Weekly Market Review
Written and accurate as at: Dec 19, 2017 Current Stats & Facts
It was another anaemic week for the Australian market, with the S&P/ASX 300 index eking out a marginal gain of 8bps. Investor sentiment globally however was more upbeat, as the US tax reform bill’s gestation keeps progressing – The two Houses have now hammered out the final version of the bill, and a vote is scheduled for this week. The legislation, if passed before Christmas, would result in a cut to the existing US corporate tax rate from 35% to 21%. Equity market has been sanguine about the prospect of the tax reform so far, whereas reactions in bond markets have been rather muted. The US Fed raised the short-term interest rate over the week, the third time this year as markets had largely expected. Market expectation is currently set for the same number of hikes next year, which is in line with what the Fed has signalled.
Within the domestic market over the week, both REITs (+1.7%) and Resources (+1.5%) performed strongly, which was largely offset by weak performance from Financials (-0.5%) as Banks (-0.4%) pulled back broadly. We continued to see same commodity prices re-strengthen: the copper price was up 5% whereas the iron ore price was up 4%. The latter now sits above the US$70/mt mark.
In terms of stock performance, the share price of Domino’s Pizza (DMP, -5.4%) declined over the week. Whilst there was no specific news attached, we suspect investors are still wary about the level of acquisition that has been occurring at the company. Elsewhere, AGL (AGL, -5.0%) had its Strategy Day which failed to excite investors further, and saw the company give back some of the recent gains: there was little upgrade to the earnings, and higher CAPEX spending remained on management’s radar. Management also reiterated their stance on offshore M&A, which they see as immature, yet a possible route for growth. In terms of the electricity price outlook, in contrast to some of the market bulls who are now suggesting the price will continue to soar above the ~$100 level, AGL seems more conservative and expects medium-term energy prices to pull back to the ~$70 level. Outside AGL, Newcrest Mining (NCM, -4.5%) and some of the US revenue earners, including Amcor (AMC, -3.1%) and Boral (BLD, -2.5%) also recorded some losses. Last but not least, the share price of Qantas (QAN) dropped by another 3%. We suspect there was some stock transitions underway in the market for the national airliner, as its recent underwhelming share performance stays at odds with the underlying strong demand for airline travel.
On the positive side, the share price of Westfield (WFD, +10.1%) soared as the Lowy family struck a $24.7bn deal with Unibail-Rodamco, which was a 1/3 cash, 2/3 share acquisition of WFD by the France real estate conglomerate. This represents good values to Westfield’s shareholders, under an environment where traditional mall operators globally have been fighting hard against the online retailers, including Amazon. Elsewhere, low-grade iron ore producer, Fortescue (FMG, + 6.6%) also recouped some of its recent losses as the iron ore price continued to edge higher. Outside FMG, Caltex (CTX) advanced by 4.3% as the ACCC decided to block the Woolworth/BP sale, due to concerns around the potential change to consumer outcomes in terms of petrol price at the pump. The deal was previously seen as a +$150m hit to Caltex’s EBITDA, as Caltex has been the key wholesale supplier to the Woolworth petrol stations. Whilst Woolworth/BP reserve the right to appeal against the ACCC’s decision, the process is likely to take six to twelve months, and is beneficial to Caltex in the meanwhile.
Finally, both Crown (CWN, +3.7%) and Transurban (TCL, +4.2%) provided some updates that supported their share price. The former progressed on a number of transactions, including the confirmation to sell CrownBet, which was first announced in late November; the sale of some vacant site on Las Vegas Boulevard to Wynn Resorts; as well as the sale of some of the Crown Sydney Residences to James Packer. The transactions are conducted as part of Crown’s ongoing debt reduction strategy. Transurban on the other hand closed the deal on the West Gate Tunnel Project (WGTP) with the Victorian Government, which was better than many had anticipated. TCL managed to get a 10-year extension on its existing CityLink concession, whilst the toll escalation scheme attached was also lifted to match the WGTP’s. Although there remain some political uncertainties around the CityLink concession changes, Transurban is protected from any major downside as the State agreed to compensate the toll road operator should the changes fail to garner parliamentary consent at a later date. It was well received by the market.