Weekly Market Review
Written and accurate as at: Jul 07, 2017 Current Stats & Facts
The Australian share market gave back most of its weekly gains last Friday, with the S&P/ASX 300 Accumulation Index edging marginally higher at 0.3% over the week. This saw the Index finish the month flat at 0.2%, rounding out a very strong 2017 financial year total return of 13.8%. Relative to global markets however, this was somewhat lacklustre with the US S&P 500 (+17.9%), the UK FTSE 250 (+22.2%), Germany’s DAX (+27.3%), the Japanese TOPIX (+32.2%) and the French CAC 40 (+24.8%) all comfortably outperforming our market over the period. Valuations remain at the top end for the Australian market, underpinned by the confluence of the relatively stable domestic economy and lower interest rates.
Over the week, Financials (+1.7%) and Materials (2.7%) were the major contributing sectors, offsetting poor performance from the defensive sectors including Health Care (-2.1%) and AREITs (-3.2%). Early in the week, a speech from the Chinese Premier Li Keqiang reaffirmed the country’s steady economic growth outlook and helped bolster the iron ore price that has been subdued lately. This in turn created a tailwind for the major miners and their share prices moved higher during the week, with notable gains from BHP Billiton (BHP +3.9%), RIO Tinto (RIO, +7.5%) and Fortescue Metal Group (FMG, +12%). On the other hand, investors jittered at a slew of hawkish comments from central bankers this week, which could indicate a possible end to an era of ultra-generous liquidity from the central banks globally. Bonds sold off as a result, with domestic 10-year bond yield climbing 23bps and the US 10-year also added 16bps. This weighed on the broad market sentiment, but in particular saw bond-sensitives sell-off significantly: Sydney Airport (SYD, -4.6%), Transurban Group (TCL, -3.9%) and Westfield (WFD, -3.6%) all pulled back significantly.
Qantas (QAN) maintained its outstanding momentum to register a strong monthly return of 14.2%, as the stabilising industry backdrop continues to support the airliner’s re-rating. Metcash (MTS) reported better-than-expected results which helped its share price to soar 17.1% in June. Key highlights include a reported EBIT of $ 295m (3-4% above market expectation); like-for-like sales for the food business was around -4%, which also beat market expectation; realised cost-out was higher than the management’s expectation of A$35m, with a revised annual cost-out target of $120m (previously $100m). The company’s rationalisation program aims to reduce its IGA product supplies from the current 6,000 items to approximately 1,500 items. The reduction is expected to deliver additional earnings improvement for the IGA business. Adding to this, company cash flow was very strong with a cash conversion rate greater than 100%, while net debt fell to $80m. Taken together, this means the company has virtually no debt, which in isolation equates to a 5% improvement in the valuation. It also allows Metcash to start paying a half-yearly dividend of 4c, which is equivalent to a 5% annualised dividend yield. On the other side of the spectrum, conditions in Western Australian remain challenging for Metcash, due to competition from ALDI and a generally weak domestic economy.
On the mining front, Whitehaven Coal (WHC) posted a strong monthly return of 13.4%, making the miner one of the best performing stocks over the financial year with an annual return of 167%. However, Iluka (ILU, -4.9%) gave back some of its previous gains in June. Iluka’s cut-back in production over the past few years has led to an improvement in Zircon pricing. Reasonably strong demand for the commodity lately also saw Iluka restart its main mine in South Australia, which was closed off two years ago due to weaker-than-expected demand from China previously.
Nine Entertainment (NEC) finished the month 6.2% higher. The media company benefited from the Federal Government’s recent removal of the broadcast license fee, which is worth $33m-$35m (or ~15% of EBITDA equivalent) and will be a retrospective cut to NEC’s cost, bolstering earnings for both FY17 and future years. Adding to this, revenue outlook is also improving for the business, with its ratings share continuing to increase from the current level of ~38%.
Last but not least, Sirtex (SRX, +35.5%) bounced back significantly in June. The pharmaceutical company had been a darling of the market but the preference quickly faded due to some misses in the company’s sales numbers and clinical trials. Management led by the company’s newly appointed Chief Executive responded with the latest company restructuring, including reductions in the value of intangibles as well as staff costs. The reductions are supposed to bring Sirtex some earnings improvement at ~15-20% and were well received by the market. Challenges however remain for the company to lift its revenue growth rate from its current sub-10% level to beyond.