MID MORNING MARKETS

The ASX200 is up 48 points in mid-morning trade, after good offshore leads. Material leading, banks higher and Energy and Telcos the key drag. BHP Q report, NVT “rationalisation”, MSB China move and BGA acquisition. AUD at 73.87. #ausbiz.

M3M4M5TODAY

  • BHP Billiton (BHP) Q report

TONIGHT

  • UK – Inflation Rate, PPI Output
  • European data – Construction Output, Inflation Rate
  • US economic data – Housing Starts, Building Permits, Beige Book
  • US earnings – Ericsson (ERIC), Morgan Stanley (MS). After-market: Alcoa (AA), American Express (AXP), eBay (EBAY). IBM

COMPANY NEWS

  • BHP Billiton (BHP) – Headlines:  Met or exceeded full year production guidance for petroleum, copper, iron ore and energy coal. Met revised (downgraded) guidance for metallurgical coal; Group copper equivalent production increased by 8% in the 2018 financial year, with annual production records at Western Australia Iron Ore (WAIO), Queensland Coal and Spence; Expect to achieve full year unit cost guidance at our major assets (based on 2018 financial year guidance exchange rates of AUD/USD 0.75 and USD/CLP 663); Group copper equivalent production for the 2019 financial year is expected to be broadly in line with the 2018 financial year; The exit process for Onshore US is progressing to plan. Bids have been received and we aim to announce one or more transactions within the coming months, targeting completion of any transactions by the end of the 2018 calendar year; In Petroleum, the Victoria-1 exploration well in Trinidad and Tobago encountered gas and the Samurai-2 well in the US Gulf of Mexico encountered hydrocarbons in multiple horizons; The South Flank sustaining iron ore project was approved during the June 2018 quarter; We expect the financial results for the second half of the 2018 financial year to reflect certain items as summarised in the table on page two. Expects US$440m charge in relation to Samarco.

M1

M2

  • Northern Star (NST) – Q production report. FY2018 production of 575,121oz exceeds top-end guidance; FY2019 guidance is 600,000-640,000oz at AISC of A$1,025-1,125/oz
  • Data#3 (DTL) – FY18 group NPBT estimate approximately $20.4m and FY18 group NPAT estimate approximately $14.0m. Following the challenging first half, the core Data#3 business delivered a record second half result, ending the year ahead of FY17. Business Aspect also had a strong second half, recovering its first half loss to end with an estimated full year result close to break even, but below FY17. The current estimate of Discovery Technology’s second half NPBT (including non-controlling interests) is approximately $1.4m below the PCP, producing a full year NPBT approximately $1.8m below the FY17 profit of $1.4m. This is due predominantly to a customer’s early termination of a 5-year supply contract, which is currently subject to legal proceedings for debt and economic loss recovery (instituted by Discovery Technology).
  • Navitas (NVT) – Rationalisation program: investigation of a divestment of all SAE US colleges; closure of two sub scale SAE US colleges on the west coast; closure or divestment of Health Skills Australia; closure of SAE Oxford; and conversion of SAE Indonesia into a licensed operation. Charges will total approximately $130m post tax. Navitas’ unaudited FY18 EBITDA result prior to these one-off charges are in line with market expectations.
  • Evolution Mining (EVN) – Agreement to terminate Norton Gold Fields’ right to mine and process ore from the Castle Hill deposit; Provides Evolution with full ownership and unfettered access to the Castle Hill deposit located 25 kilometres from its Mungari processing facility; Castle Hill is estimated to contain Mineral Resources of 695,000 ounces and Ore Reserves of 236,000 ounces which will provide a material extension to the operating life at Mungari; Infill drilling and engineering studies to commence immediately
  • Fairfax (FXJ) – Agreements with News Corp Australia to share printing networks. FXJ expects the combination of the new arrangements, and the changes to Fairfax’s printing network, to mean an annualised full-year benefit of approximately $15m, with financial benefits expected to begin towards the end of FY19 H
  • Bega Cheese (BGA) – Will acquire Saputo’s Koroit processing plant in Victoria for $250m (this is the upper end of market expectations). The Koroit Facility currently processes approximately 300ML of milk into bulk and retail butter, commodity and retail milk powders and growing up milk powder. Saputo will supply of 300ML of milk per annum until 30 June 2020. The transaction is subject to ACCC approval. BGA expects the Koroit Facility to generate an annualised EBITDA of $20m assuming the current annual intake of 300ML. Potential upside is from increased milk intake, including milk Bega already collects in the region.
  • Centuria Capital Group (CNI) – CNI has not been able to reach agreement with ESR (major shareholder) in relation to Propertylink Group and those discussions have now ceased. CNI and ESR continue to discuss other opportunities in the industrial and office space.
  • NRW Holdings (NWH) – Trading halt in relation to a contract award.
  • Mesoblast (MSB) – Has entered into a strategic alliance with Tasly Pharmaceutical Group for the development, manufacture and commercialization in China of Mesoblast’s allogeneic mesenchymal precursor cell (MPC) product candidates MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or prevention of acute myocardial infarction. The terms are: Tasly will receive exclusive rights and will fund all development, manufacturing and commercialization activities in China for MPC-150-IM and MPC-25-IC; Mesoblast will receive US$40m (AUD$54m) on closing, comprising a US$20m upfront technology access fee and US$20m in an equity purchase in Mesoblast Limited at $1.86 per share (20% premium to a blended VWAP blended price); Mesoblast will receive US$25m on product regulatory approvals in China; Mesoblast will receive double-digit escalating royalties on net product sales; Mesoblast is eligible to receive six escalating milestone payments upon the product candidates reaching certain sales thresholds in China.
  • Z Energy (ZEL) – Operational performance has been negatively affected by unexpected levels of disruption in the supply chain and record high pump prices in the first quarter. A has revised EBITDAF earnings guidance for FY19 to $420-455m 9from $450-185m). Dividend guidance of 50-55cps was reaffirmed.
  • Iron Mountain (IRM) – Will delist on August 17, 2018.

ANALYST CHANGES

  • Rio Tinto (RIO) – Q report.
    • Citi has a Buy recommendation with a target price of $87 (from $86. The analyst thought the report was mixed, only partially offset through better prices for bulks and a weaker AUD. They have cut earnings estimates by 2% but higher commodity forecasts and a weaker AUD have led to higher target price.
    • Credit Suisse has an Outperform recommendation with a target price of $89. The analyst notes strong iron ore shipments and FY guidance tightened towards the top of the range. But they thought other commodities were a mixed bag, and there was little to change their view, with the focus now on the strong balance sheet which offers growth and/or capital management possibilities.
    • Macquarie has an Outperform recommendation with a target price of $94. The analyst thought the report was firm and output of iron ore, alumina, aluminium and coking coal were all within 3% of their forecasts. Incorporation the numbers and guidance for IOC and titanium dioxide has reduced forecast earnings slightly.
    • UBS has a Buy recommendation with a target price of $93. The report was in line with the analyst’s estimates, with the exception of copper and titanium dioxide. Guidance for all commodities is unchanged except for a narrowing of the titanium dioxide band and a reduction in IOC’s iron ore pellet and concentrate production.

C1

  • Oil Search (OSH $8.80) – Reiterated 2018 guidance and production is now expected to be towards the top end of the 23-26 mmboe range
    • Citi has a Sell recommendation with a target price of $7.01. The analyst notes that financial guidance from the company was a bit different in composition, but overall, in line. Confidence in value emerging from the Alaskan assets has grown and they believe OSH will exercise and partially sell down its option to increase equity and assign value to its exploration acreage.
    • UBS has a Neutral recommendation with a target price of $8.70 (from $8.50). The analyst still sees a risk to LNG expansion timeframes, including the alignment from JV partners and approval of fiscal arrangements. They have cut 2018 EPS estimates by 13% to reflect lower realised revenue in the first half. 2019-20 EPS is increased by 2-3% to reflect successful contracting of PNG LNG volumes under a long-term contract.

C2

  • Perpetual (PPT $43.60) – FUA at 30 June 2018 $30.8bn, up $0.6bn. Net outflows were $0.3bn
    • Citi has a Neutral recommendation with a target price of $45.00. The analyst notes net flows continue to be negative, although improved from the previous quarter, with underperformance in the key Australian equities asset class an issue. They have made minor changes to forecasts and suggest the strategy might remain in limbo until new CEO starts in September.
    • Credit Suisse has a Neutral recommendation with a target price of $45 (from $46). FUM fell below the analyst’s expectations on a balance of market underperformance but smaller than forecast outflows. With five quarters of outflows, and a deterioration in fund performance, the outlook is weak. However the relative forward PE is near an all-time low and the new CEO will likely focus more on costs than growth.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $46. The FUM was ahead of the analyst’s expectations due to the market performance.
    • UBS has a Sell recommendation with a target price of $40 (from $39.40) – AUM were ahead of the analyst’s expectations, reflecting higher AUM in lower margin cash & fixed income funds. Despite better growth across these aspects, they remain cautious due to underperformance across key Australian equity funds persists while net outflow risks remain high.

C3


OVERNIGHT

M10M11

SPI FUTURES +22

US EQUITIES – S&P500 11 (+0.40%), Dow Jones +56 (+0.22%), Nasdaq +49 (+0.63%).

Main themes

  • Fed Chair comments lead to US dollar rally
  • Netflix (-5.24%) was down as much as 14.1%, on weaker than expected subscriber growth, before recovering.

EUROPEAN MARKETS – All higher. STOXX 600 +0.24%, UK FTSE +0.34%, German DAX +0.80%, French CAC -0.24%.

CURRENCIES

  • The US dollar was up 0.5% at 94.99
  • The Aussie dollar is weaker at US73.88c.

BONDS – 2-yr: +1 bp to 2.60%, 5-yr: UNCH at 2.75%, 10-yr: UNCH at 2.86%, 30-yr: -1 bp to 2.96%

COMMODITIES

  • WTI crude futures closed up US2c at US$68.08, as supply disruption concerns eased along with expectations of increased production.
  • Gold futures were down US$12.40 at $1,227.30 due to strength in the US dollar.
  • Iron Ore – IRESS reports iron unchanged at US$66.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was down US50c at US$63.00/dry ton. (CFR Tianjin port)
  • LME metals – Mostly lower. Cu -0.65%, Ni -1.32% and Al -1.12. Zn +1.54% and Sn +0.08% the exceptions

ECONOMIC DATA, NEWS & POLITICS

  • The IMF has warned that escalating trade tensions following US tariff actions threaten medium-term growth prospects
  • FedSpeak – Fed Chair Jay Powell delivered the semiannual monetary policy report to Senate Committee on Banking, Housing, and Urban Affairs. His reports suggested the FOMC will stay on the tightening path give the “Considerably stronger” economy.
  • US economic data – June Industrial Production 0.6% (consensus 0.5%; prior -0.5%) and Capacity Utilization 78.0% (consensus 78.3%; prior 77.7%); July NAHB Housing Market Index 68 (consensus 69; prior 68)
  • US earnings – Goldman Sachs (-0.18%) fell despite better than expected earnings, Johnson & Johnson (+3.54%) beat both earnings and revenue estimates, UnitedHealth (-2.60%), Charles Schwab (+3.56%). OF the S&P500 companies that have reported, 80% have beaten earnings estimates. And estimates for 3Q earnings are only edging down slightly.
  • Trade – European Commission President Jean-Claude Juncker will visit the White House on July 25 to discuss trade
  • European data – Italian June CPI +0.2% (expected 0.3%; last 0.2%) to be +1.3%yoy (expected 1.4%; last 1.3%) May Industrial New Orders +3.6% (last -0.6%) to be +4.9%yoy (last 7.2%). May Industrial Sales +1.7% (last 0.2%) to be +5.0%yoy (last 3.9%)
  • UK data – June Claimant Count Change 7,800 (expected 2,300; last -3,000). May Average Earnings Index incl bonus +2.5% (as expected, last 2.6%). May Unemployment Rate 4.2% (as expected, last 4.2%)

QUOTE OF THE DAY

“Free election of masters does not abolish the masters or the slaves.” – Herbert Marcuse, German-American philosopher born this day in 1898. Died 29 July 1979.

M12

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