Market Review
Written and accurate as at: Aug 11, 2017 Current Stats & Facts
The S&P/ASX 300 round-tripped last week, gaining +1.2% by mid-week before falling to end up just +0.3%. Metals & Mining did well, up +1.9% as the iron ore price continued to recover from its lows of early June and is now back above US$70 a tonne. A-REITs too, outperformed, up +0.6% for the week. It was again banks which weighed on the broader market as the news broke that AUSTRAC, the Federal government’s financial intelligence agency, launched civil action against the Commonwealth Bank (CBA), alleging that a failure in their automatic deposit machine systems resulted in non-compliance with anti-money laundering laws on over 50,000 separate transactions. CBA was down -3.6% for the week; the other banks held up better, but were still down for the week. At this stage the likely financial penalty, if found guilty, would be hefty but should not materially impact the bank’s capital position. However, the greater uncertainty lies in the political implications, reviving again the possibility of a royal commission and of potential management changes at CBA.
Reporting season kicked off last week. Rio Tinto (RIO) (+1.7%) grew earnings a whopping 152% versus the same half last year, yet still managed to disappoint a market looking for more. Higher-than-anticipated costs in iron ore – partly related to weather disruptions – crimped earnings somewhat, as did the cost of the industrial dispute with employees at its Escondida joint venture copper mine in Chile. RIO continues to display discipline on capex, generate strong cash flows and are returning capital to shareholders. As always, there are moving parts to watch in the coming year: resumption of production from Escondida should be positive – although moreso for BHP (BHP), which owns a larger stake in the JV – while issues remain with its copper assets in Mongolia and Indonesia. That said, at its heart RIO’s outlook remains hostage to iron ore: assuming a price near the mid-point of the recent range, FY18 earnings will be flat to slightly down, but at spot prices they will be up as much as 40%. The outlook for iron ore remains crucial.
Suncorp’s (SUN) (-4.5%) result was also disappointing as the costs associated with SUN’s new marketplace strategy saw earnings miss consensus expectations by 4%, while management downgraded the outlook for FY18 on the back of continued cost growth and higher weather-related provisions. At this point management and the market expect a reacceleration in to FY19 on the back of higher product pricing and margins, however we think the combination of competitive and political pressure will limit their ability to raise premiums, while higher claims inflation will also see earnings lower than many are expecting.
Elsewhere in financials, CYBG (CYB) (+7.3%) – the UK banking group spun off by National Australia Bank (NAB) – reported positive trends following a disappointing quarter. Management remain confident of hitting full year targets for volumes, margins and costs – and actually upgraded their target for the latter.
Resmed (RMD) (-3.0%) met the market’s revenue and margin expectations at their quarterly result, but disappointed in terms of guidance. Sales of their flow-gen machines remained robust while masks are showing signs of acceleration on the back of new product launches and the resolution of some production issues. Nevertheless, management have retained a conservative view and guided to flat margins for the next quarter. We believe there is some scope for margin improvement on the back of current trends in mask sales, given they are higher margin than the flow-gen machines. Trends this quarter will be important and we remain focused here.