MID MORNING MARKET 05-06-19

The ASX 200 is up 54 points in mid morning trade, after the Fed Chair signalled potential rate cuts. Reversal of previous trends. Ie Gold worst, IT best. Gains broad. VOC bid off, WOR investor day, GDP today. #ausbiz

m1m2m3TODAY

  • Australian economic data – AIG Services Index, CommBank Australia Services PMI Final, CommBank Australia Composite PMI Final, GDP (exp 0.5%/1.8%)
  • Ex-dividend – James Hardie (JHX) 30.1c
  • Japanese – Nikkei Services PMI
  • Chinese – Caixin Composite PMI, Caixin Services PMI

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TONIGHT

  • European – Markit Composite PMI Final, Markit Services PMI Final
  • UK – New Car Sales, Markit/CIPS UK Services PMI
  • Europe – PPI, Retail Sales
  • US economic data – Trade Balance, Productivity-Rev. Unit Labor Costs – Rev.
  • Fed speak – New York Fed President (FOMC voter) John Williams; Chairman (FOMC voter) Jay Powell

COMPANY NEWS

  • Vocus Communications (VOC) – Offer from EQT at $5.25 is off the table.
  • Wesfarmers (WES) – Sharon Warburton appointed to the Board.
  • Worley (WOR) – Investor Day presentation

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  • Cooper Energy (COW) and AGL – Announced the signing of new gas supply agreements with AGL Energy from COE’s Sole (Gippsland Basin) and Casino Henry (Otway Basin) gas operations. AGL Energy has contracted to take, at current market prices: a share of the 2019 calendar year production from Sole, inclusive of commissioning gas; up to 4 PJ from Sole for the period 1 January 2020 to 30 April 2020. This tranche represents an extension to the gas volume AGL previously contracted from 1 May 2020; 100% of Cooper Energy’s share of gas production from Casino Henry for the 2020 calendar year.
  • Dexus (DXS) – Hosting a North Shore Property Tour for institutional investors
  • ASX – Monthly Report. Total capital raised was $5.1 billion, down 60% on the previous corresponding period (pcp), average daily number of trades was 35% higher than the pcp. The average daily value traded onmarket of $4.9 billion was up 10% on the pcp. average daily futures and options on futures volumes were up 14% on the pcp. Average daily futures volume was up 13% and average daily options volume was up 143% on the pcp.

BROKER CHANGES (from previous day)

  • Adelaide Brighton (ABC) Credit Suisse has a Neutral recommendation with a target price of $3.70 (from $3.90). The analyst has considered the admission by sector peer Boral (BLD), that increased infrastructure activity will not be enough to offset falling residential construction for concrete and cement, and has cut forecasts.

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  • Boral (BLD) – Citi has a Buy recommendation with a target price of $5.85. Management has reaffirmed FY19 guidance for its Australian segment. Noted that while a strong June is required, weather conditions remain favourable. Also indicated that North American headwinds have been offset. Negotiations with Knauf on the USG joint venture stake are substantially progressed and BLD is confident it can fund the acquisition with existing debt facilities.

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  • Amcor (AMC) – Citi has a Buy recommendation with a target price of $16.10. AMC has received final regulatory clearance from the US Department of Justice for the merger transaction with Bemis. The analyst considers this a positive outcome and likely to lead to upgrades for consensus FY21 and FY22 estimates.

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  • Alumina Limited (AWC) Citi has a Buy recommendation with a target price of $2.50. China’s imports of alumina in April were 57,000t, or a net 19,000t. China has been reported actively seeking more alumina to cover a shortage because of the shutdown of the Xinfa refinery in early May. Citi forecasts an alumina price of US$380/t and US$375/t in 2020 and 2021 respectively. Alumina Ltd is expected to benefit from improved forecast realisations, while caustic soda prices have continued to moderate.
  • Accent Group (AX1) – Citi has downgraded to a Neutral (from Buy) recommendation with a target price of $1.61 (from $1.75). The analyst remains a supporter of the company’s growth strategies, including the increase in vertical brand/accessory penetration and the acquisition of The Athlete’s Foot franchises. But they have downgraded due to share price up 24% this year. Future growth could also be more challenging as the company has largely cycled the benefit of reduced discounting.

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  • Carsales (CAR) – UBS has downgraded to a Neutral (from Buy) recommendation with a target price of $14.00 (from $12.50). The analyst believes the opportunity for Carsales.com lies with lifting depth contributions, repairing display and growing internationally. In South Korea there are many drivers for longer-term growth, including greater penetration of the dealer base. Forecasts are raised to factor in improved execution, but they think success is in the price.

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  • City Chic (CCX) – Citi has downgraded to a Sell (form Neutral) recommendation with a target price of $1.60 (form $1.45). Growth prospects are good, but the analysts sees is insufficient margin of safety at current prices. They also note fashion risk and think a lower share price is necessary to provide a satisfactory reward. Rating is downgraded but estimates for EPS raised by 3% for FY19 and 9% for FY20.

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  • Domino’s Pizza (DMP) – UBS has a Neutral recommendation with a target price of $48.50. The analyst suspects store growth may disappoint the market in FY19 resulting in loss of royalty income and up-front franchise fees. It would also lower confidence around store targets and FY20 growth. The shortfall could result in a maximum drag of $6m (-3%) on earnings (EBIT) and add risk to the guidance for FY19 EBIT at the lower end of $227-247m.

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  • Nufarm (NUF) – Nufarm has acknowledged the potential for litigation and earnings risk following recent reports regarding glyphosate. Nufarm not been named in any litigation and many of the features of the lawsuits relate specifically to the producer, Monsanto/Bayer.
    • Deutsche Bank has a Buy recommendation with a target price of $7.50. While the market may be pricing in another downgrade to earnings and likely equity raising, the analyst believes it is too early, as June and July are key selling months.
    • Macquarie has an Outperform recommendation with a target price of $6.38. The analyst notes Glyphosate represents 12% of the company’s gross profit. Also Nufarm does not manufacture glyphosate but purchases the material from manufacturers to formulate into glyphosate-based products for sale. Monsanto/Bayer has been the main focus of litigation to date. The potential risks are difficult to quantify and the analyst suggests the valuation is already factoring in a substantial discount in this regard. The shares are down 47% since August 2018.

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  • IRESS (IRE) – Macquarie has a Neutral recommendation with a target price of $13.69 (up3.9%). IRE has acquired QuantHouse for EUR38.9m, to be funded by debt. The business is expected to incur a minor loss in 2019 but should be accretive to earnings in FY20. While the company’s high visibility on earnings is likely to be considered favourably, the analyst see limited upside at current valuations levels

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OVERNIGHT

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SPI FUTURES +54

US EQUITIES – S&P 500 +59 (+2.14%), Dow +512 (+2.06%), NASDAQ +194 (+2.65%).

Major themes

  • The best trading day of the year
  • FOMC Chairman Jerome Powell spoke – while not making an overt reference to cutting rates, he hinted that the FOMC will “act as appropriate” to sustain the economic expansion. Powell said the central bank will “act as appropriate to sustain the expansion.” He noted, however, the Fed does not know “how or when” global trade issues will be resolved. “We are closely monitoring the implications of these developments for the U.S. economic outlook.”
  • Easing trade tensions with China and Mexico

EUROPEAN MARKETS – All higher. STOXX600 +0.59%, German DAX +1.51%, French CAC +0.51%

CURRENCIES

  • The USD is lower at 97.06.
  • The Aussie dollar is stronger at US70.03.

BONDS – 2-yr: +8 bps to 1.91%, 3-yr: +7 bps to 1.86%, 5-yr: +6 bps to 1.91%, 10-yr: +5 bps to 2.14%, 30-yr: +5 bps to 2.60%

COMMODITIES

  • Oil – WTI futures up US23c to US$53.48 on comments from Jay Powell and the Saudi energy minister who sid a consensus is emerging among producers to continue limiting output in 2H. However Russia’s top oil producer that it would oppose extending joint cuts with OPEC.
  • Gold futures rose US80c to US$1,328.70
  • Iron Ore – IRESS has iron ore down US$3.00 at US$105.50 a tonne. CommSec has iron ore up US$1.95 or 2.0% to US$99.90 a tonne.
  • LME metals – Mixed. Cu +0.57%, Ni -0.55%, Al +0.82%

ECONOMIC DATA, NEWS & POLITICS

  • US economic data – April Factory Orders -0.8% (consensus -0.9%; prior 1.9%)
  • Italian politics – Prime Minister Giuseppe Conte said he will offer his resignation if coalition parties stop cooperating, Deputy Prime Minister Matteo Salvini said that his party wants to press ahead with the current government.
  • European economic data – Unemployment Rate hit a decade low of 7.6% (expected 7.7%; last 7.7%).

 

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