Weekly market review
Written and accurate as at: Feb 27, 2018 Current Stats & Facts
The equity market continued to recover ground lost in February’s early wobble, with last week’s +1.6% gain in the S&P/ASX 300 bringing the index to -0.6% for the month to date. There was little in the way of significant macro news to drive movements within the market. Rate-sensitive sectors rose as US 10-year yields shrugged off signs of strengthening inflation to end the week flat (S&P/ASX 200 AREITs +1.3%). Financials too were largely in line with the broader market (S&P/ASX 200 Financials ex property +1.5%). The Chinese New Year holiday saw iron ore pause for breath following recent strong price gains, while copper weakened slightly. This, in combination with some disappointment in BHP’s ((BHP) -2.7%) result, saw resources as one of the few drags on the market last week. Against a benign macro backdrop, the results reason continued to drive dispersion within the market.
Vocus Group (VOC) (-15.1%) was among the market’s weakest after reporting a 25% fall in underlying profit. VOC is demonstrating the cost challenges that can face the third player in an intensely competitive industry – an issue exacerbated by its need to digest the raft of rapid acquisitions made in recent years.
The media continued to question management of Domino’s Pizza (DMP) (-3.5%) in the wake of its result. DMP serves as a salient warning of the vulnerabilities in highly-rated growth stocks when they start to disappoint the market.
Star Entertainment’s (SGR) (-4.6%) result was not that bad. However, the benefits of a revival in VIP gaming from Asia has been offset to an extent by their decision to refurbish some of their high-end gaming facilities in Sydney, disrupting this market and the three-year window of opportunity they have to make hay until Crown (CWN) opens at Barangaroo. The benefits from their newly refurbished Gold Coast casino are also taking longer to materialise than hoped. CWN also reported: its greater leverage to Asian VIPs saw a strong result and +6.5% gain for the week.
Woodside Petroleum (WPL) (-6.9%) resumed trading following the halt that accompanied its announcement of a capital raising to buy out and develop Exxon’s stake of the Scarborough gas field. With a final investment decision for Scarborough not expected until 2020, there are some questions over the need to raise capital so early – and in an environment where WPL maintains an 80% payout ratio.
Elsewhere in resources, BHP (BHP) (-2.7%) fell following a result which disappointed on costs. The increase in costs this half is largely the result of one-off factors and at this stage the iron ore sector, in particular, is not seeing the kind of structural cost inflation that is creeping into areas such as the aluminium complex. We still see BHP as a beneficiary of structural supply side reforms in China, with further upside potential from an improvement in capital allocation as management look to dispose of non-core assets – such as US onshore energy – and focus efforts on higher return businesses such as the Pilbarra iron ore mines.
CYBG (CYB) (-3.3%), the NAB spin-off which manages a portfolio of UK banks, fell as Lloyds TSB announced a top-up to contingent liabilities for claims related to previous mis-selling. This issue remains a risk for CYB; NAB apportioned a sizeable provision as part of its spin-off, however it is not yet certain whether it will be enough to meet all potential claims. Nevertheless, we believe the move by Lloyds only brings it into a position consistent with CYB, rather than signalling an increase in this risk. Meanwhile CYB continues to effect a decent turnaround, with loan growth, strong cost control, margin improvement as rates rise and an improved capital position when it received advanced accreditation.
Several other key holdings reported last week. Nine Entertainment (NEC) (+27.8%) delivered growth in advertising revenues for the first time in two years, helped by strong ratings and increased market share, and returned to profitability. Costs have remained under control, while the digital business is starting to make a material contribution, with Stan breaking even on a cash basis for the first time. NEC is a great example of the opportunities driven by disruption within the Australian economy; the rise of advertising competition on-line saw the market throw in the towel on free-to-air television, but the management at NEC have made good decisions and been able to respond to the challenges, unlike some of their competitors. NEC is now up over 110% over the last 12 months.
Qantas (QAN) (+9.8%) also continued to deliver on its turnaround with a further 14.6% gain in underlying pre-tax profit for the half. The key here remains the combination of capacity discipline and modest demand growth, sustaining growth in passenger yields. The result was a 6-7% increase in consensus earnings for FY19, despite the possible headwind from higher fuel costs. Some are raising concerns over QAN’s average fleet age of ~10 years and argue that it requires a significant capital outlay given the younger fleets of Asian and Middle Eastern airlines. A tax incentive encourages greater air fleet churn at key Asian airlines, while the retirement of some of QAN’s older Boeing 747s should see the average age remain steady over the medium term. US airlines fleets average around 15 years. Elsewhere, engineering contract losses at Lendlease (LLC) (+12.4%) proved less than many feared and included a large one-off component.
A2 Milk (A2M) (+37.0%) surged on the combination of further Chinese growth as well as a new deal with Fonterra which reduces underlying risk. Fairfax Media (FXJ) (+19.7%) also did well, helped by the bounce in Domain (DHG) – where it retains a 60% stake – as well as the good news on its joint venture in Stan.