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Weekly market update - 29th of June 2020

Written and accurate as at: Jun 29, 2020 Current Stats & Facts

Fears of a second weighed on our local market pushing the S&P/ ASX 300 down -0.74% last week.  

The rotation from value and cyclical to growth and defensive continues.  Last week Industrials (-4.4%) fell the most as concerns about a second wave weighed on transport-related stocks such as Qantas (QAN, -12.8%), Sydney Airport (SYD, -7.8%), Atlas Arteria (ALX, -5.0%) and Transurban (TCL, -4.4%).  Health Care (+1.3%) and Materials (+2.0%) were the only sectors to advance. The latter was driven mainly by good gains from the gold and iron ore miners.  Flight Centre (FLT, -16.8%) was the worst performer in the ASX 100 — another stock hit by concerns about a possible second wave. This factor also weighed on the casinos, with Star Entertainment (SGR) down -8.4% and Crown (CWN) -8.2%.

While the health care growth names had a good week, the technology stocks did not participate. Altium (ALU, -9.0%) was among the ASX 100’s weakest, following a downgrade which reflects the impact their huge discounting strategy will have on this year’s revenue. Wisetech (WTC) was down -7.5% and Afterpay (APT, -2.9%) took a breather. Xero (XRO, +0.6%) made modest gains.  Meanwhile, ResMed (RMD, +7.4%) was the best of the health care names, while Sonic (SHL, +4.9%), Ansell (ANN, +1.7%) and CSL (CSL, +1.6%) also outperforming.

The oil/LNG names sold off despite oil price resilience: Oil Search (OSH) -10.1%, Santos (STO) -5.3% and Woodside (WPL) -3.3%.

Gold miner Saracen (SAR, +13.6%) was the best in the ASX100. Newcrest (NCM, +4.3%) and Evolution (EVN, +1.9%) also outperformed. A resilient iron ore price continued to support the majors. BHP (BHP) was up +3.0%, Rio (RIO) +2.8% and Fortescue (FMG) +2.8%.

There were a number of notable company updates.

QAN announced it was raising $1.9 billion. This is driving some short-term volatility because it plays to the bear case that the company needs money to shore up the balance sheet. In our view this is not the case. We believe the company’s actions earlier in the year left it able to weather an extended period of flight restrictions. Rather, management is taking advantage of this episode to accelerate a restructuring program designed to address some legacy costs.

They are taking advantage of a period in which they are not flying and where their major domestic competitor is also undergoing change. This means potential for disruption as a result of the restructure is reduced.

Management believes addressing some of their legacy costs can deliver $1 billion in savings. This is outside any benefits from lower fuel or depreciation. At the same time, they are indicating cash burn from an idled international business can be minimised, and they can improve margins in the domestic business.  If QAN delivers, there is likely to be a large gap between statutory earnings and cash flow in the coming years — with the latter much higher than the market is currently implying.

There is execution risk, but QAN’s management team has an excellent track record. Bain’s successful bid for Virgin Australia indicates there will be two rational, disciplined players running efficient networks in coming years, providing a supportive industry structure.

Metcash (MTS, -2.8%) delivered its FY20 results. In terms of their underlying position, there are continued signs that IGA’s loss of share in recent years has stabilised and is turning. While there were indications of this pre-COVID, the trend has been helped by a return to localised shopping in recent months. This comes soon after MTS revamped formats in many IFAs and reduced prices. People returning to IGAs in March and April have liked the experience.

MTS saw a bump in revenue during COVID. But this did not feed through to earnings, which was disappointing. A recent update from Woolworths (WOW, -0.4%) confirmed the same experience. Supermarkets were forced to take on additional costs — such as extra shifts — to meet the surge in demand, offsetting revenue gains.

MTS’s liquor and hardware businesses remain well-positioned. If the food segment can continue to perform it will no longer be seen as an offset to the other parts of the business and should help support a better rating.

Finally, James Hardie (JHX, -1.2%) also delivered a positive update and an upgrade for expected quarterly earnings, which reflects the fact that US housing is doing better than many thought. This is flowing through to higher margins for JHX, which is also gaining market share.

JHX has benefited from a geographic advantage in terms of its key US exposures. There is some risk here in the next few months given their exposure in the southern US. 

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