Weekly equities note
Written and accurate as at: May 26, 2017 Current Stats & Facts
The S&P/ASX 300 fell -1.9% last week, on festering concerns over President Trump’s removal of FBI Director Comey and increasing scrutiny of his administration’s alleged links with Russia.
The worry here is that an administration focused on surviving these allegations – with some talk of impeachment surfacing last week – will be unable to devote attention to the growth-friendly measures of tax reform and deregulation. It is interesting to note that many of the strongest beneficiaries of the “Trump trade” in the US market have round-tripped since November, and have returned to their pre-election levels. This suggests that further downside may be limited and possibly provide opportunities if sentiment regarding the President changes.
This weakness was exacerbated by worries over the Australian economy. Unemployment figures were reasonable, but the market remains focused on evidence that the retail environment is softening.
Resources provided a bright spot. The S&P/ASX 300 Metals & Mining index gained +2.5% for the week, as Chinese officials indicated that they were mindful of not tightening too quickly. Several commodity prices rose in response, lifting Fortescue Metals (FMG) (+10.6%), Rio Tinto (RIO) (+5.8%) and BHP Billiton (BHP) (+2.2%). Bluescope Steel (BSL) (+3.0%) also outperformed in a falling market. The oil price gained 6% as the Saudis and Russians said they were prepared to extend their agreement to limit production to March 2018. The price response from oil and gas producers was muted, although most have outperformed already over the month to date.
Sirtex Medical (SRX) (-25.3%), which manufactures cancer treatments, was the market’s worst performer, taking another hit with its second disappointing clinical trial in two months. Metcash (MTS) (-8.9%) was also weak as the market expressed its concerns over a batch of statistics showing softer trends in consumer spending for March. At this point there seems to be an assumption that MTS’s IGA franchise is the logical loser from still-intense competition and weaker consumer trends. We do not believe this to be the case; regardless of the weaker macro data, there is no sign that MTS are haemorrhaging sales at this point. MTS’s recently expanded hardware business continues to perform well. Once this and its other divisions are excluded, the current price implies a 2x EBITDA valuation for the IGA business, which we believe is far too low. We maintain our conviction in MTS and are looking to its June result for confirmation of our thesis.
James Hardie Industries (JHX) fell -7.0% following its result. While operating trends have been fine, management reported that their production expansion is proving slower than they anticipated, meaning their FY18 margin will not increase as much as they hoped. Elsewhere, Medibank Private (MPL) fell -5.7% as APRA data revealed that private health insurance margins have fallen over the year to date.
Fairfax Media (FXJ) was the market’s best performer, gaining 16.4% for the week on the news that Hellmen & Friedman are contesting the existing takeover bid from rival private equity firm TPG. The key target is Domain, FXJ’s real estate advertising business. However the ultimate fate of the media division could provide an interesting opportunity for further consolidation within the media space. Qantas (QAN) and Aristocrat Leisure (ALL) also continued their recent strong runs, up +2.5% and +2.3% respectively.