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Weekly market update - 30th of September 2019

Written and accurate as at: Sep 30, 2019 Current Stats & Facts

Aussie equities fell -0.2% in aggregate (S&P/ASX 300 Accumulation index) during a relatively quiet week aside from the news that the UK PM had illegally prorogued parliament and the Democrats were looking at impeaching the US President.

Bonds rallied slightly. Australian sovereign 10yrs fell 7bps to 0.95%. Their US equivalents fell 4bps to 1.68%.

Gold fell -1.3% and West Texas crude -3.8%. Oil has now given up all the gains made in the wake of the drone attack on the Saudi Aramco installations.

This dragged on contractor Worley Parsons (WOR, -6.6%), which was among the weakest in the ASX 100 as it continued to give back its post-attack bounce. Oil Search (OSH) was off -3.4%. The oil price action was exacerbated by an update on its recently acquired Alaskan asset, where the cost base now looks larger than first anticipated.

Elsewhere in the Energy sector coal stocks were weak despite no material change in the coal price. Whitehaven (WHC) was off -5.8% and South32 (S32) -5.1%. The recent Global Climate Strikes may have played a hand here.

CYBG Group (CYB, -7.9%) was the weakest performer in the ASX 100 although there was little in terms of newsflow. Treasury Wine Estate (TWE, -4.4%) was another notable underperformer. Management gave a strategy update in South Australia during the week, outlining their longer-term margin ambitions. However, hopes for new exciting developments were generally disappointed.

Telstra (TLS) fell -3.8% — which looks to have been driven largely by offshore selling. Investors were disappointed with their earnings revealing headwinds from NBN would be $400m more than expected. That said, manyview this issue is unlikely to deteriorate, while we believe the market is underestimating the effect of slightly better pricing in mobile telephony.

TLS is not at a demanding valuation and therefore lacks the risk of de-rating seen in other parts of the market. It is also offering a 4.6% dividend yield (before franking), in an environment where interest rates and bond yields remain low. 

On the other hand, A2 Milk (A2M, -3.1%) offers a salient example of the risk to highly-rated growth stocks when questions around the pace of growth start to rise. A2M is down over 11% in the last three months as the company looks to diversify its product suite and distribution channels – a sensible strategy but one which is likely to raise A2’s capital intensity.

There has been no such pause from Afterpay Touch (APT, +10.7%), which continued its relentless surge and was the ASX 100’s best performer.  Lendlease (LLC, +5.3%) also outperformed on reports it would sell its troubled Engineering & Services division. We remain mindful that any sale would probably be accompanied by contingent liabilities.

A-REITs generally outperformed, led by Stockland (SGP, +3.2%) which has also had the benefit of improved sentiment on housing.

Coles (COL) gained another +3.3%. There is a sense that investors are drawn to its familiar brand and a sense that its dividend, while not high at 3.7% yield, is dependable. Many have a cautious view on Coles given the relatively high multiple (22.5x next-12-month (NTM) consensus P/E), lack of growth, and the likelihood of an increase in capital expenditure.

Competitor Woolworths (WOW, +0.3%) is likewise on a high multiple; 25.5x NTM consensus P/E. Its valuation premium to Metcash (MTS, 0.0%), on 13.5x NTM P/E is at historically high levels and while some premium is warranted, it is likely the gap between the two should close.

ANZ (ANZ) was up +2.8%. It has lagged the rest of the Big Four over the last twelve months – and in the last three months has been well behind National Australia Bank (NAB, +0.1%).

Whereas ANZ has been the turnaround story of the last few years, there is a sense now that investors are hoping for the same from NAB under a new CEO. ANZ also has additional uncertainty over the effect of new capital requirements from the NZ regulators, to which it has the greatest exposure. The key question remains the time frame that the NZ regulators will allow the banks to build capital – and whether this is long enough to avoid ANZ having to raise equity capital.

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