Weekly market review
Written and accurate as at: Aug 17, 2017 Current Stats & Facts
There was little in the way of thematic drivers behind last week’s -0.45% fall in the S&P/ASX 300. Miners rose in the first half the week, then fell away as sabre-rattling between the US and North Korea saw geopolitical tensions edge upwards. The exchange of threats also saw bonds rally and gold and defensive stocks outperform over the last few days. The USD also strengthened against the AUD, providing some respite for offshore earners.
However the major moves within the market derived from stock specific news and results. In this vein, packaging company Orora (ORA) gained +8.4% as its result calmed investor fears about slowing growth and the effect of high power prices in Australia. Carsales.com (CAR) (+6.2%) also delivered a decent result. Its core domestic business continues to grow earnings at mid-single digits while its offshore businesses – such as Webmotors in Brazil and SK Encar in South Korea. Fund manager Janus Henderson (JHG) (+4.9%) – formed from the recent merger between Janus Capital in the US and Henderson in the UK – pointed to improved fund flows on the back of good performance as well as cost synergies from the tie-up as the foundation of its good result.
Accommodation provider Mantra Group (MTR) (+6.3%) was another strong performer after announcing the purchase of the boutique Art Series Hotels. It is a small deal – and largely expected – however the market expressed approval of an acquisition in MTR’s core business, rather than another offshore purchase. The deal is entirely debt-funded, so is immediately earnings accretive.
Elsewhere, Qantas (QAN) (+1.1%) also outperformed, partly driven by commentary that underlying domestic economic activity is not as bad as many fear. This is significant, as a few small retailers such as Baby Bunting (BBN) have noted the opposite, suggesting that there is a degree of nuance in underlying consumer demand rather than the broad-brushed negativity that has held sway in recent months.
The banks held up reasonably well despite the concentration of media upon the allegations made against Commonwealth Bank (CBA) (-0.3%). CBA’s result was reasonable; while the banks remain in a muted environment, trends in capital, mortgage competition and margins have all moved from negative to positive, suggesting that the operating climate remains benign despite the political scrutiny.
Diversified financial AMP (AMP) (-5.0%) delivered a result which was better than expected in several respects, but the market latched onto the disappointing news that the company would be returning less of the capital freed up by reinsurance deals to shareholders than it had previously indicated. Management gave little detail on the decision beyond saying they wanted to hold more capital, but there is perhaps speculation that they may want to make acquisitions, which is likely to have played a part in the stock’s fall post-result.
Construction materials maker James Hardie (JHX) fell -7.9% as its result disappointed the market’s expectation on volume growth in the key North American market. This can be traced to production issues last quarter, which saw a shortfall in product and customers moving to different suppliers. The question now remains how long it will take for JHX to regain market share.
Tabcorp (TAH) (-9.4%) was among the market’s worst performers. Management are guiding to reasonable cost synergies from the expected merger with Tatts (TTS), yet the market is questioning this based on the degree of cost inflation displayed in TAH’s own result. The Sunbet business in the UK continues to be challenged and TAH has had its own issues around anti-money laundering law breaches with AUSTRAC. Yet a fair degree of this is reflected in the price, with the stock nearing a standard deviation below its five year average relative to the ASX 300. Crown (CWN) (-7.3%) also delivered a lacklustre result, as the downturn in Perth really started to bite and main floor gaming revenue fell despite the opening of the luxury Crown Towers hotel. Management have also warned that they will finish the current round of share buybacks but that investors should expect them to hold more capital on the balance sheet ahead of construction beginning on the Sydney casino.
There were no major issues with REA Group’s (REA) (-6.4%) result beyond the fact that it may not have reached the height of investor expectations, while Vocus Communciations (VOC) (-7.9%) illustrated that the NBN rollout continues to provide significant challenges.
Elsewhere, Aristocrat Leisure (ALL) (-2.4%) announced the acquisition of Israeli online gaming company Plarium. The synergies are not immediately apparent – and management did not provide a detailed explanation of any future plans for a possible merging between the role-playing games Plarium creates and ALL’s own online gaming platform. The deal is accretive in that it is debt-financed, but the market’s reaction was not generally positive.