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Weekly market update - 27th of April 2020 

Written and accurate as at: Apr 27, 2020 Current Stats & Facts

The impact of capital raising is a key issue – more than $8 billion has been raised so far and there’s more to come. The standard discount to the company share price seems to be around 8%. But given the money is largely paying down debt or bolstering liquidity – rather than funding growth – the discount is often offset by the dilutive effect. Being selective is critical here; there are some reasonable opportunities. However, the scale of raisings is likely to weigh on the market in the coming weeks.

REITs (-8.0%) fell the furthest last week. Investor caution was driven by the twin issues of commercial rents and expectations of further capital raising. The rent issue bears watching. There are signs many commercial tenants are withholding rent payments regardless of whether they have closed stores or are eligible for government relief. This is an almost chaotic situation with important implications for both landlords and retailers as it is worked through.

Industrials (-7.1%) were also weak, with transport infrastructure names including Transurban (TCL, -5.6%), Sydney Airport (SYD, -11.6%) and Atlas Arteria (ALX, -9.2%) continuing to drag.

Defensives generally did better than the broader market. Utilities were only down -1.7% and Consumer Staples -3.9%. Iron ore miners are serving as defensives in this environment. Resilience here, coupled with outperformance by the gold miners, saw Materials (-2.4%) outperform. Energy (-3.6%) outperformed despite ructions in the oil market.

Metcash (MTS) fell -17.1% after tapping the market for an additional $330 million of equity capital. The placement spooked the market due to a focus on management comments that part of the money was needed to support distributors in the liquor division that had been impacted by the closure of pubs and clubs and lockdowns in NZ. 

The expectation of capital raising weighed on Challenger (CGF, -15.5%) which was the worst performer in the ASX 100 and also on Boral (BLD, -12.2%).

Lendlease (LLC, -13.9%) is also expected to raise capital, given the challenges in executing asset and apartment sales in the current environment. Stockland (SGP, -12.8%) and Mirvac (MGR, -11.2%) were the other weakest property names.

Flight Centre (FLT, -13.3%) sold off as the stock it raised two weeks ago became available in the secondary market.

Only ten ASX100 stocks managed to hold flat or post gains for the week.

The gold miners did best, led by Evolution (EVN, +9.3%). EVN delivered a quarterly update which confirmed the strong gold price had allowed it to pay down some of the debt that funded its Redlake mine acquisition in Canada. Northern Star (NST, +4.1%) and Newcrest (-0.1%) also outperformed.

The market reacted well to an update from Wisetech (WTC, +3.3%), which reiterated its (quite wide) guidance range and flagged there were no signs of major deterioration at this point.

There are signs investors are thinking about which well-placed domestic companies may benefit from easing of restrictions on the domestic economy. Crown (CWN, +2.3%) held up reasonably well, as did JB Hi-Fi (+2.0%). Nine (NEC, +0.0%) was flat. It will continue to face headwinds in advertising, however, its digital business – including Stan – continues to see strong growth to help offset this.

Elsewhere AusNet (AST, +2.2%) did the best of the utilities, while Fortescue Metals (FMG, +1.5%) continued to benefit from a resilient iron ore price and a low discount level for its product.

Santos (STO, +1.2%) shrugged off the headlines around a negative oil price. Its quarterly report was well received, confirming it had more hedging in place than expected, which can help support near-term cash flow. We believe it remains the best exposure to the oil/LNG complex, given its low-cost base and strong management.

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