MID MORNING MARKETS 9-10-18

The ASX200 is down another 62 points at mid-day trading, with losses in most sectors. IT follows the US down, CSL -3%. Banks “relative” outperformers…Lots of red…. $A stable at US70.80c. #ausbiz

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COMPANY NEWS

  • Commonwealth Bank (CBA) – Further actions to improve outcomes for wealth management customers including the rebating of grandfathered commissions for Commonwealth Financial Planning (CFP) customers, and a review and remediation program for any instances where unauthorised advice fees have been charged to deceased estates. Over the last 6 years CBA has paid out $580m in improving its adice business processes, administering and assuring advice remediation and implementing its Future Advice Model. It has also paid $270m in compensation for poor quality or no advice.
  • Pilbara Minerals (PLS) – Has confirmed that the final specifications of its first shipment of spodumene concentrate were 6.256% lithia and 0.724% Fe2O3, confirming the outstanding quality of Pilbara Minerals’ Pilgangoora product
  • Chorus (CNU) – Has commissioned a fully independent review relating to the employment practices of small business sub-contractors working on the Ultra-fast Broadband network.
  • Nextdc (NXT) – Offer for Asia Pacific Data Centres (AJD) at $2.00 (announced yesterday)

ANALYST CHANGES

  • ANZ – additional charges for customer compensation, accelerated amortisation of software and other notable items. $374m in customer compensation – 57% relates to customer refunds impacting revenue, with the balance relating to remediation costs recorded as an expense. The total remediation charge is split approximately 66%/34% between Continuing and Discontinued operations; $206m in accelerated amortisation $104m restructuring charge; $55m in external legal costs.
    • Shaw & Partners has cut its target price by 3% to $29.00
    • Deutsche Bank has a Hold recommendation with a target price of $29.00. The analyst had expected customer remediation costs would be an issue in the short term but ANZ has gone further with the additional charges. The impact on the capital position is still considered manageable, reducing the CET1 ratio by about -10 basis points.
    • Macquarie has an Outperform recommendation with a target price of $30.00 (from $30.50). ANZ has downgraded FY18 earnings estimates by 7% and Macquarie has lowered forecasts as a result and reduces its buyback estimate for FY19 by an equivalent amount. The analyst believes ANZ will need to deliver on its expense guidance and achieve a cost base of under $8.5bn by FY20 for its investment thesis to hold. They also think reduced scope to generate franking credits is likely to reduce the bank’s ability to increase its dividends in FY19.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $28.00. The analyst estimates an impact on the CET1 ratio of around 10 basis points but expects buybacks could end up being lower than forecasts, if there are higher fines or costs.
    • Morgans has upgraded to an Add (from Hold) recommendation with a target price of $28.50 (from $30.00). The analyst doesn’t expect the additional provisions stemming from the RC to hamper the ability of the major banks to achieve APRA’s unquestionably strong CET1 benchmark by January 2020. They are comfortable with ANZ’s announcement but have cut EPS estimates by 7%. FY19 and FY20 estimates are reduced by 0.3% and 0.8% respectively, because of share buyback estimates reducing by $800m. The upgrade results from the view that the recent share price weakness is overdone.
    • UBS has a Neutral recommendation with a target price of $28.00. The analyst notes the charges complicate what will already be a messy result given the bank’s restructuring. While happy to see the move, they don’ think it’s the last of it. Customer compensation is difficult to estimate and history shows costs tend to escalate over time, notwithstanding what is yet to stem from the RC, and the impact of a weakening housing market.
  • Incovare (IVC) – Trading update. Mild winter and benign flu season. Funeral volumes were down 1.5% in Q2. “We indicated at the half year that the number of deaths was lower than trend, but not outside normal year to year fluctuations. However, trading during the winter period has seen the number of deaths decline in the order of up to 8% in key markets. This variation is very unusual and, despite improving market share, there will be an impact on our full year results.” IVC’s funeral business has seen a decrease of circa 2,000 cases year to date (September 2018) over the prior calendar period for the comparable business. This equates to 5.8% decline in volume which represents circa $17m decline in revenue related to volume decline. The fall also reduces pricing power. Protect and grow on track – 40% in 2018. Acquisitions – eight in Australia and three in New Zealand, contributing circa $25m in additional revenue to the group on an annualised basis.
    • Deutsche Bank has a Sell recommendation with a target price of $10.40 (from $10.80).The sharp decline in case volumes is partly explained by closures for refurbishment but the analyst is concerned about the impact of  a weaker market and share losses. Costs are also increasing as part of the ‘Grow and Protect’ strategy, exacerbating the impact. Deutsche Bank notes the balance sheet is stretched, which limits the options.
    • Macquarie has a Neutral recommendation with a target price of $11.80 (down 9%). The analyst expects Invocare to revise FY18 guidance once the full impact of softer conditions has been assessed.
    • Morgan Stanley has an Equal-weight recommendation with a target price of $12.60. The analyst believes the softer guidance for 2018 represents a further downside risk to expectations, and notes the average pricing per case is also down on the back of the decline in the market.
    • Morgans has a Hold recommendation with a target price of $11.54 (from $12.85). They analyst suggests the main positive from the update was that weakness was market-related. The broker is confident that management is executing well on items within its control and believes market conditions will improve eventually.
    • UBS has a Neutral recommendation with a target price of $12.00 (from $12.70).  The analyst is not concerned about swings and roundabouts in the death rate given year to year variability, it is only concerned if InvoCare loses market share or has to start discounting to maintain it. They see the death rate swinging back again at some point and InvoCare has declared it has increased market share, but we don’t know the extent of discounting required to achieve that result.
  • Myob (MYO) – Bain Capital has sold 17.6% of the company to KKR at $3.15 and KKR now holds 19.9%. MYO has received an offer at $3.70, a premium of 24% to the $2.98 closing price. Bain still holds 6.1%. Morgan Stanley has an Underweight recommendation with a target price of $2.80. The analyst has previously highlighted the risk of M&A to its Underweight thesis, given prior interest from private equity and international peers. The bid remains subject to due diligence and financing and there is no certainty the proposal will be successful.

OVERNIGHT MARKETS

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SPI FUTURES -7

US EQUITIES – S&P500 -1 (-0.04%), Dow Jones +40 (+0.15%), Nasdaq -52 (-0.67%).

Main themes

  • US bond market closed for Columbus Day
  • Technology sector continued to underperform. Netflix -0.64%, Amazon -1.34%, Google -1.02%.

EUROPEAN MARKETS – Lower. STOXX500 -1.12%, UK FTSE -1.16%, German DAX -1.36%, French CAC -1.10%.

CURRENCIES

  • The US dollar is stronger at 95.84.
  • The Aussie dollar is also a bit stronger at 70.69c.

BONDS – The treasury market was closed for Columbus Day

COMMODITIES

  • WTI crude futures closed down US41c at US$73.93 on reports Iranian oil exports will continue despite US sanctions. Losses were limited (low of US$73.07) due to optimism on China’s stimulus moves.
  • Iron Ore –IRESS reports iron ore was unchanged at US$69.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was down US10c at US$69.40/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu +0.08%, Ni -0.36%, Al -2.96%.

 ECONOMIC DATA, NEWS & POLITICS

  • US results season ahead – Citigroup, J.P. Morgan Chase and Wells Fargo release quarterly results later this week. Earnings overall are expected to rise 19.2% in the 3Q, after a 24% increase in Q1.

QUOTE OF THE DAY

“Possession isn’t nine-tenths of the law. It’s nine-tenths of the problem.” – John Lennon, British musician born this day in 1940. Died 8 December 1980.

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