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Weekly market update - 25th of February 2019

Written and accurate as at: Feb 25, 2019 Current Stats & Facts

Australian equities continued to perform well last week, gaining +1.7% to be up +5.2% for the month-to-date (S&P/ASX 300).  Financials (+3.0%) outperformed both REITS (+0.2%) and Resources (+1.7%) in aggregate. This was driven largely by solid gains from Commonwealth Bank (CBA, +4.3%) and ANZ (ANZ, +4.3%), while Westpac (WBC, +2.0%) and National Australia Bank (NAB, +1.9%) also rose. There was little in the way of news to support these moves; indeed, the only update from a bank was Bank of Queensland’s (BOQ, -10.7%) profit warning ahead of their results next month, which reinforced the view of a challenging revenue environment and continued margin pressure. However there is a sense that many investors are underweight the banks and there has been some covering of this position at the margin as other parts of the market have done well.

Outside of this, there was little in the way of macro movements. Industrial metals such as copper (+6%) continued to gain on better sentiment surrounding China’s ability to stimulate growth and, more specifically, on signs that a trade deal with the US may be forthcoming. Iron ore was flat, while oil rose +4%. China’s apparent decision to limit the flow of Australian coal is unlikely to be a material concern at this point. Australia’s key customers for coal are Korea, Taiwan and Japan and, while there may be an element of political signalling present, Chinese imports have been running well ahead of their usual pace. A slow-down in the pace may be part of an attempt to normalise these flows. BHP (BHP, +3.4%) delivered an average result in operational terms, however issues in terms of both cost and production outages continue to be overshadowed by strong commodity prices.

It was a tough week for some of the market’s favourite growth stocks as their results failed to meet the expectations implied in valuations ratings. Wisetech Global (WTC, -15.3%), Cochlear (COH, -13.3%) and Dominos Pizza (DMP, -5.1%) all slumped in response to their earnings results. Treasury Wine (TWE, -7.8%) delivered decent statutory earnings, however the market expressed concern over the lack of cash flows to match them.

Coles (COL, -8.5%) delivered its maiden result after spinning out from Wesfarmers. Its report, like that of competitor Woolworths (WOW, -4.6%) painted a picture of tough conditions for supermarkets. It is proving difficult for companies to pass on higher input costs as competition remains tight. COL has had to wear higher labour costs as a result of new employee benefit agreements (EBAs) and WOW is set to face the same challenge over the next year. This is a broader theme within the market, with some companies looking to undertake new EBAs ahead a possible change in Federal Government this year. The supermarkets are also finding it tough to grow: most of their sales growth is coming in online channels, which means higher costs and almost no margin. As a wholesaler, MTS is not under the same pressure from renegotiated EBAs. At the same time, a lot of the cost pressures in supermarkets is coming in the fresh food, which is less of an issue for MTS. WOW retains its defensive valuation premium, trading at 21.1x next-12-month consensus PE despite a 5% FY19 downgrade at its result. COL is at 17.3x, while MTS is 11.4x.

IOOF (IFL, +28.4%) was among the market’s best, enjoying a relief rally as its results proved better than many feared. Fellow wealth manager AMP (AMP, +7.8%) also rose as its new CEO did the rounds of analyst meetings following it results. Challenger (CGF, +14.1%) and Carsales.com (CAR, +6.3%) were two others which saw a rebound after a weak period post-reporting.

Nine Entertainment’s (NEC, +13.1%) result demonstrated that it has been able to pull the lever on costs and make gains in market share to offset a weaker overall TV ad market. The tie-up with Fairfax was underpinned by a desire to create a more diversified media company and this proved helpful as the metro media division also held up better than expectations. Stan continues to gain subscribers and, with pricing increases, should be profitable in FY20.

A pick up in mining capex is feeding through to earnings momentum for both Seven Group (SVW, +11.3%) and Monadelphous (MND, +5.5%). Some have been worried that uncertainty over Chinese demand and commodity prices might weigh on the service companies. However, some believe the cycle is just beginning to pick up in this sector, with the miners needing to spend on equipment maintenance and production replacement after several years of tight cost and investment control.

Flight Centre (FLT, +4.1%) continues to see weakness in Australian leisure travel in the wake of a disruptive divisional overhaul, however strong returns in corporate travel saw it beat most expectations. Elsewhere in travel, Qantas (QAN, +0.5%) managed to offset a large increase in its fuel bill with stronger revenue, holding earnings in its domestic business flat and still managing to announce further capital return via a dividend and buyback. It took the unusual step of hedging fuel costs for 2020 earlier than would be the case, which reduces risk heading in to next year. The international business saw revenue pressure, however capacity growth should fall to almost zero in the next half, providing the potential for some improvement here.

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