The ASX 200 is up 5 points in mid-morning trade. Materials in the lead, banks are mixed. Energy under pressure after STO rejects Harbour Energy bid. BKL and WPL investor briefing. SLK rejects takeover. Some thoughts on themes (see below). RC Round 3 continues #ausbiz



  • Economic data – Construction Work Done
  • Company events – Blackmores (BKL) analyst meeting, Woodside Petroleum (WPL) investor day, Boart Longyear (BLY) AGM
  • Ex-dividend – Cordish Dixon Private Equity Fund II (CD2) 4.0c, Whitefield (WHF) 9.0c
  • RBA Governor Philip Lowe speaking later this evening
  • Japanese data – Nikkei Manufacturing PMI Flash


  • European data – Markit Composite PMI Flash, Markit Manufacturing PMI Flash, Markit Services PMI Flash, Consumer Confidence Flash
  • UK data – PPI Input, Inflation Rate,
  • US economic data – New Home Sales
  • FOMC Minutes


  • Santos (STO) – Has rejected the offer from Harbour Energy and has terminated all discussions. Harbour’s most recent approach began on April 2 at $4.98 (or A$6.50). Shares were trading at $5.07 before the bid and they closed yesterday up 27% at $6.44. That’s still well short of the of the offer price, suggesting some doubt that the deal would have received FIRM approval. STO rejected the bid on 3 critera; Superior shareholder value could be realised by executing the existing strategy; Offer price was too low, control premium inadequate, and; The private equity transaction structure complex, high risk, uncertain and unequal treatment of shareholders. Harbour has said that it was disappointed with the STO decision. “There was insufficient engagement with Santos on valuation, no meaningful attempt by Santos to discuss a realistic price which could be supported by any reasonable set of technical and commercial assumptions, and an unwillingness by their Board to explore means of closing the gap between the Offer and their expectations,”…This makes me think there might be another round of interest, although apparently they can’t come back for 6 months
  • Sirtex (SRX) – Response to Varian’s decision not to counterbid the offer from CDH Genetech. The board is reviewing the 2 offers and will provide a recommendation in due course.
  • Ardent Leisure (AAD) – Ms Toni Korsanos has been appointed to the Board.
  • Rio Tinto (RIO) – Update on Grasberg. RIO notes reports about the potential purchase of its interest in Grasberg by PT Indonesia Asahan Aluminium (Persero) (“Inalum”) for $3.5bn, saying discussions are ongoing but no agreement has been reached.
  • Syrah Resources (SYR) – Has purchased an industrial site for its Battery Anode Material (BAM) development in Vidalia, Louisiana, for US$1.225m.
  • Commonwealth Bank (CBA) – Has sold its 37.5% equity interest in BoComm Life to Mitsui Sumitomo Insurance Co for RMB 3.2 billion ($668 million). The carrying value of BoComm Life was $150m as at 31 December 2017. Will result in an increase of 13 basis points to the CET1 ratio, comprising an initial 5 basis point reduction at the time of an initial capital contribution and an 18 basis point increase upon completion of the sale of the BoComm Life equity interest.
  • Blackmores (BKL) – Investor Briefing. Lot’s of slides updating on the Chinese strategy, noting “the big get bigger” and concluding “Blackmores understand China…”
  • CIMIC (CIM) – Standard & Poors has had its outlook upgraded to stable, with the credit rating of BBB/A-2 affirmed.
  • Woodside Petroleum (WPL) – Investor Day
  • SeaLink (SLK) – Has rejected a takeover bid at $4.75, saying it undervalues the company.


  • Collection House (CLH $1.57) – Morgans has a Hold recommendation with a target price of $1.55 (from $1.40). CLH has entered a transaction with Balbec Capital to assign part of its arrangement book for $19.5m. It intends to reinvest this in PDLs and has the option to repurchase the residual rights to collect the remaining arrangements at the end of the five-year agreement. The Morgans thinks this is a positive deal and gives the balance sheet more flexibility.


  • Healthscope (HSO $2.40) – Lots of news yesterday. Will close Geelong Private Hospital and Cotham Private Hospital in Victoria and record an impairment relating to Frankston. Charge to FY18 results of approximately $17 million comprising asset write-downs, redundancies and other costs and Frankston charge of $68m. Now expects Hospital Operating EBITDA for FY18 to be $340-$345m compared with FY17 $359.4m. (Previously was broadly similar to FY17.) 2H Hospitals Operating EBITDA is expected to be in line with pcp, reflecting an improved performance relative to 1HFY18, which was down 8.6% on pcp. FY19 Hospital Operating EBITDA growth is expected to be at least 10%. Will not provide due diligence access to the 2 interested parties, the BGH – AustralianSuper Consortium or Brookfield.
    • Credit Suisse has a Neutral recommendation with a target price of $2.36. The analyst thinks a sale and leaseback strategy may free up capital, but the potential value of the portfolio may be significantly reduced.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $2.23 (from $2.36). The analyst notes the near-term fundamentals are likely to take a backseat while the portfolio assets are re-organised and they expect a premium to remain in the shares.
    • Morgans has a Hold recommendation with a target price of $2.30 (from $2.42). The analyst thinks Asian pathology will be divested and has downgraded FY18 forecasts by 4-5%. There are a lot of moving parts and they think it is difficult to know if the two would-be suitors will sweeten their current offers.


  • Santos (STO $6.44)
    • Citi has downgraded to a Sell (from Neutral) recommendation with a target price of $5.30. The analyst notes that Harbour Energy said it wasn’t impressed from the due diligence, which complicates things. Using a long term oil price of US$55/bbl, their valuation is now $5.30.
    • UBS has a Neutral recommendation with a target price of $6.40. The analyst notes that shares were trading at a significant discount to the bid price in recent days, with risk due to potential for rejection or FIRB approval. They say Harbour Energy cannot return with another bid for six months.


  • TechnologyOne (TNE $4.65) – Result yesterday. 1H result. Exceeds previous guidance. Net Profit Before Tax up 1% to $10.4m, revenue up 6% to $120m, total expenses up 6% to %110m, R&D up 8% to $25.6m fully expensed, total annual recurring revenue up 14% to $64.1m, Annual Licence Fees up 6% to $51m, Annual SaaS Platform Contract Value up 51% to $31m, Initial Licence Fees up 7% to $25.9m. Dividend up 10% to 2.86cps. “On track to deliver profit growth of between 10% to 15% over the full year.”
    • Morgans has a Hold recommendation with a target price of $4.82 (from $5.10). The analyst notes that timing issues were again a them for the 1H result. Guidance for the full year is in line with expectations. They see the company as high-quality, given its defensive earnings and long-term track record, but think the valuation is elevated.
    • UBS has a Neutral recommendation with a target price of $5.30. The analyst thought the result was in-line but the guidance was 4-9% lower than expected. The 10-15% FY18 pre-tax profit growth implies 17-18% growth in 2H and the think a substantial turnaround in consulting is required. They notes cloud momentum remains strong and is a key supporter of earnings in the medium term but they want to see stabilisation across the consulting and UK businesses before taking a more positive view.



Some interesting themes over the last 12 months are worth pointing out. My interest was sparked because of the consistent underperformance of Telstra (TLS), AMP and the major banks. NAB, CBA and TLS are all at 12 month lows, compared to CSL which is at a 12 month high.

  1. Small companies have outperformed big companies – Over the last year, the All Ords up 11% (including dividends) and the ASX 200 is +10%. The Top 20 is only up 7.5% and the Top 50 +7.9%. The Mid small index is up 19.3% and the Small Ords is up 24.2%
  2. Outperformance of resources – The 200 Resources index is up 34.8% while the Metals & Mining index is up 37.4%.
  3. The yield trap – The dividend opportunities index is only up 1.9%. The banking index is down 3.2%…including dividends (banks are actually down 9.2% on a price basis). And those companies that so many investors are holding for yield. ANZ is ok +3.8%, but CBA -8.3%, NAB -4.4%, WBC -2.5% and AMP -15.8%. Those returns include dividends.




US EQUITIES – S&P500 -9 (-0.31%), Dow Jones -179 (-0.72%), Nasdaq -16 (-0.21%).

Main themes

  • China cut tariffs on auto imports
  • US President Trump said he’s not satisfied with China trade talks
  • Trump also met with South Korea President Moon today to discuss the impending summit and says there is a “substantial chance” that North Korea meeting scheduled for June 12 may not happen at all
  • Financials outperform, partly on a Bloomberg report which suggested Wall Street could potentially see some regulatory relief with the Volcker Rule (bans proprietary trading) in House legislation.

EUROPEAN MARKETS – All higher. STOXX 600 +0.27%, UK FTSE +0.23%, German DAX +0.71%, French CAC +0.05%. Italian and Greek bonds rallied after recent weakness.


  • The US dollar was down 0.04% at 93.64.
  • The Aussie dollar is also a little weaker at US75.78c.

BONDS – Not much going on here. 2-yr: -1 bp to 2.56%, 5-yr: -1 bp to 2.89%, 10-yr: -1 bp to 3.06%, 30-yr: UNCH at 3.21%


  • WTI oil futures were down 11c at US$72.13. The US imposed sanctions on Venezuela after the weekend re-election of Nicolas Maduro, where production is already at its lowest in decades. There is also support from concerns about falling Iranian following potential sanctions. The US has demanded Iran made many changes, including ceasing its nuclear program and pulling out of the Syrian civil war, or face economic sanctions.
  • Gold futures closed down 0.03% to US$1290.90.
  • LME metals – Prices were mixed. Cu +1.45%, Ni +0.72%, Al -0.44%


  • US-China trade – China will reduce tariffs on passenger vehicles and auto parts. Tariffs on certain vehicles will come down to 15% from as much as 25% while levies on some parts will be brought down to 6%effective July 1. But there has been some pushback in Congress about lifting sanctions on Chinese telecom firm ZTE
  • UK – Bank of England Governor Carney said the economic slowdown in the first quarter was most likely temporary
  • UK economic data – May CBI industrial Trends Orders -3 (expected 2; Prior 4)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s