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Weekly market update - 2nd of December 2019

Written and accurate as at: Dec 02, 2019 Current Stats & Facts

Metals & Mining (+2.2%) led the charge last week – helped by some reasonable data out of China and gains in the iron ore price – to drive the S&P/ASX 300 Accumulation index to a 2.04% gain.

The oil price came off sharply at the week’s end, ahead of the OPEC meeting. Still, the energy sector (+4.1%) was among the market’s strongest, helped by some corporate action and positive trends from the petrol stations. All sectors made gains although financials (0.7%) lagged the market as the banks were relatively weak.

In this vein, Bank of Queensland (BOQ, -9.4%) was the worst performer in the ASX 100 after announcing a $275m capital raising. The raising will be 8% dilutive and – in combination with cost-driven headwinds to NPAT and expected payout ratio – implies a reasonable cut to the per-share dividend. There was little detail around the bank’s intentions for the additional capital. The new CEO is expected to outline his strategy in February. Bendigo & Adelaide Bank (BEN, -3.9%) fell in sympathy. While the focus of regulatory and political pressure has been on changing behaviour at the Big Four banks, there is no doubt regional banks are also feeling the pinch of the current environment, making it harder for them to improve their competitive position.

Alumina (AWC, -3.4%) was one of the few miners not to do well. The alumina complex continues to face pressure from a pipeline of additional supply over the past year.

The banks were also generally weak. National Australia Bank (NAB, -1.5%) fared worst. Westpac (WBC) was down -1.0%. Many of the key facts of AUSTRAC’s claims against WBC remain unclear. Some issues, such as ASIC’s interest in the timing of WBC’s capital raise, may drag on for some time. However it appears likely there will be onerous financial implications in the form of a fine, potential capital charge, and the need to invest in system improvements. The bank has taken a decisive step with the removal of the CEO and acceleration of the Chairman’s retirement. Several other directors are in line for election at the upcoming AGM and it will be interesting to see how the Board finally shakes out.

The bank was trading at a discount to its usual sector-relative rating prior to the AUSTRAC issue; its subsequent performance and management changes suggest there is valuation support at this level. That said, we have to wait until some point in Q1 2020 to see the new chairman, who will then search for a new CEO – who may not be in place before this time next year. We will then have to wait a period to find out the new strategy. As a result, there will be an extended period of uncertainty which may drag on the stock.

Caltex Australia (CTX, +24.1%) was the ASX 100’s best performer. On Monday it upgraded earnings for the half year, an early call which suggests a high degree of management confidence given the volatility in petrol prices. It also announced plans to spin 250 petrol stations out into a REIT, of which CTX would retain a 51% holding. Subsequently, it transpired that the world’s largest petrol retailer, Canada’s Alimentation Couche-Tard, had made a takeover off in October. This information should arguably have been disclosed earlier. Nevertheless it fuelled a strong surge towards the bid price. CTX does own one of Australia’s four refineries, which means the deal will attract scrutiny from the Foreign Investment Review Board. Viva Energy (VEA, +3.7%) went up in sympathy.

Virgin Money UK (VUK, +22.3%) – formerly CYBG Group – delivered a well-received result. The bank did better than the market feared on margins and capital. The strong bounce highlighted the degree of shorting interest following a poor year. While operational improvements are good to see, the bank still faces exogenous risk form the UK election and Brexit, but does so without the capital buffer it once enjoyed.

Telstra’s (TLS, +8.4%) strategy day did not provide a great deal of new information, but served to reassure the market that the telco continues to turn the corner. Recent price and package changes from competitors emphasise that the mobile market remains competitive, but less intense than was the case over the past few years. There is also some interest building in the roll out of 5G, which could provide TLS with a point of differentiation.

Elsewhere, we saw a bounce back in some stocks which have been under pressure lately, including Worley (WOR, +7.8%), Nine Entertainment (NEC, +5.4%) and Metcash (MTS, +6.0%).

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