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Weekly market update - 3rd of June 2019

Written and accurate as at: Jun 03, 2019 Current Stats & Facts

The local market paused for breath following its recent run. Most global equity markets declined as uncertainty over trade rumbled. This outweighed the last vestiges of the ASX’s post-election surge and the Australian index ended the week down -0.9%

Metals & Mining managed to hold their ground, flat for the week. However Financials ex-property declined -0.6%, with the banks’ recent momentum waning. National Australia Bank (NAB, +2.6%) posted a gain, however Commonwealth Bank (CBA, +0.4%) and ANZ (ANZ, +0.1%) were flat while Westpac (WBC, -2.4%) went backwards.

Australian listed property fell -2.8%, with Mirvac Group (MGR) down -2.9% as it took advantage of a strong share price to issue an additional $700m of capital at only a 4% discount. While the raising is not linked to any specific project, it was relatively well received and supported by the market and may herald further similarly opportunistic moves in the listed property space.

Financial administration company Link (LNK) tumbled -22.5% on a profit warning, as management downgraded FY19 EBITDA expectation to between $350 and $360m, versus consensus expectations of $390m. Management pointed to a drop in revenues in its UK business as Brexit has seen IPOs and secondary listings dry up.  This accounted for ~60% of the downgrade, with higher-than-expected costs in Australia supplying the rest. Both the UK and Australian businesses require significant investment to bolster LNK’s market position.

Costa Group (CGC, -20.2%) was also among the market’s worst performers for the week, likewise as a result of a management downgrade. CGC disappointed on a number of fronts. A later-than-usual harvest from blueberries from it Moroccan acreage is bringing it into competition in Europe with Spanish suppliers, putting pressure on prices. At the same time it has had issues with the quality of its raspberry crop and the discovery of a fruit fly at its citrus farms in NSW could see an increase in costs as fruit is shipped elsewhere for storage and packing. There was also some pressure on costs for its mushroom crop. CGC’s diversified strategy helps offset the seasonal, cyclical and climate-related risks of agriculture stocks. Nevertheless this serves as a reminder that it is an agriculture stock and that, as unusual as it is that almost every major division had a setback, risk is real. This stock is a long-term view given its diversification and exposure to some of the highest-growth crops. That said, remain mindful that this is a company which has in its past traded on a valuation which does not reflect the risk inherent in agriculture stocks.

Vocus Communications (VOC, +18.0%) was among the few stocks to make large gains last week, on the news of a private equity takeover bid by Sweden’s EQT. AGL Energy (AGL) also stated that they had been running the numbers on a potential bid for VOC. This could have been a sensible tie-up given VOC’s value is in its customer base rather than extensive infrastructure. Nevertheless at this point it looks like EQT’s bid is in the driver’s seat.

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