MID MORNING MARKETS 28-05-18

The ASX 200 is down 24 points in mid-morning trade after mixed US leads ahead of a long weekend in the US and UK. Energy sector hit after oil dropped 4%. Banks and resources both lower. WES expands in SA without key client. FPH result, RWC back online. RC Round 3 continues #ausbiz

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  • Ex-dividend – DuluxGroup (DLX) 14c
  • ALS (ALQ) – Results
  • Macquarie Atlas Roads (MQA) renamed Atlas Arteria (ALX) today
  • Fisher & Paykel (FPH) – Earnings
  • Steadfast Group (SDF) – Investor DAy
  • Melbourne IT (MLB) – AGM

TONIGHT

  • US and UK markets closed

COMPANY NEWS

  • Wesfarmers (WES) – Media reports of a potential divestment of the liquor business to KKR.
  • Fisher & Paykel (FPH) – NPAY up 12% to NZ$190.2m. Dividend up 11% to 12.5cps. Revenue up 10% in to a record NZ$980.8 million (9% growth in constant currency); 14% growth in Hospital operating revenue (13% growth in constant currency); Revenue growth of 22% in constant currency for consumables used in non-invasive ventilation, Optiflow nasal high flow therapy and surgical applications, accounting for 57% of Hospital consumables revenue. 4% growth in Homecare operating revenue; Gross margin up 31 basis points for the full year (34 basis points in constant currency). Investment in R&D up 10% to NZ$94.7m. 87% of the company’s revenue was generated from recurring items, such as consumables and accessories. OUTLOOK: capital expenditure for FY2019 to be NZ$160-$170m due to increased capacity for both existing and new products and progress with our building programmes in New Zealand and Mexico. Expect 2019FY  operating revenue of NZ$1.05bn and NPAT of NZ$210m.
  • Metcash (MTS) – New distribution centre in SA that will enable significant operational efficiencies and broader product range. Drakes has no committed to supplying its supermarkets from the new DC. (Total Sales Drakes Supermarkets in SA were ~$270 million in FY18.) The Supermarkets & Convenience pillar is expected to report a 1.2% fall in total sales and a 3.6% decline in wholesale sales (excluding tobacco) for FY (30 April 2018). FY18 earnings for Supermarkets & Convenience is expected to be in line with the prior financial year. It is not expected that this advice from Drakes will have a material impact on the earnings of the Supermarkets & Convenience pillar in FY19.
  • Boral (BLD) – Has signed a new agreement with Mirvac to include an additional 278 hectares of land in the development arrangements for Boral’s Donnybrook property in Victoria. Boral now expects property earnings to be at the high end of the guidance range $55-$65 million of EBITDA for FY2018.
  • Independence Gold (UGO) – Divesting Jaguar operations north of Leonora, WA to CopperChem (subsidiary of Washington H. Soul Pattinson) for $73.2m cash ($25m on completion and $48.2m deferred).
  • Fortescue Metals Group (FMG) – The board has approved the development of the Eliwana mine and rail project, located in Western Australia’s Pilbara region. Estimated capital cost of US$1.275bn; 143km of rail, a new 30mtpa dry ore processing facility (OPF) and infrastructure; Production commences December 2020 with a life of mine strip ratio of 1.1; Underpins the introduction of a 60% iron grade product (Fortescue Premium) in the second half of FY19; Financed from operating cashflows at a capital intensity of US$42 per tonne
  • CIMIC (CIM) – Sedgman (CIM mineral processing company) has been awarded a contract by Century Mining Limited to operate and maintain the Lawn Hill processing plant, concentrate pipeline and Karumba Port facility in Queensland. Revenue will be approximately $110 million over five years.
  • Downer EDI (DOW) – Nicole Hollow as Non-executive Director
  • Resolute Gold (RSG) – Has acquired 15% interest in Orca Gold
  • Investa Office Fund (IOF) – Bid from Blackstone at $5.25 cash, or $5.15 taking into account the expected 2H distribution. The $5.15 is a 13.2% premium to IOF’s ex-distribution closing price of $4.55 on 25 May, a 16.0% premium to the one month volume weighted average unit price of IOF of $4.44 up to 25 May 2018; 4.0% premium to IOF’s last reported NTA per unit of $4.95 as at 31 December 2017; 3.9% FY18 DPS yield (based on previous distribution guidance for FY18); and 4.0% premium (an increase of 20¢ per IOF unit) to an initial l proposal by Blackstone made on 5 April 2018.
  • Sirtex (SRX) Varian Interlocutory Application Update. SRX support and recommend the Varian
  • APN Outdoor (APO) – FY18 Guidance. FY underlying EBITDA is expected to be $92-$96 million as revenue momentum continues to build. Headline 1H18 revenue growth mid-single digits on pcp, and high-single digits excluding the impact of the Yarra Trams contract loss in 2H17. FY18 capex expenditure $25-$30m, in line with guidance at the FY17 results presentation.

ANALYST UPDATE

  • Wesfarmers (WES $45.52) – Will divest the Homebase business in the UK and Ireland (bought in 2016) to a company associated with Hilco Capital. Hilco will acquire all Homebase assets (including the Homebase brand, its store network, freehold property, property leases and inventory) for a nominal amount. The 24 Bunnings pilot stores will convert to Homebase. Wesfarmers will participate in a “value share mechanism”, receiving 20% of any equity distributions from the business and allowing WES to participate in any profitable divestment of the business in the long-term. WES said there was potential for turnaround but risks and benefits didn’t justify the cost and management time. Expects to record a loss on disposal of £200-230m in the Group’s 2018 full-year financial results. The chart is very “blah” and not offering any positive signals. RSI and the MACD indicator both looking toppy. But the Bunnings divestment and press speculation about further asset sales and restructure might give this most recent spike some legs.
    • Citi has downgraded to a Sell (from Neutral) recommendation with a target price of 41.50 (from $40.10). A bad decision, but the costs or exit are better that the Citi analyst expected, remove a big risk overhanging the company and improve the balance hseet.
    • Credit Suisse has an Outperform recommendation with a target price of $47.3 (from $45.20). Again, a better outcome that the CS analyst expected, particularly the 20% share of future equity distribution.
    • Deutsche Bank has a Hold recommendation with a target price of $42.00. The analyst estimates exit costs of £50-80m.
    • Morgan Stanley has an Underweight recommendation with a target price of $39.00. The analyst sees the losses from the UK business eliminated post FY2019.
    • UBS has a Neutral recommendation with a target price of $43.00 (from $41.30). Accretive since the analyst had forecast further losses. FY19 earnings up by 3%. While the current businesses are strong, they expect a muted performance in the medium term.

CHT1

  • WorleyParsons (WOR $16.78) – Macquarie has an Outperform recommendation with a target price of $17.70 (from $16.08). The analyst notes the increasing number of contract announcements in the market, which supports recovery prospects. Shares are still in an uptrend but the RSI sell signal (drop below 70) combines with the MACD histogram dipping below zero suggests a bit of short term caution.

CHT2

  • Seven Group (SVW $19.59) – Macquarie has an Outperform recommendation with a target price of $22.08 (from $18.80). The analyst sees a continuation of the upgrade cycle and strong momentum in a number of SVW’s businesses, with margin expectations lifted for WesTrac. On the charts, shares do look to be losing momentum but nothing convincing at this stage…just a rolling over of the RSI. Watch it if this dips below 70.

CHT3


LAST WEEK

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THIS WEEK

It’s a quiet start the week due to holidays in the US and UK. But the key economic releases include US GDP and ISM index on Friday, European inflation and unemployment, Chinese PMI numbers, and domestic retail sales and CAPEX

  • Domestic data includes building permits on Wednesday but the biggies are retail sales on Friday and Capex on Thursday which feeds into the GDP number out next month
  • In China, we have most of the PMI numbers, the official government numbers on Thursday and the Caixin manufacturing number on Friday.
  • A big week in Japan – unemployment on Tuesday, retail sales and consumer confidence on Wednesday, industrial production on Thursday and manufacturing PMI on Friday.
  • In Europe, inflation and unemployment on Thursday will be the key releases, while consumer confidence is Wednesday and the manufacturing PMI is Friday.
  • UK data includes consumer confidence in Wednesday, house prices on Thursday and the manufacturing PMI on Friday
  • Holiday in the US on Monday for Memorial Day. Key data includes employment and the ISM index on Friday. Other points to note include consumer confidence on Tuesday, the second estimate of GDP on Wednesday, and the Fed’s Beige Book on Wednesday.

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Company Calendar

  • Tuesday 29 May – Challenger (CGF) Investor Day
  • Wednesday 30 May – TechnologyOne (TNE) – Investor Day
  • Thursday – nothing
  • Friday 1 June – OceanaGold (OGC) – AGM

OVERNIGHT

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SPI FUTURES -30

US EQUITIES – S&P500 -6 (-0.24%), Dow Jones -59 (-0.24%), Nasdaq +9 (+0.13%).

Main themes

  • President Trump’s comments about North Korea suggests summit could happen
  • US bonds and European bonds sold-off amid ongoing political concerns
  • WTI crude futures were down 4% after Saudi Arabia and Russia talked about boosting production
  • Market cautious ahead of extended Memorial Day weekend

EUROPEAN MARKETS – A little mixed. STOXX 600 +0.14%, UK FTSE +0.18%, German DAX +0.65%, French CAC -0.11%.

CURRENCIES

  • The US dollar was higher at 94.25.
  • The Aussie dollar is a touch lower at US75.57c.

BONDS – Continued to strengthen with the 10 year yield down a further 5 points to 2.93%. 2-yr: -2 bps to 2.48%, 5-yr: -5 bps to 2.76%, 10-yr: -5 bps to 2.93%, 30-yr: -4 bps to 3.09%.

European bonds sold off on rising political risk in Europe with Italian +6bp, Spanish +6bp, Greek +13bp, and Portuguese +4bp.This supported US debt

COMMODITIES

  • WTI oil futures fell US$2.83 or 4.0% to US$67.88 after confirmation that OPEC and non-OPEC producers might raise output to deal with falling production in Nenezuela and US sanction on Iran. The oil ministers of Saudi Arabia and Russia met in St Petersburg to discuss the options.
  • Gold futures were marginally lower at US$1303.60.
  • Iron Ore – IRESS reports iron ore at US$65.00 a tonne, down from the US$68.00 it had for most of last week. The CommSec site says China Import (Fines 62% Fe) was down US$1.40 to US$63.75/dry ton. (CFR Tianjin port)
  • LME metals – Prices were mixed. Cu +0.07%, Ni -0.81%, Al -0.79%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – April Durable Orders -1.7% (consensus -1.6%; prior 2.7%) and Durable Orders -ex transportation 0.9% (consensus 0.6%; prior 0.4%), Final May Michigan Sentiment Index 98.0 (consensus 98.8; prior 98.8)
  • Fed Speak – Fed Chairman Jay Powell says forward guidance, which was highly useful following the financial crisis, will have a smaller role in the future
  • European politics – Italian Prime Minister-designate Giuseppe Conte has yet to form a cabinet. In Spain, 29 people related to Prime Minister Mr Mariano Rajoy’s party were convicted of corruption-related offenses on Thursday.
  • European economic data – German April Ifo Business Climate Index 102.2 (expected 102.7; last 102.1). April Business Expectations 98.5 (expected 99.5; last 98.7) and April Current Assessment 106.0, as expected (last 105.7); Italian non-EU trade balance €1.86bn (last €3.83bn), Spanish PPI +1.9% (last 1.3%)
  • UK data – Preliminary Q1 GDP +0.1% (as expected, last 0.1%) to be +1.2%yoy (as expected, last 1.2%).

QUOTE OF THE DAY

“I cannot afford to waste my time making money.” – Louis Agassiz, Swiss scientist born this day in 1807. Died December 1873. Of course Louis, that why one needs the “experts”. I would have loved to have helped you in another time.

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