MID MORNING MARKETS 11-06-19

The ASX 200 is up 65 points in mid morning trade as we catch up on 2 days of positive US trade. Utilities & Gold lag. H/care and IT winners. AGL bids for VOC, APT cap raise, SGR ↓date, PGL lists midday. #ausbiz

m1m2m3TODAY

  • Economic data – NAB Business Confidence
  • Japanese data – Machine Tool Orders

TONIGHT

  • UK data – Average Earnings, Unemployment Rate, Employment Change
  • US economic data – PPI

COMPANY NEWS

  • Prospa (PGL) floats today. Offer price of $3.78.
  • Woodside Petroleum (WPL) – Extension of Pluto LNG turnaround – completed as planned but the mixed refrigerant compressor has experienced vibration on restart. WPL has made arrangements to meet obligations to our customers, including the purchase of third party cargoes. But 2019 production is expected to be at the lower end of the 88 – 94 MMboe guidance range.
  • AGL/Vocus Communications (VOC) – AGL granted exclusive access to conduct due diligence on VOc for its $4.85 offer.
  • Link Group (LNK) – Following the sale of Link Asset Services for £240m, the pro forma net debt to Operating EBITDA ratio is expected to fall into the bottom half of Link Group’s guidance range of 1.5x to 2.5x.
  • Afterpay Touch (APT) – Trading halt due to capital raising. Raising $300m to support mid-term strategy, with 13.8m shares (equates to $21.75 floor but pricing determined by a book build). SPP Also secondary sell-down by Anthony Eisen, Nicholas Molnar and David Hancock for 2.05m, 2.05m and 0.40m shares respectively. The Secondary Sell-down will be allocated to two US cornerstone investors, Tiger Management and Woodson Capital and represents approximately 1.9% of total shares. Won’t sell any more shares for at least 120 days.
  • Downer (DOW) – Site tour presentation

BROKER CHANGES (from last Friday)

  • Amcor (AMC) – Macquarie \ has an Outperform recommendation with a target price of $17.60 (from $16.25). The Amcor-Bemis merger will be completed next week and NYSE trading will commence. The broker is positive on the new entity given the level of combined scale, synergies and free cash flow. This justifies a premium multiple to global peers, and the broker believes Amcor’s relative defensive earnings stream is attractive in uncertain markets.

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  • Aurizon (AZJ) – Deutsche Bank has upgraded to a Buy (from Hold) recommendation with a target price of $5.40 (from $4.80). The analyst notes that management is carrying out a structural review, including an assessment of the legal and capital structure. An update is expected at the FY19 results. They believe there is limited opportunity to gear up, given the cyclical nature of the resources sector, and there is greater upside from selling an equity stake in the network.

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  • Genex Power (GNX) – Morgans has upgraded to an Add (from Spec Buy) recommendation with a target price of 35c (from 29c). JPower, one of Japan’s largest hydropower operators and developers, will acquire up to 20% of Genex Power and up to $25m following financial close of K2-H. The company has conditional approval on the bulk of its required funding and the main outstanding issue is a final investment decision from Energy Australia. The analyst is now a lot more confident that project will proceed.

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  • Iluka (ILU) – Deal with the IFC whereby IFC will invest and aggregate US$60m and take a 10% stake in the Sierra Leone assets.
    • Citi has a Buy recommendation with a target price of $11.00. The deal leads to a 1% decrease in estimated earnings and a slight downward revision in valuation. In research into the implications of China restricting US access to rare earths Citi notes Iluka produced monazite from its Western Australian operations up until 1995. The broker estimates the monazite stockpile would now be around 500,000t. The challenges in monetising this stockpile involve removing thorium at an economic cost as well as the scale of the market outside of China. The analyst values the monazite stocks at $165m but carries a -50% discount to reflect the time value of potential sales.
    • Macquarie has a Neutral recommendation with a target price of $9.20. Supply shortages suggest upside for the rutile price. Iluka is also enjoying strength in iron ore prices via its Mining Area C (MAC) royalty from BHP Group (BHP). Forecasts would be much boosted were the broker to incorporate spot iron ore prices into its model.
    • Morgan Stanley has an Overweight recommendation with a target price of $11.25. The IFC investment should help Iluka cope with a challenging jurisdiction. IFC will commence with an investment of US$20m for a 3.57% stake, and a further US$40m will increase the stake to 10% if Iluka approves the construction of early works for the Sembehun project.

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  • JB Hi-Fi (JBH) – Ord Minnett has downgraded to a Hold (from Accumulate) recommendation with a target price of $29 (from $27). Shares have risen materially since the federal election and over the past 6-12 months, leading to the downgrade. JB Hi-Fi reiterated FY19 guidance at a recent investor conference and the analyst notes June 2018 will be a tough comparable period to cycle because of the FIFA World Cup, while category trends are more benign and competition is mixed.

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  • Super Retail Group (SUL) – Ord Minnett has downgraded to a Hold (from Accumulate) recommendation with a target price of $9.50 (from $9.00). Shares have risen materially over the past 6-12 months and since the federal election, leading to the downgrade. The analyst considers Super Retail is anchored by a strong and resilient automotive business while the consumer environment appears to be having less of an impact than previously feared. Macpac is proving to be a strong performer although the turnaround in BCF is less certain.

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  • Regis Healthcare (REG) – FY19 guidance reduced – now at the lower end of $47-51m. New FY20 guidance of $105m in operating earnings (EBITDA) and $38m in net profit.
    • Macquarie has an Underperform recommendation with a target price of $2.40 (from $3.01). Occupancy rates have continued to slip in 2H. Given new facilities under development assume 100% occupancy, the actual number is probably lower than the 91.6% rate currently noted. The analyst thinks believes conditions are unlikely to abate given current flu trends. Regulatory risks and industry conditions, including flu, are providing material challenges for the operator, providing further downside risk.
    • Ord Minnett has a Buy recommendation with a target price of $3.00 (from $3.50). Based on current conditions, the analyst considers the 20% profit reduction implied by the FY20 guidance is rational. The broker still envisages a challenging 12 months ahead, including a potential appearance before the Royal Commission.
    • UBS has a Buy recommendation with a target price of $3.10 (from $3.80. The new guidance is below UBS estimates. Continued deterioration in group occupancy and the analyst now expects this to be flat into FY20. They have downgraded estimates for FY19 and FY20 by 4% and 28% respectively. They still believe the company’s portfolio is still well-placed to leverage an improving demand profile over the next decade.

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THIS WEEK

  • Domestic – Shorter trading week. NAB business confidence, Westpac Consumer confidence and employment data on Thursday (the consensus is for a drop in the unemployment rate to 5.1%.
  • China – Trade data on Monday, inflation on Wednesday, and a big day on Friday with retail sales, industrial production and fixed asset investment
  • Japan – GDP (final) and current account, and industrial production
  • Europe – industrial production
  • UK – GDP and unemployment,
  • US – PPI Tuesday, CPI Wednesday, and retail sales and industrial production on Friday

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LAST WEEK

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MARKET CATCH UP

FRIDAY MARKETS (ASIAN TIME ZONE)

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FRIDAY NIGHT (OVERNIGHT)

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OVERNIGHT MARKETS (MONDAY)

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SPI FUTURES +21 (and +32 for Monday)

US EQUITIES – S&P 500 +13 (+0.47%), Dow +79 (+0.30%), NASDAQ +81 (+1.05%). (Friday night S&P 500 +30 (+1.05%), Dow +263 (+1.02%), NASDAQ +127 (+1.66%))

Major themes

  • 6th straight day of gains, but eased in the final hour on concerns about Trump and his views on China and the Fed.
  • Deal between the US and Mexico to combat illegal migration removes the threat of US tariffs on goods imported from Mexico.
  • On Friday, equities and treasuries extended gains due to weaker than expected employment data and expectations of a Fed rate cut
  • United Technologies and Raytheon have agreed to an all-stock merger.

EUROPEAN MARKETS – All stronger. STOXX600 +0.21%, UK FTSE +0.59%, German DAX closed, French CAC +0.34% (Friday STOXX600 +0.93%, UK FTSE +0.99%, German DAX +0.77%, French CAC +1.62%)

CURRENCIES

  • The USD is lower at 96.7856.
  • The Aussie dollar is higher at US69.61.

BONDS – 2-yr: +5 bps to 1.89%, 3-yr: +6 bps to 1.87%, 5-yr: +6 bps to 1.91%, 10-yr: +6 bps to 2.14%, 30-yr: +5 bps to 2.63%. (Friday 2-yr: -5 bps to 1.84%, 3-yr: -4 bps to 1.81%, 5-yr: -3 bps to 1.85%, 10-yr: -4 bps to 2.08%, 30-yr: -5 bps to 2.57%)

COMMODITIES

  • Oil – WTI futures were down US13c or 0.23% to US$52.51 after the Saudi energy minister said Russia was the only major oil exporter undecided about extending production cuts. On Friday WTI futures rose 2.7% to US$54.25 after Saudi Arabia said OPEC was close to agreeing to extend an output production cut beyond June
  • Gold was down 1% or US$16.80 at US$1,329.30 an ounce
  • Iron Ore – IRESS has iron ore down US$3.00 at US$99.00 a tonne. CommSec has iron ore up US$2.05 or 2.1% at US$100.40 a tonne.
  • LME metals – Mixed. Cu +1.45%, Ni +0.17%, Al +0.97% (Friday all lower. Cu -0.857%, Ni -0.47%, Al -0.70%).

ECONOMIC DATA, NEWS & POLITICS

  • US economic data Monday – Job Openings 7.449m; prior 7.474m)
  • US economic data Friday – 75,000 (consensus 180,000; prior 224,000), Nonfarm Private Payrolls 90,000 (consensus 170,000; prior 205,000), Average Hourly Earnings 0.2% (consensus 0.3%; prior 0.2%) to be +3.1% over the year (prev +3.2%), Unemployment Rate 3.6% (consensus 3.7%; prior 3.6%) while U6 unemployment rate (which accounts for unemployed and underemployed workers) decreased to 7.1% from 7.3%; and Average Workweek 34.4 (consensus 34.5; prior 34.4); Wholesale Inventories 0.8% (consensus 0.7%; prior 0.0%); Consumer Credit $17.50bn; consensus $13.00bn; prior $11.00bn).
  • Chinese data – May trade surplus $41.65bn (expected $20.50bn; last $13.84bn). May imports fell 8.5%yoy (expected -3.8%; last 4.0%) while exports increased 1.1%yoy (expected -3.8%; last -2.7%). The view is that manufacturers were moving to ship products offshore before the next round of threatened trade tariffs kick in.

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  • Japanese data – Q1 GDP grew 0.6% qtr/qtr (expected 0.5%; last 0.5%), or 2.2%ann (expected 2.1%; last 2.1%). Q1 GDP Private Consumption -1% (as expected, last -0.1%). April Current Account surplus JPY1.60tr (last JPY1.27tr)
  • British politics – Conservative politicians have begun campaigning for the leadership post ahead of Thursday’s first round of voting. The first round of voting (new Prime Minister) will be held on June 13.
  • ECB – Policymakers are reportedly open to a rate cut if growth continues weakening as the year goes on.
  • UK April GDP -0.4% (expected -0.1%; last -0.1%) but +1.3%yoy (last 1.8%). April Industrial Production -2.7% (expected -0.7%; last 0.7%), to be +1.0%yoy (expected 1.0%; last 1.3%). April Manufacturing Production -3.9% (expected -1.1%; last 0.9%) to be -0.8%yoy (expected 2.2%; last 2.6%). April Construction Output -0.4% (expected 0.6%; last -1.9%) to be +2.4%yoy (expected 3.3%; last 3.2%). April trade deficit GBP12.11bn (expected deficit GBP13.10bn; last deficit GBP15.43bn).
  • Italian data – April Industrial Production -0.7% (expected 0.2%; last -1.0%) to be -1.5%yoy (expected -0.2%; last -1.6%).
  • Fed rate cut expectations – Futures market currently sees an 85.6% implied likelihood of a rate cut at the July 30-31 FOMC meeting.
  • Housing finance Friday – Home Loans -1.2% (expected -0.2%; last -2.5%) while May AIG Construction Index decreased to 40.4 from 42.6.
  • German growth Friday – The Bundesbank lowered its 2019 GDP forecast to 0.6% (from 1.6%) and 2020 forecast to 1.2% (from 1.6%). Bundesbank continues expecting 2019 inflation at 1.4% while inflation in 2020 is expected at 1.5%, down from the previous forecast for an increase of 1.8%.

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