yoy (expected 3.3%; last 2.7%)
  • Argentina’s President Mauricio Macri announced the government will request financial assistance from the International Monetary Fund.
  • Chinese trade data yesterday – higher growth in both imports and exports than expected (data below is in US dollars)

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QUOTE OF THE DAY

“I am no longer afraid of becoming lost, because the journey back always reveals something new, and that is ultimately good for the artist.” – Billy Joel, American musician born this day om 1949.

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