MID MORNING MARKETS 21-6-18

The ASX200 is +39pts in mid-market trading, down from intital +58pt start. Telcos the only red sector. TLS div est cuts, RHC write-downs and downgrade, BAL secures supply, GTY in play, WTC acquisition, BofE meets tonight A$ 73.65 #ausbiz

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TODAY

  • Economic data – Westpac Leading Index
  • RBA Bulletin
  • Ex-dividend – Fisher & Paykel Hlth (FPH) 11.4c

TONIGHT

  • European – Consumer Confidence Flash
  • UK – Public Sector Net Borrowing
  • BoE Interest Rate Decision
  • US economic data – Philadelphia Fed, FHFA Housing Price Index, Leading Indicators

ECB fest in Portugal – Lots of talk from the ECB get-together, including from our own RBA Governor Philip Lowe. Lowe said he is confident inflation will get back to 2.5%, but that would mainly be through borrowing money (asset price inflation), noting this is a much bigger risk to the economy than low inflationary expectation. He said “very high” debt levels and asset prices are the number 1 domestic risk in Australia. Implication is rate rises are a long way out…but the risk of lower rates is even higher.

COMPANY NEWS

  • Ramsay Healthcare (RHC) – Asset write-downs and updated guidance. Charge of £70 million (A$125 million) net of tax, consisting of an onerous lease provision and asset write-downs related to certain UK sites. FY18 Core EPS growth is now expected to be approximately 7% (previous guidance of 8% to 10%). In the UK, “NHS demand management strategies are having a significant negative impact on volumes despite the significant and increasing number of people in the UK awaiting treatment.” Australia – weaker growth rates in procedural work and inpatient admissions in its Australian operations in recent months as well as delays in the rollout of the Ramsay Pharmacy franchise network. Expects conditions to remain challenging. Expects trends to continue into FY19.
  • APN Outdoor (APO) – Has received a takeover offer from JCDecaux SA (JCD) at $6.52 (11.45% premium to yesterday’s close). APO is continuing with its offer for Adshel for $500m with a view to agreeing a transaction with HT&E Limited (ASX: HT1). No action required.
  • Gateway Lifestyle (GTY) – Has received another offer, this time from Brookfield Property Group, at an indicative price of $2.30. It’s higher than the previous offer from Hometown at $2.10. Gateway Lifestyle will now provide due diligence access to Brookfield on an exclusive basis
  • Wisetech Global (WTC) – Has acquired Pierbridge, a leading US parcel shipping transportation management solution provider to medium and large enterprises. Involves ~$37.0m upfront with a further multi-year earn-out potential of up to ~$22.4m. With 2017 annual revenue of ~$9.3m and ~$0.1m contribution to EBITDA, this transaction, while of strategic value, is not material to the WiseTech Global group2 .
  • Atlas Iron (AGO) – MinRes announced that it will not make a counter proposal to the Hancock Offer yesterday. Interesting use of the word “majority” in the ATO announcement today. “A majority of the Atlas Board has determined that the Hancock Offer is superior to the MinRes. Accordingly, a majority of the Atlas Board has now withdrawn its recommendation of the MinRes scheme, and recommends that Atlas shareholders accept the Hancock Offer.” There is a $3.12 break fee. The Board advises shareholders take no action.
  • Woolworths (WOW) – BP won’t be buy the Petrol business (as announced on 28 December 2016). WOW is continuing to engage with alternative options
  • Fletcher Building (FBU) – Investors Day. OUTLOOK – earnings: FY18 result is likely to include below-the-line restructuring charges plus impairment of certain business unit carrying values; FY19 objective is to stabilise and focus the business, growth from FY20 driven especially by AU turn around and targeted M+A; working capital: opportunity for one-off c.$100m cash release through to FY23; CAPEX: expected investment in base business of $275-325m p.a. from FY19; returns: target >15% return on funds employed; cash generation: targeting improvement in cash conversion from c.45% in FY18F to >70% through to FY23; cash: cashflow profile impacted in FY19-20 by Formica divestment, B+I and taxation; taxation: B+I losses will limit cash tax in FY19-20. TRADING UPDATE: Current trading across FBU’s New Zealand and Australian businesses remains in line with expectations

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  • Spark Infrastructure (SPK) – More than 50% of its broadband customers have now moved away from copper (ADSL and VDSL), onto new broadband technologies. Around 34% are now on fibre and 16% on wireless broadband (delivered over Spark’s 4G and 4.5G mobile networks). Spark says it’s solid progress towards the ambition of having at least 85% of its broadband customers upgraded to new, future-proofed broadband technologies by the end of June 2020.
  • Belamy’s (BAL) – Three new organic milk supply arrangements. I) an amended agreement with Fonterra to begin development and conversion of a Tasmanian organic milk pool to support infant formula production at Fonterra’s Darnum site ii) a new multi-year agreement to secure access to Australian sourced organic fresh milk with an affiliate of Australian Consolidated Milk (ACM) iii) an amended agreement with Tatura Milk Industries Limited (TMI) to incorporate fresh organic milk into production leveraging TMI’s organic dairy supply base.
  • Pilbara Minerals (PLS) – Has produced the first concentrates at its 100%-owned Pilgangoora Lithium-Tantalum Project in WA.

BROKER CHANGES

  • Amcor (AMC) – Macquarie has an Outperform recommendation with a target price of $15.72 (from $15.74), Guidance is for a modestly lower FY18 outcome versus the February update and the analyst says this translates to modestly lower profit on pcp on constant currency basis. Trends are improving but Pepsi is still losing share and they forecasts net profit growth of 8% in FY19

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  • Telstra (TLS) – Investor Day. 8,000 jobs and removing 4 layers of management. New InfraCo with $11bn assets and $5.5bn revenue. The lower guidance earnings range of $8.7-$9.4bn is 10-15% below consensus which is after most analysts have already lowered forecasts over the last few weeks. Plans so far are not concrete and appear arbitrary, with little detail. The positive might be the digestion of the “InfraCo” which could be a positive for the company going forward. While shares will probably provide a trading opportunity at some stage, there is no need to be here now.
    • Macquarie has a Neutral recommendation with a target price of $2.75 (down 14.1%). Tougher outlook for mobiles. The analyst expects dividends to be cut to 16c from FY19. They are concerned about the revenue trajectory and, while the strategy should mean the company regains the initiative in the mobiles business, it is not without costs or risks.
    • Morgans has an Add recommendation with a target price of $3.42 (from $3.99). They note guidance includes lower over-usage, restructuring costs and delays in the NBN. The analyst notes lower earnings translate to a lower dividend, regardless of timing delays, and has downgraded FY19/20 dividend estimates to $0.17 per share.
    • Citi has a Sell recommendation with a target price of $2.30 (from $2.70). The most vocal of the critics, the Citi analyst is now forecasting TLS’s dividend will not be higher than 10c starting in FY21. Earnings estimates have been slashed 33% and 36% off previously lowered estimates.
    • Morgan Stanley has an Underweight recommendation with a target price of $3.00. The analyst thinks the update signals significant structural pressures. They retain medium to long-term concerns regarding the fundamental’s of the business, but think a range of new initiatives should cushion the impact of structural pressures.
    • UBS has a Buy recommendation with a target price of $3.00. The analyst says restructuring, 5G and cost reductions should lift terminal earnings versus a “do nothing” approach, and potentially even lift FY22 EBIT back above FY19. Keeping the Buy on a risk/reward basis but see limited near-term catalysts unless a trough in earnings for FY19 are deomnstrated.

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  • Lindsay Australia (LAU 37c) – Morgans has an Add recommendation with a target price of 50c (form 51c) – The analyst thinks the compnay will have a strong result, underpinned by improved capacity utilisation, market share gains and price rises in the core transport division. They believe the stock is a compelling way to gain exposure to the expected growth in domestic fresh produce and improving export market access.

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  • Motorcycle Holdings (MTO $3.43) – MTO has guided to operating earnings of $19-21m for FY18. Morrgans has an Ad recommendation with a target price of $4.01 (from $4.49). The mid point for guidance is around 8.7% below the analyst’s prior estimate, with the shortfall likely relating to the base business, as opposed to Cassons, and persistent weakness in Harley-Davidson. They don’t think the drivers of the headwinds are structural and expect a rebound in momentum in FY19

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  • Worley Parsons (WOR $16.88) – UBS has reinstated coverage with a Neutral recommendation with a target price of $17.50. The analyst expects a gradual recovery in global oil & gas CAPEX and suggests it’s aleady siscounted in the share price. They note oil sector fundamentals have improved and have positive view on the medium-term growth prospects

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OVERNIGHT

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SPI FUTURES +11

US EQUITIES – S&P500 +5 (+0.17%), Dow Jones -42 (-0.17%), Nasdaq +56 (+0.72%).

Main themes

US-China trade tensions remained in focus.

Most sectors positive – tech sector outperforms.

EUROPEAN MARKETS – Lower. STOXX 600 -0.70%, UK FTSE -0.36%, German DAX -1.22%, French CAC -1.10%

CURRENCIES

  • The US dollar was little changed at 95.09
  • The Aussie dollar under a bit weaker at US73.69c.

BONDS – Sell off, reversing yesterday’s gains. 2-yr: +2 bp to 2.57%, , 5-yr: +3 bps to 2.80%, 10-yr: +4 bps to 2.93%, 30-yr: +3 bps to 3.06%

COMMODITIES

  • WTI oil futures rose US80c or 1.2% to US$65.70 in a volatile session. EIA US crude inventories fell 5.9mb, but a rise in fuel stockpiles offset the decline. Ahead of Friday’s OPEC meeting, Iran said a deal was unlikely to be reached, but many producers have been overdelivering on the agreed production cuts so a return to agreed levels would result in a production boost. Threats of tariffs on oil are also having an impact, with China taking 20% of all US exports.
  • Gold futures were down US$4.10 at US$1,274.50.
  • Iron Ore – IRESS reports iron ore unchanged at US$67.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was unchanged atUS$64.25/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu -0.98%, Ni +2.18% and Al -0.23%.

ECONOMIC DATA, NEWS & POLITICS

  • US Economic data – Q1 Current Account Balance -$124.10bn (consensus -$129.20bn; prior -$116.20bn), May Existing Home Sales down 0.4% to 5.43m (consensus 5.55m; prior 5.45m)
  • General Electric will be removed from the Dow Jones Industrial Average (it has inhabited for more than a century) to be replaced by Walgreens Boots Alliance (+5%). The change will take effect prior to the open of trading next Tuesday.
  • Disney raised its bid for Twenty-First Century Fox to $38 per share, or $71.3 billion, higher than $65bn offer by NBCUniversal parent Comcast. Fox shares rose 7.5%.
  • Starbucks (-9.1%) announced plans to close more than 150 stores in the next year and lowered 3Q sales guidance
  • Brexit – Lawmakers rejected a Brexit amendment that would have given more power over talks to the British parliament.

QUOTE OF THE DAY

“But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit.” – Josiah Stamp, 1st Baron Stamp, British industrialist and economist, born this day in 1880. Died 16 April 1941.

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