MID MORNING MARKETS 17-10-18

The ASX 200 is up 60 points in mid-morning trade with no awards for guessing there’d be a strong start today after +ve US Qs. Materials the only lag. Banks fired up. A2M update, BHP and OZL Qs, CSL AGM and RBA on housing. FOMC minutes tonight #ausbiz

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TODAY

  • BHP Billiton (BHP) – Q production report
  • AGMs – CSL at 1pm, Origin Energy (ORG), The Reject Shop (TRS)
  • Ex-dividend – Gowing Brothers (GOW) 6.0c, Holdings (NWH) 2.0c

TONIGHT

  • UK data – Inflation
  • European – Inflation
  • US economic data – Housing Starts, Building Permits, FOMC Minutes

COMPANY NEWS

  • Amazon – Media reports that Amazon will add “pantry food and drinks” – dry groceries including tea, coffee, tinned goods, biscuits, breakfast cereals, chocolates. Now offering 27 categories and more than 80 million products. Amazon is said to have no current plans for fresh foods in the short- to medium-term, as it lacks a chilled supply chain.
  • BHP Billiton (BHP) – Q production report. Group copper equivalent production up 2% despite maintenance across a number of operations. Volumes for the 2019 financial year are expected to be broadly in line with last year, FY production guidance remains unchanged for petroleum, iron ore, metallurgical coal and energy coal. Total copper production guidance reduced by approximately 3% to between 1,620-1,705 kt reflecting lower volumes now expected at Spence (electro-winning plant outage) and Olympic Dam (acid plant outage).; Unit cost guidance maintained for all major assets for the 2019 financial year. All major projects under development are tracking to plan. In Petroleum, the Victoria-1 and Bongos-2 exploration wells in Trinidad and Tobago, and the Samurai-2 well in the US Gulf of Mexico, encountered hydrocarbons. A sidetrack of the Samurai-2 well is currently being drilling to further appraise the discovery. Onshore US sale process is on track to be completed by the end of October 2018, with the Fayetteville transaction completed on 29 September 2018. The net proceeds from the sale of our Onshore US assets are expected to be returned to shareholders.

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  • Oz Minerals (OZL) – Q report. Prominent Hill 2018 copper production expected to reach the top end of guidance with All-in Sustaining Costs at the lower end of the range; Carrapateena project on track for first concentrate production in Q4 2019; Carrapateena expansion studies: Punt Hill drilling underway; maiden Fremantle Doctor Resource expected Q4; West Musgrave PFS making encouraging progress across resource geology and metallurgical studies; OZ Minerals completes 51% earn-in during October; Pedra Branca project receives key Provisional Licence; resource delineation drilling to commence in Q4; Two new directors joined the Board bringing extensive international mining experience; Cash balance remains strong at $454 million after investment into Carrapateena ($75 million) and dividend payments ($26 million)

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  • A2 Milk (A2M) – Investor Presentation including market update

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  • Boral (BLD) – Will sell its US Block business to Quikrete Holdings, Inc. for US$156m to focus on its core building products and fly ash businesses in North America, its gypsum-based wall and ceilings business in USG Boral and construction materials in Australia. Not expected to be a material after tax profit or loss on sale of the busines
  • Lynas (LYC) – Has released background info in relation to media speculation on t recent media reports have speculated on: (1) compliance with scheduled waste regulations, and (2) mitigation plans arising from the current review in Malaysia.
  • Wisetech (WTC) – Has acquired IFS Global Holdings (‘SmartFreight’), a leading parcel and LTL (Less Than Truckload) shipping software provider. Cost is $20.0m upfront, with a further expected multi-year earn-out potential of ~$35m in relation to business and product integration, customer transition and 2020 revenue performance. With FY18 annual revenue of ~$7.9m and ~$1.0m contribution to EBITDA, this transaction is strategic but not material.
  • Challenger (CGF) – AUM $81bn; Life net book growth of $425m, or 3.1% book growth for the quarter; Second highest quarterly annuity sales on record; Total annuity sales of $1,171 million, up 7% on pcp; Australian annuity sales of $1,071 million, up 21% on pcp; New annuity partnership with Netwealth. Remains on track to achieve normalised net profit before tax growth of 8-12% on FY18. Remains committed to its 18% pre-tax normalised return on equity target. Normalised return on equity is expected to increase in FY19 following deployment of higher levels of capital from the MS&AD equity placement in August 2017, however it is not expected to reach the 18% target in the FY19 year.
  • Bluescope Steel (BSL) – wholly owned subsidiary New Zealand Steel Limited has acquired approximately 15.8% of the shares in Steel & Tube Holdings Limited (Steel & Tube) for a total consideration of A$42.3M. Steel & Tube is a customer of New Zealand Steel. Neither BlueScope nor New Zealand Steel has any intention to make a takeover offer for Steel & Tub
  • NextDC (NXT) – NXT has received notice that APDC Group’s senior debt bank, Bankwest has issued AJD with a default notice following its recent change of control. APDC Group is now required to repay the $29m outstanding within 14 days. This has potential adverse implications for the ability of the APDC Group to pay the Special Distribution of $0.02 per security the APDC Group’s Boards declared on 8 October 2018 and quoted as being payable on 14 November 2018.

ANALYST CHANGES

  • James Hardie (JHX) – UBS has a Buy recommendation with a target price of $24.40 (form $26.20). The analyst suspects JHX’s business is at an inflection point, and the next leg of growth is likely to prove more challenging and more expensive to achieve. But the business and strategy is sound and they think the share price has overshot to the downside and is factoring in a bearish set of assumptions. They’ve reduced longer term earnings forecasts for FY22 and beyond by 10% to reflect slower growth in US housing starts and a greater appreciation for the expected increase in the cost to serve.

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  • Link Administration (LNK) – UBS has upgraded to a Buy (from Neutral) recommendation with a target price of $8.90 (from $8.00The analyst notes that client losses and the effects of the Commonwealth budget have caused the stock to underperform over the past six months. They now think momentum is improving, as is gearing, and there is significant upside from capital redeployment. They estimate little value is being attributed to several positive factors, such as longer-term funds administration growth and options for capital management, which could drive an increase in value of more than 20%.

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  • Sydney Airport (SYD) – Morgans has upgraded to an Add (from Hold) recommendation with a target price of $7.34 (from $7.24). The analyst has upgraded the retail segment and decreased forecasts for parking earnings across FY18-22. Property earnings estimates are also increased. This provides a minor lift to operating earnings forecasts overall. The analyst also points to the Sydney Gateway road project, to reduce congestion around the airport, which is considered to be a minor benefit for medium-term interest costs. Sydney Airport’s compensation is $170m, with a commitment to invest the compensation in exploring other transport solutions for the airport. They have upgraded due to recent share price falls.

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  • Orora (ORA) – AGM. Confirmed first quarter profit is up on the previous year and in line with assumptions.
    • Citi has a Neutral recommendation with a target price of $3.70. Shares have corrected around 10% since the peak in August and the analyst expects support in the near term as continued earnings growth has been reaffirmed for FY19. Growth projects are progressing as planned and the company is back targeting acquisitions.
    • Deutsche Bank has upgraded to a Hold (from Sell) recommendation with a target price of $3.20. Shares have underperformed while FY guidance has been reaffirmed for underlying earnings growth, subject to global economic conditions.
    • Macquarie has an Outperform recommendation with a target price of $3.75 (from $3.70). The analyst notes major capital projects progressing as expected and management changes have led to a steady improvement in the performance of Orora Visual. They note the weaker A$ is a tailwind and acquisitions remain the focus given a strong balance sheet.

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  • Rio Tinto (RIO) – Q Prod
    • Citi has a Buy recommendation with a target price of $90.00. The analyst observes weaker iron ore production and shipments offset higher-than-forecast copper and bauxite volumes in the September quarter. Guidance is retained for Pilbara shipments at the upper end of the 330-340mt range. Copper guidance has been revised to the upper end of the prior range of 510-610,000t. Aluminium guidance has been lowered to 3.4-3.5mt because of the ongoing strike at the Becancour smelter.
    • Deutsche Bank has a Hold recommendation with a target price of $84.00. September quarter production was largely in line with expectations. Pilbara shipments were lower than the prior quarter, although full year guidance has been reiterated at the upper level of the former range, which the analyst calculates to mean a lift in production to 85-89mt in the current quarter, a 4-8% quarter on quarter increase.
    • Macquarie has an Outperform recommendation with a target price of $92.00 (from $91.00). The analyst thought it was a solid Sep Q production, which featured an in-line result for iron ore but beats for copper and industrial minerals. Bauxite and alumina production were the only weak spots. The exit from coal is now complete and robust commodity prices provide for upside potential to current capital management programs, the broker suggests. Outperform retained, target rises to $92 from $91.
    • Morgans has an Add recommendation with a target price of $82.28 (from $81.32). SepQ production was slightly softer than expected and the analyst observes most of the quarterly performance was driven by iron ore as it dominates group earnings. There was a small decline in mined and shipped volumes from the Pilbara because of interruptions from maintenance and a fatality. The analyst also noted that Rio Tinto has not participated in much of the upside stemming from tightness in the aluminium market because of legacy contracts linked to the depressed LME aluminium price. This resulted in negative earnings impact in the first half of 2018 and a further US$130m loss in the September quarter.
    • UBS has a Buy recommendation with a target price of $90.00. Iron ore shipments in the September quarter were slightly below the UBS estimates. Mined copper and titanium dioxide slag were better than expected. Production guidance for all commodities is unchanged with the exception of aluminium which has been lowered because of labour disputes at the Becancour smelter.

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OVERNIGHT

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SPI FUTURES +32

US EQUITIES – S&P500 +548 (+2.15%), Dow Jones +548 (+2.17%), Nasdaq +215 (+2.89%).

Main themes

  • Strong US earnings reports – Goldman Sachs (+3.01%), Morgan Stanley (+5.68%). Johnson & Johnson (+1.95%). United Health (+4.73%) all reported better-than-expected earnings, BlackRock (-4.44%)beat on earnings but missed on sales, Netflix (+12.49% in after-hours trade), IBM (-4.73% in after-hours trade)

EUROPEAN MARKETS – Mixed. STOXX500 +1.58%, UK FTSE +0.43%, German DAX +1.40%, French CAC +1.53%.

CURRENCIES

  • The US dollar is a touch weaker at 95.09.
  • The Aussie dollar is little changed at 71.44c.

BONDS – 2-yr: +1 bp to 2.85%, 5-yr: +2 bps to 3.02%, 10-yr: +2 bps to 3.16%, 30-yr: +3 bps to 3.34%

COMMODITIES

  • WTI crude futures closed up US14c at US$71.92 on lower Iranian export data (1.5mbpd in October to India, China and Turkey versus 2.5mbpd in April).
  • Iron Ore – IRESS reports iron ore was up US50c US$70.00 a tonne. The CommSec site says China Import (Fines 62% Fe) was up US45c at US$71.50/dry ton. (CFR Tianjin port)
  • LME metals – MIxed. Cu -1.36%, Ni -0.16%, Al +0.35%.

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – September Industrial Production 0.3% (consensus 0.3%; prior 0.4%) and Capacity Utilization 78.1% (consensus 78.2%; prior 78.1%); August JOLTS – Job Openings 7.136 mln (prior 7.077 mln) and NAHB Housing Market Index 68 (consensus 67; prior 67)
  • European data – Trade surplus €11.70bn (expected surplus of €15.10bn; last surplus of €17.60bn). October ZEW Economic Sentiment -19.4 (expected -9.2; last -7.2); German ZEW Economic Sentiment -24.7 (expected -12.3; last -10.6) and ZEW Current Conditions 70.1 (expected 74.5; last 76.0).
  • UK data – August Average Earnings Index + Bonus +2.7% (expected 2.6%; last 2.6%). August Unemployment Rate 4.0% (as expected, last 4.0%) and September Claimant Count Change 18,500 (expected 4,500; last 14,200)

QUOTE OF THE DAY

“Don’t be seduced into thinking that that which does not make a profit is without value.” Arthur Miller, American playwright born this day in 1915. Died 10 February 2005

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