MID MORNING MARKETS 2-7-18

The ASX200 is up 7 points in mid-morning trade. AREITS bounce back, banks and materials mixed. SIG loses contract, increased offer for GTY and no sale for AHG. RBA meeting, retail sales and US employment the key features this week. RC moves to Darwin. #ausbiz

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TODAY

  • Domestic economic data – AIG Manufacturing Index, ANZ Job Advertisements
  • Chinese – Caixin Manufacturing PMI
  • Japan – Nikkei Manufacturing Index (final)
  • Ex-dividend – VanEck Vectors Australian Property ETF (MVA) 43.0c, VanEck Vectors Australian Banks ETF (MVB)3.0c, Vaneck Vectors S&P/ASX Midcap ETF (MVE) 20.0c, VanEck Vectors Australian Resources ETF (MVR)12.0c, VanEck Vectors Small Companies Masters ETF (MVS) 31.0c, VanEck Vectors Australian Equal Weight ETF (MVW) 23.0c, Namoi Cotton (NAM) 1.9c, Turners (TRA)3.9c

TONIGHT

  • US data – ISM Index (prior 58.7) and Construction Spending (prior 1.8% )
  • European data – Markit Manufacturing Index, Unemployment
  • UK – Markit/CIPS Manufacturing Index

COMPANY NEWS

  • Sigma Health (SIG) – Will not be an extension of SIG’s contract with My Chemist/Chemist Warehouse Group (MC/CW) Will continue until June 30 19. Revising guidance in line with softer economic conditions to underlying EBIT, citing particularly weak trading conditions in May and June, while the introduction of the June PBS price adjustment had a much more significant impact than expected and was equal to the full year impact of PBS adjustments in April and October. The company said “We are currently implementing initiatives to reduce our operating costs, which will provide some benefit in the second half of FY19 and will also benefit FY20 and beyond but these are not sufficient to offset the shortfall in sales in FY19.” FY19/20 guidance of $40-50m. SIG said its balance sheet will be improved by the return of over $300m as the current MC/CW payment terms unwind. Also confirmed its intention to continue to pay a high proportion of profits as franked dividends.
  • Ebos Group (EBO) – Has won the contract with Chemist Warehouse/My Chemist. It’s a 5-year supply agreement from 1 July 2019, with the potential for an extension for a further 3 years. EBOS estimates that sales to the Chemist Warehouse Group stores will generate approximately AUD$1 billion in revenue in the first year of the agreement.
  • Ardent Leisure (AAD) – Leadership changes. Dreamworld CEO Craig Davidson will leave the business next month. Nicole Noye (currently Group Chief Experience Officer) will be Acting CEO of Theme Parks while a international search takes place. Nicole was formerly CEO of Ardent’s Bowling & Entertainment division. 2 other appointments include Phil Tanner as Director of Safety and former Queensland Police Inspector Mike McKay APM as Director for Culture, Community and External Relations.
  • Gateway Lifestyle (GTY) – New offer at $2.25 (representing $2.3035 before being adjusted for the 5.35 cent distribution). Hometown presently has a relevant interest in 18.2% of Gateway’s stapled securities. Also potential to increase to $2.30 with Gateway Board recommendation. Hometown says its offer is not subject to due diligence, has lower completion risk and delivers a shorter timeframe to completion than the Brookfield Proposal.
  • Spark New Zealand (SPK) – Two new leaders. Matt Bain will be joining Spark in November 2018 as Marketing Director, a new role which Spark announced back in March it would be looking to recruit for; and Melissa Anastasiou, Spark’s General Counsel, has been promoted to the Leadership Squad
  • Automotive Holdings (AHG) – HNA International (HNA) has terminated the agreement announced on 23 November 2017 to acquire the AHG’s Refrigerated Logistics business. There were delays with FIRB approval and discussions on transaction terms (AHG says HNA had liquidity problems). AHG said it was disappointed by logicstic business could now focus on running the business.
  • Corporate Travel (CTD) – The acquisition of Australian based SCT Travel (announced 1 May 2018) is now complete.
  • GUD Holdings (GUD) – Management changes. Jonathan Ling has resigned as Managing Director and Chief Executive Officer and will be leaving the Company on 30 September 2018. Graeme Whickman has been appointed Managing Director and Chief Executive Officer. Graeme is the former president and chief executive officer of Ford Australia and New Zealand
  • Bendigo & Adelaide Bank (BEN) – Marnie Baker starts as Group Managing Director today.
  • Beach Energy (BPT) – Reserves and contingent resources as at 30 June 2018. 1P reserves increased by 152 MMboe (+405%) to 190 MMboe; 2P reserves increased by 239 MMboe (+320%) to 313 MMboe; Beach ‘pre-Lattice acquisition’ assets1 2P reserves increased from 75 to 95 MMboe; Lattice acquired assets1 2P reserves increased from 158 to 218 MMboe; Organic 2P reserves replacement ratio2 of 368%; 2P reserves life has increased from 7 years at the end of FY17 to 11 years at the end of FY183
  • Orocobre (ORE) – The NI43-101 Technical Report on the resource upgrade of the Cauchari Lithium Project in Jujuy, Argentina has been completed. The report has increased the inferred resource to 1,200 million cubic metres of brine at average grades of 450 mg/l lithium and 4,028 mg/l potassium for 3.0 Mt of Lithium Carbonate Equivalent (LCE) and is the basis for a Preliminary Economic Assessment to be completed in Q3 2018.

ANALYST CHANGES

  • CIMIC Group (CIM $42.30) – Deutsche Bank has upgrade to a Hold (from Sell) recommendation with a target price of $40.50. The analyst sees more value in the current price. They note a more balanced risk-reward profile, as the 12-month PE has fallen from 22x to 18x. The chart look interesting, with RSI ticking up, the MACD indicator (the blue bars) about to give a buy signal and a gap in the candle.

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  • Reliance Worldwide (RWC $5.36) – Macquarie has resumed coverage with an Outperform recommendation with a target price of $6.20. The analyst lies the proposed acquisition of John Guest, a UK-based plastic PTC fitting specialist, for GBP687.5m and a survey of UK plumbers has confirmed confidence and conviction. Estimates (Adjusted EPS) for FY19, FY20 and FY21 have increased by 19%, 11% and 15%, respectively, mainly accounting for the JG acquisition but also altered FX estimates. The share price is drifting lower after the recent spike and gap, with RSI looking to give a sell signal soon (moving below 70).

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  • Seek (SEK $21.81) – Citi has a Sell recommendation with a target price of $15.10. The analyst notes the contribution of strong NZ employment but point job ads (now been flat for nine months) and leading indicators which are pointing to the risk of declines in the near term. They have reduced forecasts by 3% and don’t expect dividend increases for the foreseeable future (46c).

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  • Orica (ORI $17.75) – Deutsche Bank has a Hold recommendation with a target price of $18.00. The analyst notes news of the Anti-Dumping Commission’s investigation into imports from China, Sweden and Thailand should help support the domestic ammonium nitrate market and say the timing is positive as several large contracts are due for renewal.

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  • Treasury Wine Estates (TWE $17.39) – Morgan Stanley has an Overweight recommendation with a target price of $20.00. The analyst notes that Constellation Brands reported a soft 1Q due to weakness in wine and spirits, driven by higher grape and transport costs. They suggest Constellation sources more wine externally than Treasury Wine, with a greater cost exposure. They also see a positive from tightening in grape supply given TWE’s more premium portfolio. Despite low expectations for the JunQ US result, they think the Chinese-based sell-off has been overdone and recent AUD weakness should provide a tailwind. Shares look to be overshold and MACD is at historically low levels. Shares may consolidate a bit more at these levels but otherwise look to still be in a firm uptrend.

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LAST WEEK

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THIS WEEK – Highlights for the week

  • Domestically – RBA tomorrow (no change in rates expected, with major data including building permits Tuesday, followed by trade data and retail sales on Wednesday
  • Chinese Caixin manufacturing index today, followed by the services and composite index on Wednesday.
  • European data includes unemployment tonight, with retail sales and PPI on Tuesday and Markit PMI data on Wednesday
  • Bank of England meeting minutes are Wednesday, and data includes Markit PMI, house prices and industrial production. Mark Carney will be speaking on Thursday.
  • US employment data on Friday will be the main event but other releases include the ISM index  and factory orders tonight, while the FOMC meeting

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OVERNIGHT

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SPI FUTURES +23

US EQUITIES – S&P500 +2 (+0.08%), Dow Jones +55 (+0.23%), Nasdaq +7 (+0079%).

Main themes

  • Market lost early gains
  • Financials rose on Fed stress test results that allowed buybacks and higher dividends, but faded over the day
  • Nike (+11.13%) rallied on earnings and revenue estimates
  • General Motors (-2.76%) warned that tariffs on imported cars could lead to “a smaller GM”
  • Reports that President Trump is working on a second phase two of his tax plan and is considering cutting the corporate tax rate to 20% from 21%.
  • EU leaders reached a deal on a migration

EUROPEAN MARKETS – All higher. STOXX 600 +0.81%, UK FTSE +0.28%, German DAX +1.06%, French CAC +0.91%.

CURRENCIES

  • The US dollar was weaker at 94.47
  • The Aussie dollar is stronger at US74.47c.

BONDS – 2-yr: +1 bp to 2.53%, 5-yr: UNCH at 2.73%, 10-yr: UNCH at 2.85%, 30-yr: UNCH at 2.98%

COMMODITIES

  • WTI oil futures closed up US70c or 1.00% to US$74.15 (reached a high of US$74.46). Factors include a risk that Iran’s oil exports could be cut further. An outage at Canada’s Syncrude has also cut more than 300,000 bpd of production, while in Libya force majeure will be declared on loadings from the eastern ports of Zueitina and Hariga from today, raising losses to 800,000 bpd.
  • Gold futures were up US$3.50 at US$1,254.50.
  • Iron Ore – IRESS reports iron unchanged at US$66.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up 50c at US$64.45/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu +0.05%, Ni +0.78% and Al -1.02%.

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Personal Income 0.4% (consensus 0.4%; prior 0.2%), Personal Spending 0.2% (consensus 0.4%; prior 0.5%), PCE Prices 0.2%(consensus 0.2%; prior 0.2%), and PCE Prices – Core 0.2% (consensus 0.2%; prior 0.2%); Chicago PMI 64.1 (consensus 61.0; prior 62.7); Final June Michigan Consumer Sentiment Index 98.2 (consensus 99.0; prior 99.3). The downgrade from the prelimiary reading was due to tariff concerns.
  • FED Stress Tests – 31 of the largest 35 banks passed the second round of stress tests. Deutsche Bank’s US unit was cited for “widespread and critical deficiencies” while Goldman Sachs and Morgan Stanley received conditional passes.
  • EU summit in Brussels – Leaders struggled to reach agreement on a joint statement (9 hours of negotiations). The final statement acknowledged plans for “controlled centres” within the EU to process asylum requests and that Italy would no longer bear sole responsibility for rescues at sea. However, the statement was vague on details, suggesting more work remains to be done
  • European data – CPI +2.0% (as expected, ast 1.9%). Core CPI +1.0% (as expected, ast 1.1%), German Unemployment Change -15,000 (expected -8,000; last -11,000) and Unemployment Rate 5.2% (as expected, last 5.2%), Retail Sales -2.1% (expected -0.5%; last 1.6%) to be -1.6%yoy (expected 1.8%; last 1.0%). Import Price Index +1.6% (expected 1.0%; last 0.6%) to be +3.2%yoy (expected 2.7%; last 0.6%); June CPI +0.1% (as expected, last 0.4%) to be +2.1%yyoy (last 2.0%). PPI +0.6% (last -0.6%)
  • UK economic data – UK’s Q1 GDP +0.2% (expected 0.1%; last 0.1%) to be +1.2%yoy (as expected, last 1.3%). Q1 Current Account -£17.70bn (expected -£18.00bn; last -£19.50bn). May Mortgage Approvals 64,530 (expected 62,200; last 62,940) and May Mortgage Lending £3.86bn (expected £3.73bn; last £3.79bn). Q1 Business Investment -0.4% (expected -0.2%; last -0.2%)
  • Chinese data over the weekend

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QUOTE OF THE DAY

“None of us got where we are solely by pulling ourselves up by our bootstraps. We got here because somebody – a parent, a teacher, an Ivy League crony or a few nuns – bent down and helped us pick up our boots.” – Thurgood Marshall, American judge born this day in 1908. Died 24 January 1993

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