MID MORNING MARKETS 1-8-18

The ASX200 is up 4 points in mid-morning trade. Trumps Trade Tariff Talk. Materials strong, banks and Telcos lower. JHC result, GMA –ve on housing, ALQ AGM guidance, RIO FY later today and FOMC tonight #ausbiz

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TODAY

  • Economic data – AIG Manufacturing Index
  • Japanese data – Nikkei Manufacturing PMI Final
  • Chinese data – Caixin Manufacturing PMI

TONIGHT

  • European data – Markit Manufacturing PMI Final
  • UK – Markit/CIPS Manufacturing PMI
  • US economic data – ADP Employment Change, Construction Spending, ISM Index
  • FOMC Rate Decision

COMPANY NEWS

  • Janus Henderson (JHG) – Results. Dick Weil appointed as CEO; investment performance across all time periods, with 69%, 64% and 82% of assets under management (“AUM”) outperforming benchmarks on a 1, 3 and 5 year basis, respectively, as at 30 June 2018; Net outflows of US$2.7bn; AUM of US$370.1bn, with positive investment performance offset by net outflows and negative currency movements; Quarterly dividend of US$0.36 per share; US$100 million on-market share buyback authorised by the Board

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  • Xero (XRO) – Has acquired Hubdoc, a data capture solution that helps accountants, bookkeepers, and small businesses to streamline administrative tasks such as financial document collection and data entry. 2 stages to transaction – US$60m initially (35% cash and 65% in Xero equity). XRO has arranged new debt funding for the cash component of the acquisition price. Second tranche of US$10m in equity issued to Hubdoc’s shareholders in 18 months, subject to meeting agreed operational targets and conditions. Expected to reduce FY19 EBITDA by NZ$7m.
  • Lifestyle Communities (LIC) – Profit update. Material uplift in property portfoliovaluation due to strong new home settlements achieved in FY2018, higher than expected prices for existing home sales (which leads to higher deferred management fees being used for valuation purposes) and a 0.25% reduction in the capitalisation rate used by the independent valuers (from 7.75% to 7.5%). Positive impact on FY18 – Underlying NPAT $33-34m; and Statutory NPAT $52-53m. New home settlements for FY2018 were 321.
  • Australian Pharmaceutical Industries Limited (API) Completed first stage of the acquisition of Clearskincare Clinics, and has has taken an initial 50.1% controlling interest in the clinics and 100% of the skincare product business. This has been funded through a new medium term facility of $65 million.
  • CIMIC (CIM) – Sedgman (subsidiary) has been awarded contracts by Resource Generation’s subsidiary Ledjadja Coal for the design, engineering procurement, construction, as well as the ongoing operations and maintenance at the Boikarabelo Coal Handling and Preparation Plant (CHPP) in South Africa. Revenue expected to be US$210 million1 over 26 months. The operations and maintenance contract will generate revenue to Sedgman of US$100 million over the four year period post completion of the facility.
  • Oil Search (OSH) – Has resumed operations, following repair work necessary after the PNG Highlands earthquake in February 2018. All Oil Search-operated facilities are now online. Oil production commenced at an initial rate of approximately 2,000bpd and a progressive ramp-up in production is anticipated through to early 2019. 2018 production guidance remains unchanged at the upper end of the 23 – 26 million barrels of oil equivalent range.
  • Genworth (GMA) – On housing – ”Genworth expects the moderating trend in housing market conditions to continue in the second half of the year reflecting pressure on lending as a result of macro-prudential measures, tightening credit standards and record levels of new housing supply coming onto the market. Metropolitan housing markets in Sydney and Melbourne are predicted to lead the trend whilst the rate of decline in regions linked to the mining resource industry in Queensland and Western Australia, is expected to stabilize. On the outlook – “NEP and the full year loss ratio are expected to be adversely impacted by the 2017 Earnings Curve Review in FY18 (and to a lesser extent in FY19). In FY18, NEP is expected to decline by approximately 25% to 30%. Despite an expectation that Net Incurred Claims will be lower in 2018 than in 2017, the lower NEP means the full year loss ratio is expected to be between 40% and 50%. Genworth continues to target an ordinary dividend payout ratio range of 50% to 80% of underlying NPAT”.

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  • Unibail-Rodamco-Westfield (URW) – Has sold four shopping centres in Spain for €489m (net initial yield of 5.6%. This transaction is part of the €3bn of disposals to be made by URW as part of its previously announced European asset rotation programme
  • RCR Tomlinson Ltd (RCR) has extended the trading halt to a voluntary suspension. RCR said it is reviewing cost overruns that were recently discovered on a project and which are expected to have a material negative impact on FY18 earnings. Given the materiality of the cost overruns and the need to undertake further work to assess the likely financial impact, the Company is not yet in a position to make an announcement regarding this matter.
  • Dicker Data (DDR) – Has been appointed as a distributor of the complete range of LG Commercial Display products for the Australian market with effect from Wednesday, 1st August 2018. Will “help us work with new types of partners who service markets that we’re actively attempting to expand our reach into.”
  • ALS (ALQ) – AGM and guidance. Seeing positive returns and growth in our Environmental, Food, Pharmaceutical, Geochemistry and Tribology businesses. Profits from the Asset Care business unit remain flat and conditions challenging. 1H underlying NPAT from continuing operations expected to be in the range of [$85 – $90m], compared with $71.9m in the first half last year on a like for like basis
  • Alacer Gold (AQG) – 2Q results and half-yearly overview.
  • Pushpay (PPH) – Q result. Revenue up 52.6% to US$21.4m (guidance US$20.5-US$22.0m)

ANALYST CHANGES

  • Credit Corp (CCP $20.58) – NPAT up 17% to $64.3 million; Consumer lending business NPAT up 30%; Inaugural full year profit from the US debt buying operation; and continued NPAT and collections growth from the Australian/New Zealand debt buying operation. Outlook – US debt buying and consumer lending businesses are expected to drive solid profit growth in 2019 in the range of 4% to 7%. (EPS 140-144c). Morgans has an Add recommendation with a target price of $21.97 (from $21.14). FY18 profit growth of 16.5% was in line with the analyst’s expectations but FY19 guidance of 4-7% growth is below historical performance. The US business should be a material growth driver ahead. They see strong and highly visible medium term growth as the US strategy is beginning to materialise and the existing business is maturing.

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  • Flight Centre (FLT $68.01) – Has signed a Letter of Intent with Serko Limited (SKO), a leader in online travel booking and expense management for business. Morgans has a Hold recommendation with a target price of $61.70 (form $52.80). The analyst thinks the share price implies expectations of an earnings upgrade at its upcoming results release, but they think it would have been announced by now if the case. They still think guidance will be slightly exceeded and have upgraded forecasts.

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  • Origin Energy (ORG $9.77) – Q production report. Credit Suisse has an Outperform recommendation with a target price of $10.50 (from $10.60). The result was ahead of the analyst’s expectations due to higher volumes and higher realised domestic and LNG prices. It was offset by oil and LNG hedging losses plus a $40m exploration write-down. They still think there is a risk to consensus earnings estimates, but this should be overlooked due to transformative de-leveraging and cost reductions.

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  • Reliance Worldwide (RWC $5.95) – Credit Suisse has Initiated coverage with a Neutral recommendation with a target price of $5.70. The analyst notes RCW’s core push-to-connect fittings remain well below terminal share, despite 10 years of sales growth of 12% per annum. They expect sales growth of 9.6% in FY18-21 and EPS growth of 21.8% per annum, inclusive of the accretive John Guest acquisition.

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ECONOMIC DATA YESTERDAY – AUSTRALIA

There were two key releases yesterday. Building approvals was generally positive in terms on confirming continued strength in the residential construction sector, but credit data further confirmed that credit for housing investment continues to slide (annual growth of 1.6% is an all-time record low).

ABS Building Approvals

TREND SERIES

  • The number of dwelling approvals rose 0.1% in June (to 18,736) – apartments +1.1% (to 8,496) and houses -0.6% (to 10,066).
  • State performance – ACT (+5.8%), SA (+5.6%), NT (+4.8%), TAS (+2.2%), WA (+1.7%), NSW (+0.2%), QLD (-1.6%), VIC (-1.2%).
  • The value of total building approvals fell 0.8% (7th consecutive month) – residential building +0.3% (and new residential building rose 0.5%), non-residential -2.9%.

SEASONALLY ADJUSTED SERIES

  • Dwelling approvals rose 6.4% to 19,133 (exp +0.2%, prev -2.5%) in June – apartments +7.2% (to 8,786), houses +5.0% (to 10,127).
  • The value of total building approved fell 1.2% – residential building +1.8%, non-residential building -7.0%.

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RBA Credit Data – RBA Investment housing credit slipped into negative territory in June, with annual growth at 1.6%, which is the slowest on record. Following a lift in the 10% cap on investor lending growth (July 1), we may see a bounce this time next month. More positively, owner-occupier credit is still very healthy.

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OVERNIGHT

M10M11

SPI FUTURES +8

US EQUITIES – S&P500 +14 (+0.49%), Dow Jones +108 (+0.43%), Nasdaq +42 (+0.55%).

Main themes

  • Reports the US and China could restart trade talks – exposed stocks Boeing (+1.52%)
  • Apple result (+3.56% after hours). EPS grew by 40% to $2.34 vs. $2.18exp, revenue grew by 17% to $53.3bn vs. $52.34bn exp, sales of 41.3 million iPhones (basically flat from the year-ago period and lower than estimates for 41.79m) but the ASP of $724 was positive; guidance fourth-quarter revenue $60-62bn (est$59.47bn)

EUROPEAN MARKETS – All higher. STOXX 600 +0.18%, UK FTSE +0.62%, German DAX +0.06%, French CAC +0.37%.

CURRENCIES

  • The US dollar was 0.1% higher at 94.48
  • The Aussie dollar is a little stronger at 74.40

BONDS – 2-yr: UNCH at 2.67%, 5-yr: UNCH at 2.85%, 10-yr: -1 bp to 2.96%, 30-yr: -2 bps to 3.08%

COMMODITIES

  • WTI crude futures fell US$1.37 or 2.00% to US$68.76 on new OPEC supply rose 70kbpd to 32.64mbpd in July, a high for the year. It comes after Russian energy minister Alexander Novak said last week that Russia’s output will hit a new 30-year high of 11.02mbpd in 2018. US President Trump also seems to soften his stance with Iran, saying he would meet with President Hassan Rouhani without any preconditions (although this was rejected). For the month, oil prices fell 7.3%, the biggest monthly fall in 2 years.
  • Gold futures were up 0.28% to $1,234.90.
  • Iron Ore – IRESS reports iron up $1.00 at US$68.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US60c at US$67.55/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu +0.80%, Ni +1.23% and Al -0.62%.

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Q2 Employment Cost Index 0.6% (consensus 0.7%; prior 0.8%), PCE Prices 0.1% (consensus 0.1%; prior 0.2%), PCE Prices – Core 0.1% (consensus 0.2%; prior 0.2%), Personal Income 0.4% (consensus 0.4%; prior 0.4%), and Personal Spending 0.4% (consensus 0.5%; prior 0.2%); S&P Case-Shiller Home Price Index 6.5% (consensus 6.5%; prior 6.6%); Chicago PMI 65.5 (consensus 62.0; prior 64.1); Consumer Confidence 127.4 (consensus 126.6; prior 127.1)
  • US earnings scorecard – 60% of S&P 500 companies have released results, with 82% of those beating estimates.
  • Chipotle Mexican Grill (-6.85%) after reports of another outbreak of food-borne illness, resulting in more than 100 cases in Ohio.
  • European data – preliminary Q2 GDP +0.3% (expected 0.4%; last 0.4%) to be +2.1%yoy (expected 2.2%; last 2.5%). July CPI +2.1%yoy (expected 2.0%; last 2.0%) and Core CPI +1.1%yoy (expected 1.0%; last 0.9%); German Retail Sales +1.2% (expected 1.1%; last -2.1%) to be +3.0%yoy (expected 1.5%; last -1.6%). Unemployment Change -6,000 (expected -10,000; last -14,000) and Unemployment Rate 5.2% (as expected, last 5.2%); French CPI -0.1% (expected -0.2%; last 0.0%) to be +2.3%yoy (expected 2.2%; last 2.0%)l Italian Q2 GDP +0.2% (as expected, last 0.3%) to be +1.1%yoy (expected 1.2%; last 1.4%). CPI +0.3% (expected 0.2%; last 0.2%) to be +1.5%yoy (expected 1.4%; last 1.3%). Unemployment Rate 10.9% (expected 10.8%; last 10.7%)
  • Japanese data yesterday – pretty much all worse than expected. Unemployment picked up to 2.4%, industrial production down 2.1% (exp of -0.4%), housing stats down 7.1% (exp -2.4%) and consumer confidence dropped. The Bank of Japan left its key rate at -0.10% (expected) but announced that it will widen its target range for the 10-yr JGB yield and increase its purchases of ETFs that track the TOPIX index (rather than the larger stocks). The BoJ also said its 2.0% inflation target for fiscal year 2019 won’t be met.

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  • Chinese data yesterday – Chinese PMI numbers were also weaker than expected.

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  • Moody’s comments on Australia yesterday – Moody’s said Australia is more externally vulnerable than most Aaa-rated sovereigns due to dependence on external financing and low AUD is risky. “Low domestic savings relative to investment mean that the country has consistently run current account deficits and accumulated one of the largest negative net international investment positions (NIIPs) among Aaa-rated sovereigns at around 55 per cent of GDP in 2017”. There is also a warning about the risk of a fall in the AUD due to the risk of an earlier monetary policy tightening and because a weaker AUD means less appetite for Australian assets, which could raise risks given reliance on external funding.

QUOTE OF THE DAY

“Study as if you were going to live forever; live as if you were going to die tomorrow.” – Maria Mitchell, American scientist born this day in 1818. Died 28 June 1889

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