Weekly equities note
Written and accurate as at: May 30, 2017 Current Stats & Facts
The thematic flip-flopping of recent months continued, with bond-sensitives regaining market leadership last week as listed property (S&P/ASX 200 A-REIT +2.1%) and infrastructure stocks (Macquarie Atlas (MQA) +4.1%, Transurban (TCL) +3.1%) outperformed the S&P/ASX 300’s +0.4% gain. At this point it seems there are enough concerns about the strength and momentum of economic growth to keep the bond-sensitives grinding ahead, even though most expect the US Fed to continue hiking rates this year.
Resources made modest gains in aggregate, with the S&P/ASX 300 Metals & Mining index up 0.1%; however this marked significant divergence between stocks. Mineral sands miner Iluka Resources (ILU) (+11.2%) was among the market’s best performers as management flagged a 13% increase in the reference price for zircon, which is used for the glaze in ceramic tiles and is benefiting from the recent expansion in Chinese property construction. South32 (S32) (+3.1%) and Rio Tinto (RIO) (+0.6%) also made gains while BHP Billiton (BHP) fell -1.1%. Fortescue Metals (FMG) dropped -7.4% as the recent falls in iron ore – and the wide discount for its comparatively low-grade product – are squeezing margins.
Chemical testing company ALS (ALQ) (+13.6%) delivered a solid result, helped by a 28% gain in EBIT for its resource-related division. Reporting was broadly in-line with management guidance and the aggression with which the market latched onto a mild positive suggests that there is a significant amount of cash on the sidelines, looking for opportunities in a somewhat challenging market.
Aristocrat Leisure (ALL) (+5.3%) also reported, delivering a 24.6% gain in revenue over the six months to 31 March which drove a 53% increase in underlying earnings (constant currency). This strong result was underpinned by the North American business, where new games continue to drive gains in market share. Management indicated that they expect 20-30% earnings growth for the full year, and continued strength into FY18 and beyond. At 22.9x 12m forward consensus P/E, ALL’s valuation rating is far less demanding than most of its high growth peers, and it remains our preferred stock within this space.
The banks continued to underperform, with tempered expectations around the pace of bond yield increases implying that margin pressure will remain in place. Commonwealth Bank (CBA) fell -0.1%, while ANZ (ANZ), Westpac (WBC) and National Australian Bank (NAB) were down -1.0%, -1.4% and -2.1% respectively. While we are comfortable with our underweight at this point, sustained weakness in recent weeks has seen the Big Four give back much of their relative outperformance from the lows of mid-2016, and they may become more interesting should their underperformance persist. Regional banks Bendigo & Adelaide Bank (BEN) (-5.6%) and Bank of Queensland (BOQ) (-4.0%) weakened following a credit rating downgrade from Moody’s, which will see the marginal increase in wholesale funding costs offset any potential competitive benefits that they may have extracted due to their exemption from the Federal government’s bank levy.
Elsewhere, retail stocks continued to suffer from the speculative fervour surrounding Amazon’s potential arrival in Australia at some point in the next couple of years. Myer (MYR) fell -10.6%, while Harvey Norman (HVN) was down -3.4%. We continue to believe that the almost inevitable collapse in sentiment regarding the sector when Amazon actually makes some concrete commitment to entry is likely to provide some interesting opportunities. The experience overseas suggests that there have been both winners and losers among existing retailers who co-exist with Amazon, and that, despite the implication of some of the stock falls in recent weeks, the latter’s rise does not result in the obliteration of the incumbent retail sector.
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