Weekly Market Review
Written and accurate as at: Dec 13, 2017 Current Stats & Facts
It was a relatively quiet week for the Australian market, with the S&P/ASX 300 price index ticking 5bps higher, while Resources (-0.2%) underperformed Industrials (0.3%). The former was dragged down by the retreating price of some commodities including iron ore, which dropped 3% over the week. On the macro front, the latest US payroll data indicated that job growth was stronger than expected, while wage growth remained subdued. The benign inflation outlook saw a rather muted reaction in bonds; equities, on the other hand, were well supported. We also saw some meaningful progression on US tax reform. Both Houses have now passed through their versions of the bill, and the reconciliation of differences has been put in place. This potentially creates another tailwind to already healthy momentum in the US economy.
Turning to stock specifics, Qantas (QAN) was down 6.5% over the week. There wasn’t much new information surfacing around the national airliner, however its share price has been under some pressure lately due to its removal from the MSCI Australia Index (as it nears its 49% limit of foreign ownership), as well as the end of the share buy-back. Vocus (VOC, - 6.1%) also gave back most of the gains from previous weeks, and so did Downer (DOW, -5.0%) and REA Group (REA, -3.6%). Elsewhere, fertiliser/explosives manufacturer Incitec Pivot (IPL, -4.5%) saw its share price decline after losing its supply contract with BHP’ iron ore business in the Pilbara, which doesn’t affect IPL’s earnings until 2019-2020. Whilst not yet confirmed by Orica (ORI, +9.8%), IPL’s loss is highly likely to be attributed to ORI’s new ammonium nitrate plant on the Burrup Peninsula, which is closer to the iron ore operations of the major miners. Amongst the miners, Rio Tinto (RIO, -2.8%) had its Strategy Day over the week, which failed to excite investors. The diversified miner is still aiming at cost-out to free up capital that will be returned to investors. Value over volumes also remains the company’s mantra. Last but not least, Caltex Australia (CTX) was down 2.7%, as the ACCC’s impending decision on the BP/Woolworths deal remains an overhang. The decision was delayed at BP/Woolworths’ request two weeks ago, and is expected to be released this coming Thursday.
On the more positive side, Metcash (MTS, +12.7%) saw its share price advance on the back of its half-yearly results. Cash flow was strong, whilst the release of inventory from the hardware acquisition demonstrates improved business efficiency. Debts were also brought down meaningfully, reflecting a business with much lower risks when compared to just a few years ago. The fact that the stock is still trading at 13-14x means that the market is yet to fully appreciate the quality of Metcash. With Aldi now approaching the end of its rollout in WA and SA, and the weak WA economy stabilising, MTS’s negative ex-tobacco sales growth is expected to improve from here. That said, we are cognisant that the supermarket industry remains highly competitive for now, with the majors like Coles still trying to win more customers ahead of Christmas.
Other major winners over the week include Telstra (TLS, +7.9%) and JB Hi-Fi (JBH, + 6.6%). For the former, the realisation that the recent earnings downgrade was little more than a shift in timing of the carrier’s future earnings helped sentiment. There were also chatter that NBN Co may offer discounts to encourage consumers to trade up the packages they are getting now. Such trading-up, if realised and maintained is going to help the mix of the NBN’s users, and is seen as positive for Telstra. For JB Hi-Fi, it was a moderate relief rally that lifted the electronic retailer’s share price. The long awaited arrival of Amazon Australia disappointed the market somewhat, with a fairly limited depth of product offerings. Local retailers have been preparing themselves for months ahead of Amazon’s arrival, and the impact from the e-commerce giant seems muted for now. As we have previously communicated, we think Amazon Prime – the paid subscription service of Amazon and the next stage of Amazon’s Australia rollout – is more likely to deliver greater disruption to domestic retailers.