MID MORNING MARKETS 17-08- 1

The ASX200 is up 10 points in mid-morning trade after earlier falls. Global markets better. Banks and Telcos+ve, Materials and H’care -ve. ASL back on line after results and acqu, Other results KGN, EVN, LNK.  More rises for TLS. #ausbiz

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TODAY

  • Economic stuff – Speeches by the RBA Governor Philip Lowe and RBA Assistant Governor Luci Ellis.
  • Ex-dividend – Dicker Data (DDR) 4.4c, Domain Holdings (DHG) 4.0c, lobal Construction Services (GCS) 2.5c, SRG 4.5c

TONIGHT

  • European data – Current Account, Inflation Rate
  • US economic data – Leading Indicators, Univ. of Michigan Consumer Sentiment – prelim

COMPANY NEWS

  • Ausdrill (ASL) – Back on line after results, acquisition and results. ASL reported a 95.7% increase in NPAT to $61.1m. Sales revenue up 16.4% to $887.3m. Underlying profit after tax up 70.8% to $45.2m on the back of efficiencies and scale benefits. Also has acquired Barminco Holdings Pty Ltd, a specialist underground hard-rock mining contractor with operations predominantly in Australia as well as in Africa (through the AUMS1 joint venture with Ausdrill), Egypt and India. ASL will exchange 150.7 million fully paid ordinary ex-dividend Ausdrill shares and $25.4 million in cash. This is equivalent to an equity acquisition price of $271.5m. Funded by fully underwritten 1 for 2.13 pro rata accelerated non-renounceable entitlement offer to raise approximately $250m before costs.
  • Gateway Lifestyle (GTY) – Hometown confirms its offer of $2.25 (reduced by future distributions or dividends) is its best and final offer. Close 10 September.
  • Vita Group Ltd (VTG) – The EBITDA result down 37% on previously communicated remuneration reductions and adverse product mix movements within the group’s information and communications technology (ICT) channel, impacting gross margins, partially offset by a rigorous focus on cost control. Dividend of 4.4c, giving FY div of 9.1c. Vita has applied to become part of the new, premium Telstra Business Technology Centre (TBTC) model in FY19. Vita is confident it will be successful.

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  • Goodman Group (GMG) – Operating profit up 9% to $845.9m; Operating EPS +8.3% to 46.7c; Total distribution of 28.0c, up 8.1% on FY17; NTA up 10% to $4.64; Statutory profit of $1.1bn; Strong cash flows have resulted in reducing gearing to 5.1%3 (look through gearing at 16.3%) and interest cover ratio (ICR) of 16.2 times; Liability management exercises have lowered WACD4 to 2.4% with $3.4 billion of liquidity available at 30 June 2018, predominantly in cash; Forecast FY19 operating earnings of $913 million and EPS of 50.0 cents (up 7% on FY18); Forecast FY19 distribution of 30.0 cents per security (up 7% on FY18) with payout ratio unchanged
  • Evolution Mining (EVN)

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  • Link Admininstration (LNK) – Statutory NPAT +68% to $143.2m; Operating EBITDA +53% to $335.3m; Operating NPATA up 67% to $206.7m; Revenue up 54% to $1,198.4m; Recurring Revenue of $954m, representing 80% of total revenue; Net operating cash flow of $320.3mn, up 48%; Acquisition of Link Asset Services (LAS) completed on 3 November 2017; Final div 13.5c (100% franked), FY div 20.5 cents, up 46%. Both Operating EBITDA and Operating NPATA benefited significantly from the inclusion of LAS from 3 November 2017 as well as recording further progress on the integration and efficiency objectives and a strong operating performance in Technology & Innovation
  • Com Ltd (KGN) – Revenue up 42.4%, NPAT +110.4%. No guidance.

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  • AVJennings Limited (AVJ) – Revenue down 6.8% to $374.3m; PBT -11.7% $45.1m; (PAT -12.2% $31.3m); down 11.7% and 12.2% respectively; Strong operating cash flow of $47.9m (30 June 2017: negative $13.2m); Net debt dropped by 20.3% to $130.7m and provides capacity for future land acquisitions; 3 div ff giving total div of 5c; Strong pre-sales of more than 1,000 lots. “The fundamental drivers of demand for residential property remain positive with low interest rate and inflationary expectations combined with population growth and shortages of detached dwellings, townhouses and low-rise apartments in Sydney, Melbourne and Auckland,“ Says that as some markets soften, it will benefit as activity eventually returns to levels that are more sustainable over the longer term. In FY2019, the Company expects to benefit from continued strength in the Sydney market and settlements from the Lyndarum North and Waterline projects in Victoria in particular. The Company expects positive revenue and earnings momentum given current levels of production, strong pre-sales volumes and continued progress of key projects.

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ANALYST CHANGES

  • InvoCare Limited (IVC $13.14)- Results below expectation and lower guidance. Also announced the acquisition of Morrisons Funeral Directors in Auckland, New Zealand.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $12.60. The analyst notes the adoption of AASB15 has clouded 1H results made earnings revisions more complex to interpret. They have reduced underlying EBITDA by 7%. Domestic market share has increased for the first time in several years and they think optimising of network and brand should provide a further tailwind. The guidance downgrade was considered highly likely and they still envisage risks.
    • Morgans has a Hold recommendation with a target price of $12.85 (from $13.00). The result was below the analyst’s forecasts and they thought updated 2018 guidance was disappointing. Despite this they have increased 2018 EBITDA forecasts by 1%. With ongoing disruptions with the Protect and Grow plan and an uncertain earnings outlook they think it’s fully valued.

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  • Origin Energy (ORG $9.09) Underlying EBITDA from continuing operations up 36% to $2.95bn, driven by improved performance in both the Energy Markets and Integrated Gas businesses. Outlook. Origin expects underlying profit to be higher, Energy Markets Underlying EBITDA will be lower at $1.50-$1.60 billion (in line without hedging changes). Australia Pacific LNG’s FY2019 production is expected to be 660-690 PJ.
    • Morgans has a Hold recommendation with a target price of $9.31 (from $8.52). The analyst thought the result disappointing. The highlight was the escalating competitive pressure on the retail energy market while regulatory risks and record high customer churn have affected the company’s non-oil linked earnings. ORG will reinstate dividends in FY19. The APLNG JV has reduced break-even costs to US$39/boe (although behind peers).

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  • Telstra Corporation (TLS $3.06)
    • Morgans has an Add recommendation with a target price of $3.50 (from $3.47). The result was in-line with the revised guidance and the analysts the market (though tough), is not deteriorating. Network quality and content resulted in strong post-paid mobile additions. They believe there is upside risk with a re-rating once the market is comfortable regarding sustainable EBITDA (around $8.5bn).
    • Citi has a Sell recommendation with a target price of $2.30. The analyst notes TLS first result in 2 years without a downgrade. They note growing costs, and raises concern about a widening value gap in the mobile postpaid market, which could accelerate churn and hurt revenue.
    • Morgan Stnaley has an Underweight recommendation with a target price of $2.60. No distribution guidance See intensifiying competition will put pressure on earnings.

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  • QBE Insurance Group (QBE $10.89) – Cash profit after tax up 3% to $385m, Adjusted net profit after tax down 18% to $380M3 (HY17 $464M5) reflecting a reduced level of positive prior accident year claims development and lower investment returns.
    • Morgans has a Hold recommendation with a target price of $12.01 (from $11.30). The analyst thought the 1H results was broadly in line and they’ve raised 2018 and 2019 EPS estimates by 8-10% on higher top line and insurance margin forecasts. They are encouraged by the result but believe there is still significant work to do and the operating environment remains challenging.

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  • Sonic Healthcare (SHL $26.30) – FY2018 result in line with guidance – underlying EBITDA growth 6.4% (constant currency); Underlying EBITDA growth 8.3% to $962m (actual currency); Revenue growth 8.2% to $5.5bn; Net profit growth 11.2% to $476m; Earnings per share growth 9.9% to $1.12 cents; Final dividend up 6.5% to $0.49 per share (full-year dividend up 5.2% to A$0.81); Strong earnings growth in both Laboratory and Imaging divisions; Ongoing successful organic, acquisition and hospital laboratory joint venture growth strategies.
    • Morgans has an Add recommendation with a target price of $28.70 (from $26.04). The result was slightly ahead of the analyst’s expectations. They continue to expect a stable earnings profile, with strong laboratory growth amid a fairly benign regulatory environment. They have raised FY19-21 earnings estimates slightly.

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  • Treasury Wine Estates (TWE $19.41) – F18 EBITS3 up 17% to $530.2m; EBITS margin accretion to 21.8%, up 2.8ppts; NPAT up 34% to $360.3m; EPS growth to 49.7 cents per share, up 36%; Execution of transformational route-to-market change in the US in 4Q18; Depletions exceed shipments and forward days inventory cover in line with prior year, globally; Proactive exit of more than 2m 9Le cases of lower margin Commercial volume in F18, globally; Long-term investment in winemaking drives significant increase in Australian Luxury conversion from 2018 vintage; Simplify for Growth to deliver enhanced operational effectiveness and higher brand investment returns; F18 EBITS growth contributes to 4yr EBITS CAGR of 25%; TWE reiterates guidance for expected F19; EBITS growth of approximately 25%. Reiterated guidance for expected F19 EBITS growth of approximately 25%.
    • Citi has a Sell recommendation with a target price of $14.50. Just beat guidance. Asia and Australiasia the darlings.
    • Deutsche Bank has a Hold recommendation with a target price of $18.00. Reasonable result given US distruption.
    • Morgan Stanley has downgraded to an Equal-weight recommendation with a target price of $20.00. Inline result. Thinks a better buying opportunity will result.

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RESULTS SCORECARD

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NEXT WEEK – It’s very quiet on the economic front.

  • Domestically, RBA Meeting minutes on Tuesday, with the Westpac Leading index and construction data on Wednesday
  • Japanese manufacturing PMI index, along with the leading index on Thursday and inflation on Friday
  • European PMI indices and consumer confidence
  • US existing and index home sales and durable goods orders.

Results season – The key ones include Woolworths (WOW), Amcor (AMC), BHP Billiton (BHP), Oil Search (OSH), Newcrest Mining (NCM), Sydney Airport (SYD), WorleyPArsons (WOR), Flight Centre (FLT), Santos (STO), Medibank (MPL),

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WEEKLY ECONOMIC WRAP – There were a number of important economic releases this week.

Westpac Consumer Sentiment Index

The headline Westpac consumer confidence index fell to 103.6 from 106.1, giving back half of the strong gains seen in June (which were a function of May budget tax cut news). Despite the latest decline, the Index is still well above 100 (the level where optimists outnumber pessimists) and is 5.5% above the average over 2014 to 2017. August is the 9th successive month above 100, a big shift from the twelve months in which 11 out of 12 readings were below 100.

Consumer views around housing improved in August. The “time to buy a dwelling” index rose 5.5% and is now up 15.1% on a year ago and over 20% from the mid2017 low. At 108.8, the index is at its highest level since September 2016 but still below the long run average of 120. Sydney and Melbourne, markets with the biggest price declines, are also the cities with the biggest index increases, although off a lower base. Westpac notes that reduced concerns about higher mortgage rates have contributed to the lift in housing sentiment.

Consumer expectations for house prices stabilised in August. The “House Price Expectations” edged 0.3% higher to 112.8 in August, following a 13.1% drop over the previous two months. Expectations showed solid gains in NSW and Vic (both up 4.8%), the states that had led the declines in June and July (down 22% and 23% respectively).

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Wages Data

Wages grew 0.6%sa in the June quarter to be 2.1% over the year. It is the 4th quarter that the annual rate was at or above 2.0% and the strongest result since March 2014. In original terms, wage growth in the Wholesale trade, Construction and Health care and social assistance industries were the main contributors, while the lowest rate of growth was seen in Retail trade, Accommodation and food services, Arts and recreation services, and Other services.

The data was in line with market expectations and confirms the view that wages have bottomed. Despite the trend in wages looking more positive, but there is little reason to see that any pick-up will be substantial enough to put pressure on inflation.

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Employment

It was a mixed employment report. The headline “unemployment rate” fell to 5.3%sa in July (from 5.4%) but the fall was due to a drop in the participation rate, with the number of employed falling by 3,900. Despite the fall, the composition of the data was positive. Full time employment rose 19,300 while part-time employment fell 23,200.

The largest increase in employment was in Victoria (up 29,400 persons), followed by South Australia (up 1,700 persons). The largest decrease was in New South Wales (down 27,100 persons).

The data isn’t significant enough to be concerned about, particularly as the monthly fall follows a very strong increase in June and the full-time series was still solid. Overall, the trend in unemployment remains down.

Other features of this week’s report include a big improvement in the youth employment prospects (15-24 year olds), while the broader measures of unemployment (such as the underutilisation rate), have not moved much from their peak.

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OVERNIGHT

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SPI FUTURES -2

US EQUITIES – S&P500 +22 (+0.79%), Dow Jones +396 (+1.58%), Nasdaq +32 (+0.42%).

Main themes

  • China-US – Vice commerce minister Wang Shouwen will visit the US in late August to discuss trade with US Treasury Under Secretary David Malpass on 22-23 August
  • Lira (+1.93%) after US Treasury Secretary Steven Mnuchin said Turkish officials will face new sanctions if the country does not release Pastor Andrew Brunson in short order
  • Walmart (+9.33%) reported well and raised guidance for the fiscal year
  • JC Penny (-26.97%) reported lower than expected earnings and revenues and iddues disappointing guidance.

EUROPEAN MARKETS – A bit of a rebound. UK FTSE +0.78%, German DAX +0.61%, French CAC +0.83%. Peripheral markets were weaker Italy -1.83%, Greece -1.74%.

CURRENCIES

  • The US dollar was down 0.1% at 96.60
  • The Aussie dollar is stronger at 72.62.

BONDS – 2-yr: UNCH at 2.61%, 5-yr: +2 bps to 2.75%, 10-yr: +2 bps to 2.87%, 30-yr: +1 bp to 3.03%%.

COMMODITIES

  • WTI crude futures closed up US45c at US$65.46 on the news of the China-US delegation.
  • Iron Ore – IRESS reports iron ore down US50c at US$68.00 a tonne. The CommSec site says China Import (Fines 62% Fe) was down US15c at US$66.90/dry ton. (CFR Tianjin port)
  • LME metals – Big bounce back. Cu +2.36%, Ni +3.70%, Al +1.14%, Pb +5.86%, Zn +4.00%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – Housing Starts +0.9% to 1168K (consensus 1256K; prior 1158K), July Building Permits 1311K (consensus 1316K; prior 1292K), weekly Initial Claims 212K (consensus 217K; prior 214K), Continuing Claims 1721K (prior 1760K), and August Philadelphia Fed 11.9 (consensus 23.0; prior 25.7)
  • UK – Retail Sales +0.7% (expected 0.2%; last -0.5%) to be +3.5%yoy (expected 3.0%; last 2.9%). July Core Retail Sales +0.9% (expected 0.1%; last -0.6%) to be +3.7%yoy (expected 2.8%; last 2.9%)
  • PBoC – Has reportedly banned Shanghai banks from depositing or lending offshore yuan through the free trade zone. This should result in tighter liquidity and a higher cost of shorting the yuan.

QUOTE OF THE DAY

“Time goes on. So whatever you’re going to do, do it. Do it now. Don’t wait.” – Robert De Niro, American actor born this day in 1943

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