MID MORNING MARKETS 10-10-18

The ASX200 is down 11 points after a positive start. Approaching long term support US bonds step back. H’care recovers. Banks ↓ on -ve reseach. M&A in force for NVT & GXL. $A higher at US71.10c. #ausbiz

m7m8m9TODAY

  • Ex-dividend – Sequoia Financial Group (SEQ) 0.5c
  • RBA Coombs Speech
  • Economic data – Westpac Consumer Confidence Index
  • Japanese data – Machinery Orders

TONIGHT

  • UK – Balance of Trade, Construction Output, Manufacturing Production, Industrial Production
  • BoE Haldane Speech
  • US economic data – Core PPI, PPI, Wholesale Inventories
  • Fed Speak – New York Fed President (permanent FOMC voter) John Williams, Chicago Fed President (alternate voter) Charles Evans

General Market Comment – This is a weekly chart of the ASX200 over the last 3 years. The moves over the last few days, while looking to be a break of the inner uptrend support line. are still respecting the lower uptrend support line. The MACD and RSI indicators suggest we might actually hit that longer term support (from the low in February 2018) before improving…so I’m a little cautious at this stage until we see a move higher

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COMPANY NEWS

  • Navitas (NVT) – Has received an unsolicited, preliminary, conditional and non-binding proposal from BGH Capital Pty Ltd, AustralianSuper and Mr Rodney Jones at $5.50, a 26% premium to closing price on 9 October. Alternative is $2.75 cash and a share in a newly formed company.
  • Greencross (GXL) – Response to Press speculation of takeover. Confirms it has received a number of offers.
  • Automotive Holdings (AHG) – Has appointed Tony Cramb to the role of Chief Operating Officer (Franchised Automotive)
  • Cochlear (COH) – Has announced the next phase in development of totally implantable cochlear implant technology
  • Infigen Energy (IFN) – Monthly Production

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  • IPH Limited – Company presentation to the Morgans QLD conference.
  • ALS Limited (ALQ) – Company presentation to the Morgans QLD conference

ANALYST CHANGES

  • Japara Healthcare (JHC) – Ord Minnett has upgraded to a Hold (form Lighten) recommendation with a target price of $1.25 (from $1.50). The analyst is confident the final recommendations from the inquiry into aged care will call for improved funding and increased compliance requirements, and this will raise barriers to entry. The see valuation appeal in the sector, but expect a challenging period ahead with months of negative media coverage and potential cash flow pressures from a downturn in residential property prices.

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  • Regis Healthcare (REG $2.80) – Ord Minnett has Buy recommendation with a target price of $3.30 (form $4.00). As above for the sector, which is likely to weigh on sentiment for some time. The analyst applies a 15-25% discount to cash flow valuations to reflect this sentiment. They favour Regis Healthcare as the highest quality operator in the sector, with strong systems and cash flows from recently-opened facilities

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  • Oil Search (OSH $8.91) – UBS has a Neutral recommendation with a target price of $9.45. The analyst thinks the next catalyst in Alaska will be the taking up of the option to double equity in the permits to 51% for US$450m before June 2019. They expect Oil Search to take up the option, given the resource upgrade that has occurred since acquisition, and potentially sell down the interest to reduce its share of development expenditure. They believe OSH should consider retaining an interest greater than 35%. First oil is expected in 2023, which UBS understands is necessary for the company to access accelerated appreciation benefits.

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  • Qube (QUB) – Citi has resumed coverage with a sell recommendation with a target price of $2.40. The analyst acknowledges considerable potential for the company’s Moorebank Logistics Park but thinks the outlook for earnings is still unclear and requires considerable faith from investors. Their valuation on a stand-alone basis at $1.1bn requires near-perfect execution, particularly around warehouse occupancy and the penetration of integrated logistics solutions. Citi notes QUB’s revenue growth is reliant on market growth which is forecast to be 3-4% over the longer term.

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  • Morgans on the banks – The analyst notes Australian banks are facing a weaker housing market, a final report from the ACCC on residential mortgages and the fall out from the Royal Commission. They do not expect huge surprises in operating earnings in 2H but expects the share prices to be influenced by trends in funding costs, expectations for customer remediation, housing loan growth and capital generation.
    • ANZ – Equal-weight recommendation with a target price of $26.60 (form $28.00). ANZ has more scope than its peers to navigate the transition facing the banks but Morgans considers the investment characteristics are well understood. Moreover, revenue headwinds are becoming worse and the stock has re-rated versus peers.
    • CBA – Underweight recommendation with a target price of $64.50 (from $65.00). The analyst has been Underweight since 2016 and envisages no reason to change its view, given the combination of downside risk to earnings and returns as well as structural headwinds in full valuations
    • National Australia Bank (NAB) – Underweight recommendation with a target price of $26.30 (from $26.40). The analyst has been Underweight since 2016 and comments from CBA apply.
    • Westpac (WBC) – Equal-weight recommendation with a target price of $26.80 (from $27.50). WBC is now the analyst’s preferred major bank but they are neutral given the sector negative stance and downside risk to valuation and price targets. While WBC is relatively more exposed to the end of the mortgage bull market, near-term expectations have been re-based and the broker envisages potential for some self-help on costs.

OVERNIGHT

m10m11

SPI FUTURES -6

US EQUITIES – S&P500 -4(-0.14%), Dow Jones -56 (-0.21%), Nasdaq +2 (+0.03%).

Main themes

EUROPEAN MARKETS – Lower. STOXX500 +0.19%, UK FTSE +0.06%, German DAX +0.25%, French CAC +0.35%.

CURRENCIES

  • The US dollar is weaker at 95.68.
  • The Aussie dollar is also a bit stronger at 77.01c.

BONDS – 2-yr: UNCH at 2.88%, 5-yr: -2 bps to 3.06%, 10-yr: -3 bps to 3.21%, 30-yr: -4 bps to 3.37%

COMMODITIES

  • WTI crude futures closed up US48c at US$74.77 on data that suggested Iran’s exports fell in October to around 1mbpd (down from 2.5mbpd in April and 1.6mbpd in September). There was also support from a partial shutdown in the Gulf of Mexico ahead of Hurricane Michael.
  • Iron Ore –IRESS reports iron ore was unchanged at US$69.50 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US$1.15 at US$70.55/dry ton. (CFR Tianjin port)
  • LME metals – Mixed. Cu +1.85%, Ni +3.46%, Al -0.53%.

ECONOMIC DATA, NEWS & POLITICS

  • European bonds – The spread between Italy’s 10-yr BTP yield and Germany’s 10-yr bund yield on the rise as Italian government refuses to alter deficit target for 2019.
  • US earnings – JPMorgan Chase, Wells Fargo, Citigroup and Walgreens Boots Alliance report later this week. Consensus earnings growth is 19%, down from 25% in the previous 2 quarter.
  • Growth forecast downgrade – The IMF has downgraded its forecast for global growth this year from 3.9% to 3.7%. The IMF noted the risk of negative shocks had increased, and that current policies supporting growth were unsustainable over the longer term. US growth downgraded on the back of the likely impact of tariffs. The IMF also cited the flux of NAFTA and Brexit. The US and China will grow by 2.9% and 6.6% this year, respectively, would slow more than expected to 2.5% and 6.2% respectively, in 2019. Australia is forecast to grow 3.2% this year and 2.8% in 2019 (down from the 9% forecast in April).

QUOTE OF THE DAY

“There’s no question that if we stay on planet Earth and never leave, that eventually we’ll be wiped out. “ – John M. Grunsfeld, American astronaut born this day in 1958.

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