MID MORNING MARKETS 7-8-18

The ASX200 is down 10 points in mid-morning trade after a quiet US session. Resources and consumer stocks down, banks ok, Energy the best. Results season swings IFL, TCL, NVT, RKN. AMC confirms acqu, ECX profit warning, RBA today. #ausbiz

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TODAY

  • Domestic data – AIG Construction Index
  • RBA Interest Rate Decision
  • Japanese data – Household Spending, Average Cash Earnings, Coincident Index Prel, Leading Economic Index Prel, Foreign Exchange Reserves

TONIGHT

  • UK Halifax House Price Index
  • US economic data – JOLTS – Job Openings, Consumer Credit

COMPANY NEWS

  • Navitas Limited (NVT) – Revenue down 2.5% to $931.0m. EBIT down 99% to $1.1m. Loss of $55.8m. Final dividend of 8c. One-off charges of $123.8m ($84.5m of SAE and HSA one-off expenses;$29.4 non-cash goodwill impairment charge; and$9.9m non-cash write down in the carrying value of US deferred tax assets).
  • Transurban Group(TCL) – FY19 distribution guidance of 59.0 cps, will be maintained in the event of a successful WestConnex bid; Statutory profit from ordinary activities of $468 million; Average daily traffic (ADT) grew by 2.2%2 inclusive of disruption from upgrade projects including CityLink Tulla Widening (CTW), Monash Freeway Upgrade (MFU), Logan Enhancement Project (LEP), Gateway Upgrade North (GUN) and Inner City Bypass (ICB); Proportional toll revenue increased by 8.7% to $2,340m; Proportional EBITDA and before significant items increased by 10.2% to $1,796m; FY18 distribution of 56.0c including the impact from $1.9bn of equity raised to support the West Gate Tunnel Project
  • IOOF Holdings Ltd (ILF)- UNPAT of $191.4m – up 13%; Final fully franked dividend 27c; $5.8b net inflows – up 28% FUA $125.9bn; Disciplined cost management – reduced operating expenditure $9.4m; Cost to income ratio 53.1%, improved 5%; Consistent group net operating margin – 23bps; Accelerated economic completion of ANZ Wealth Management; NATL acquisition successfully completed, fully integrated and delivering synergies. Also settlement of claims (wholly-owned subsidiary, Australian Executor Trustees Limited (AET), has agreed settlements in relation to its role as debenture trustee of Provident Capital Limited, with costs expected to be $44.25m.
  • SCA Property Group (SCP) Funds From Operations (“FFO”) up 5.4% to $114.m; FFO adjusted for maintenance capex, incentives and leasing costs (“AFFO”) up 5.6% to $105.7m; Distribution of 13.9 cpu, up by 6.1%, representing a payout ratio of 91%; Statutory NPAT down 45.2% to $175.2m. primarily reflecting a smaller increase in property values compared to the prior year; Weighted average cost of debt stable at 3.8%pa and gearing of 31.2% as at 30 June 2018; Investment property portfolio value of $2,453.8 million, up by $89.2 million since 30 June 2017, largely due to acquisitions ($40.8 million), development expenditure ($28.9 million) and revaluations ($74.1 million), offset by assets held for sale ($57.9 million) being the four assets sold to the SURF 3 unlisted fund in July 2018; Net tangible assets of $2.30 per unit as at 30 June 2018, up by 4.5% from $2.20 last year; Management expense ratio (“MER”) of 0.430% as at 30 June 2018, down from 0.452% last year; FY19 FFO per unit guidance of 15.6 cpu, and FY19 Distribution per unit guidance of 14.3 cpu
  • Reckon Limited (RKN) – Revenue -20% to $39.9m, revenue from continuing businesses -6% to $39.9m. EBIT -11% to $16.4m or continuing businesses up 3% to $17.3m. NPAT form continuing businesses +9% to $5.9m or down 5% to $5.2m. Remain positive regarding the future prospects for and the value of the Accountant Practice Management Group. been approached by several parties interested in acquiring this division
  • Wesfarmers (WES) – sell its 40% interest in the Bengalla Joint Venture to its jv partner New Hope Corporation (ASX:NHC) for $860m. Expects to report pre-tax profit of $670-680m.
  • Amcor (AMC) – Announced it will acquire Bemis at a fixed exchange ratio of 5.1 Amcor shares for each Bemis share, resulting in Amcor and Bemis shareholders owning approximately 71% and 29% of the combined company, respectively (US$6.8bn deal). It’s equivalent to a transaction price of US$57.75 per Bemis share based on AMC’s closing share price of $15.28 on August 3, 2018, and represents a premium of 25% to Bemis’ closing price of US$46.31 on August 2.

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  • ALS Limited (ALQ) – Three separate strategic acquisitions totalling $18m in its Life Sciences (food and pharmaceutical) business stream in Brazil, USA and Italy.
  • Cleanaway (CLW) – The ATO has allowed an objection to the FY13 tax return. Balance Sheet – An increase in the deferred tax asset on the balance sheet of approximately $18m); Profit and Loss – A reduction to the FY18 tax expense of approximately $18m; Cash Flow – Cash tax refunds of approximately $29m, of which $4.4m was received in FY18 and the balance received today.
  • Eclipx (ECX) – Profit downgrade. Now expects FY18 NPATA of $77-$80m (+13%-17% on FY17), compared with the previous expectation of +27-30% growth. The company said GraysOnline auction activity is being affected both by low insolvencies buoyant construction sector which is reducing auctioned equipment disposals. Right2Drive’s is experiencing a more challenging environment from new competitor offerings by some auto insurers.

ANALYST CHANGES

  • Amcor (AMC $15.28)) – US$6.8bn acquisition of Bernis.
    • Credit Suisse has a neutral recommendation with a target price of $14.20. The analyst says the combination would add less than 10% to EPS for Amcor and they have identified synergies of US$150-170m based on the scenario outline.
    • Deutsche Bank has a Buy recommendation with a target price of $17.00. The analyst thinks an acquisition of Bemis is strategically sound and consistent with AMC’s strategy of increasing share in the North American flexibles market. On assumptions of 30% premium, equity funding and of 2.0% of combined sales revenue, it would be 15% accretive to earnings. (better than that as premium was actually 25%). But the return on capital would be just 10.5% and short of the company’s target of 20%, or 15% in the event of a strategic acquisition.

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  • Eclipx (ECX) – Profit downgrade. Citi has downgraded to a Neutral (from Buy) recommendation with a target price of $3.17 (from $4.50). The analyst has reduced forecasts on the back of the negative update yesterday. They still see downside risks in the short term from increased infrastructure spending, competition for Right2Drive, lower used car pricing and declining new vehicle sales.

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  • Fletcher Building (FBU $6.42) – Credit Suisse has downgraded to an Underperform recommendation with a target price of NZ$6.08 (from NZ$8.40). CS has changed analysts and notes the company is emerging from a major re-setting. They like the new CEO, the strategy and the Australian turnaround but have factored in a reversion to mid-cycle activity levels in New Zealand. They would be more confident is FBU can get early traction in Australia and successfully exit Formica and the B&I business.

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  • Seek (SEK $20.00) – Updated guidance and significant items of $142m – Includes impairment charges for Brasil Online ($119m), OCC ($59m) and non-cash gain on investment in Maimai (+$36m). FY19 guidance – Revenue growth in the range of 16 to 20% (FY19 v FY18), EBITDA growth in the range of 5% to 8% (FY19 v FY18). Reported NPAT (including cost of investments in ESVs) to remain broadly similar to FY18.
    • Citi has a Sell recommendation. The analyst notes updated FY19 guidance effectively translates into a 13% downgrade for consensus forecasts. The believe growth expectations should remain low in the years ahead, while the opportunity remains longer term. They also see risk of a cyclical downturn affecting one or more of the company’s core markets. They have cut estimates and highlight capex has grown at a 38% CAGR over the past five years, compared to revenue growth of 16%.
    • Morgans has upgraded to a Hold (from Reduce) recommendation with a target price of $20.24 (from $19.06).  The analyst comments that Seek has pushed out a lift off in profit, committing to another increase in operating and CAPEX to grow market share in China, Southeast Asia and Australia. They have downgrade forecasts to reflect both the FY18 result and the guidance for FY19.

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OVERNIGHT

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SPI FUTURES +7

US EQUITIES – S&P500 +10 (0.35%), Dow Jones +40 (+0.16%), Nasdaq +48(+0.61%).

Main themes

  • Tech stocks outperform Facebook +4.45% on reports it is n talks with banks to incorporate users’ financial information into Messenger, Netflix +2.28% and Amazon +1.34%
  • Earnings – Berkshire Hathaway (B shares +2.91%))

EUROPEAN MARKETS – Mostly lower. STOXX 600 -0.13%, UK FTSE +0.06%, German DAX -0.14%, French CAC -0.03%.

CURRENCIES

  • The US dollar was up 0.2% at 95.37
  • The Aussie dollar is weaker at 73.90

BONDS – -2yr: +1 bp to 2.65%; 5-yr: -1 bp to 2.81%;10-yr: -2 bps to 2.94%; 30-yr: -1 bp to 3.08%

COMMODITIES

  • WTI crude futures rose US52c or 0.8% to US$69.01. OPEC sources said Saudi crude production unexpectedly fell in July to 10.29mbps (down 200kbpd). The imminent reinstatement of US sanctions against Iran also supported prices.
  • Gold futures were down US$5.50 at $1,217.70.
  • Iron Ore – IRESS reports iron ore up US50c at US$68.00 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US$1.5at US$68.95/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu -1.18%, Ni +1.00%, Al +0.74% the exception

ECONOMIC DATA, NEWS & POLITICS

  • Earnings season – FactSet reports that 80% of companies have posted better-than-expected profits. If this remains at or above 80% it will be the highest percentage of companies to beat expectations since FactSet started tracking the data in 2008.Earnings have growth 24%, above forecasts for 20%.
  • Trade tariffs – Trade – China’s state-run media criticised President Trump for turning international trade into a zero-sum game. The People’s Daily described the plan to impose tariffs on $60bn worth of US goods as ‘restrained.’ A Trump administration official said the White House is not ruling out auto tariffs on Canada.
  • European economic data – Sentix Investor Confidence 14.7 (expected 12.8; last 12.1); German Factory Orders -4.0% (expected -0.3%; last 2.6%)

QUOTE OF THE DAY

“Fidelity, Bravery, and Integrity set the expectations for behavior; they set a standard for our work. More than just a motto, for the men and women of the FBI, Fidelity, Bravery, and Integrity is a way of life.” –  Robert Mueller, American attorney and former FBI director born this day in 1944. I cannot wait to hear the results of your latest investigation Mr Mueller.

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