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Weekly market update - 18th of February 2019

Written and accurate as at: Feb 18, 2019 Current Stats & Facts

The local market paused for breath last week, ending the week flat (+0.0%). Resources (+3.7%) made solid gains, which were offset by weakness in AREITs (-0.6%) and Financials (-2.2%). There was little in the way of macro news, with most stock movements in response to earnings results.

Bendigo & Adelaide Bank’s (BEN, -11.5%) result emphasised the weakness in retail banking that showed up in CBA’s result. The outlook for banks remains lacklustre. Retail bank loan growth is running at 2-3% in an environment of more stringent loan conditions and competition from non-bank players. At the same time there is margin compression, further weighing on revenue, while costs continue to rise at about 2% and bad & doubtful debts rise gently at the margin. The upshot is that the banks will do well to hold earnings flat in coming halves, with a material risk that we might see a period of earnings decline. The idea that BEN and other smaller banks might benefit from a more even playing field is not being borne out, at this point. In the near term some of the banks can provide potential capital management as they slim down and sell off assets, however this is a rare ray of sunlight in an otherwise clouded outlook. 

Elsewhere in financials, AMP (AMP, -10.7%) delivered a result inline with expectations, but which flagged more costs and pressure on outflows looking forward. We are also entering something of a news vacuum until the new CEO has had a chance to assess the business and deliver a new strategy. Challenger (CGF, -8.4%) had preannounced its result and downgraded earnings, but fell regardless following the result, with investors expressing concern over the structural pressure on CGF’s business model as margins narrow and flows decline. Suncorp’s (SUN, -3.8%) result also disappointed, at least partly via enlarged provisions for catastrophic events. This had always been a source of debate over the stock and, while it does remove an overhang, it also has a negative impact on next year’s earnings.

Tabcorp’s (TAH, -5.6%) numbers revealed that competition in wagering remains intense, even following the introduction of the point-of-sale tax. CSL (CSL, -4.9%) also underperformed, despite delivering a decent result which is on track to hit the upper end of management guidance. The market focused on weakness in Albumin volumes, which management has attributed to a one-off issue as it waits for a licence to supply Chinese demand from an additional plant. Carsales.com (CAR, -1.1%) was initially down following its result on disappointing third-party advertising revenues, as car listings had softened. However, it bounced back later in the week. Its international business – and particularly Korea – continues to deliver strong gains.

In property, Lendlease (LLC, +7.7%) is running up ahead of its result on the announcement of some new development contracts in Europe and the hope that the write-downs in recent months signals that the worst is over. The stark performance divergence between Unbail-Rodamco-Westfield (URW, -7.7%) and Goodman Group (GMG, +6.7%) last week neatly captures the broader trends within REITs, where industrial property continues to perform well while retail struggles in an environment of slower consumer spending. In URW’s case, this was compounded by its European exposure, where growth is weaker than Australia.

Sluggish consumer spending is proving a headwind for JB HiFi (JBH, +2.4%), but it is doing a better job than most in adapting. It continues to eke out growth in a tough environment, delivering a result which is tracking towards the upper end of management’s guidance for the full year. It also managed to deliver sales growth on the pcp for January, which was no mean feat given a strong January 2018. The result revealed that Good Guys continues to trend better.

Gold miner Northern Star (NST, +5.8%) was among the market’s best, as it squeezed out more production in a period of better gold prices. Whitehaven Coal (WHC, -6.3%) continues to print money on the back of a strong coal price, but higher costs and production issues at Narrabri saw it disappoint the market. Elsewhere in energy Santos (STO, +5.7%) outperformed as the oil price rose.

The market baulked at little at Telstra’s (TLS, -1.9%) half year dividend, which came in below many expectations. However, the stock rebounded as investors digested the fact that the underlying mobile phone businesses showed signs of improvement and maintained strong subscriber growth. We think that TLS can maintain this better trend – the key question is whether it can be augmented with further meaningful cost out.

Amcor (AMC, +3.2%) reported better trends in both its North American and Latin American business, supporting our view that the pressure in these markets has been cyclical, rather than structural. There were also signs of less pressure on input costs. Management stated they were close to finalising the tie-up deal with Bemis. James Hardie (JHX, +5.8%) continued to outperforming following the previous week’s result.

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