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Weekly market update - 22nd of February 2021

Written and accurate as at: Feb 22, 2021 Current Stats & Facts

News flow was driven mainly by reporting season. In aggregate, results were better than expected for the banks, resource companies and a number of industrials. However, this was not reflected in the S&P/ASX 300’s muted reaction (+0.01%). This is tied to the market’s strength going into reporting season, as well as the headwind of rising bonds.  Ultimately we believe there is a strong chance that decent earnings, more stimulus and pent-up demand following the vaccine rollout will underpin and drive markets further following some consolidation.

Covid and vaccines

New daily cases and hospitalisation rates continue to fall in the US, UK and Europe. Vaccination rates stalled a little, due to poor weather. With the involvement of pharmacies, it is possible to see vaccinations in the US continue to accelerate into Spring.

Economics and market

We finally saw a crack in the bond market with sentiment around vaccines improving, cases continuing to fall, increased fiscal stimulus size increasing and central banks determined to hose down any suggestions of tightening. Ten-year government yields backed up 13bp in the US and 21bp in Australia as inflation risks were priced in.  Interestingly, this change is linked to rising real yields which suggests the market is questioning the Fed’s resolve to maintain its commitment to current rate settings in the face of huge fiscal stimulus. So far there is no sign of the Fed feeling the need to react and buy bonds. Equities have also absorbed the move well, credit spreads are stable and liquidity remains plentiful. A steeper yield curve is also good for banks and ultimately will encourage credit growth.

The usual flow-on effects occurred, with a rotation to value (notably financials) and growth underperforming. Traditional defensives such as utilities and consumer defensives were the worst hit.  Commodity prices rose after the Lunar New Year. Oil stalled with the Texas freeze supporting prices, but was offset by signs Saudi may ease up on supply restrictions.  There were potential early signs of sentiment rolling over towards some recent pockets of excess such as IPO ETFs, Tesla and renewable energy ETFs. Bitcoin, however, surged onwards.

Results summary

Overall reporting season has been good so far, with strong free cash flow generation and positive momentum on earnings. So far consensus EPS expectations are up 5.3% from last month (+2.4% ex-resources).

Good results

The banks delivered surprisingly good results. Westpac (WBC, +8.8%), ANZ (ANZ, +7.2%) and Bendigo Bank (BEN, +5.7%) all reported bad and doubtful debts (BDDs) were falling away – particularly so at WBC. More importantly better margin performance — driven by the deposit side — lifted pre-provision profits forecasts about 5% and out-year earnings some 10%+. ANZ and WBC are our preferred exposures: they sit at big valuation discounts to Commonwealth Bank (CBA, -5%) and National Australia Bank (NAB, +0.7%). 

BHP (BHP, +5.8%) and Rio Tinto (RIO, +5.0%) delivered solid operational results. Stronger prices saw an uplift from their copper divisions. Cash flow was through the roof and management are returning it to shareholders. Both companies surprised by the upside in terms of dividends. BHP’s, for example, was up 55% on the same half last year. Both companies are likely to yield in the 7-8% range. 

Fortescue Metals (FMG, +0.6%) also delivered strong cash flow and dividends — its interim yield was almost 6%. But the attention was focused on the immediate departure of several managers and slashed bonuses for a couple more, including the CEO. This was related to a delay and $400 million (15%) increase in the cost of the Ironbridge development. The sanctions appear to be related to concerns over how senior managers have been focused on the issue – and how it has been communicated internally — rather than indicating a more serious problem. The company is suggesting that up to 10% of profits will be channelled into renewable energy and green hydrogen investments.

Domino’s Pizza (DMP, +12%) was the strongest performer in the ASX100. Covid provided a tailwind for its European and Japanese businesses in particular. Its business model has a circularity — more profit growth enables faster franchisee store roll-out.

Tabcorp’s (TAH, +3.4%) earnings came in about 5% above expectations due to strength in lotteries. The wagering turnover was reasonable, growing 5%, but yields were a bit light. This highlights continued competitive pressure in the segment. The market remains focused on the price they may be able to extract from suitors for their wagering business.

Treasury Wines (TWE, +10.2%) delivered a good performance in the parts of its market unaffected by trade disputes. Cash flow was good and management were able to demonstrate how they are reallocating wine away from China without hurting their margin. This was a better outcome than many expected, but the company still has a long way to go to. 

JB Hi-Fi (JBH, -2.3%) continues to see strong sales growth in 2021, in stark contrast to trends at Coles (see below). In January JB Hi-Fi Australia enjoyed 18.6% sales growth versus the same month last year, while the Good Guys were up 14.4%. At this point, pent-up demand appears to be still be coming through in consumer electronics. 

Cochlear (COH, +7.4%) is seeing a quicker return to normality than expected. While Q1 sales fell 8%, they rose 7% in Q2. There are signs the company is winning market share.

Goodman (GMG,-4.1%) delivered a good result and earnings upgrade. But expectations were high heading into the result and the stock got caught in a rotation away from growth and defensives. 

Mixed results

CSL (CSL, -0.8%) delivered a very strong first half. The company is not yet seeing the impact of plasma collection issues from last year. But management was particularly cautious on the next two halves, before signalling a strong recovery beyond that. Recent performance suggests the market looks like it hasn’t the patience to wait near term, given funding needs to raise weights in resources and banks. Looking through the near-term supply challenge, we continue to see strong growth in demand.

As always QBE (QBE, +3.8%) was complicated. Recent provision top-ups remain an issue in the near term. But the company is seeing the benefits of accumulated premium growth which suggests decent margin improvement next year and double-digit top-line growth. As long as provisions remain under control QBE could be heading into a sweet spot for the next few years. 

Star Entertainment (SGR, +0.3%) and Crown (+3.6%) remain disrupted by lockdowns and restrictions, though these are easing. Management has taken out costs and both are at the end of an extended period of CAPEX spend, so becoming more interesting. The key risk is a regulatory burden that is more onerous than expected. On this front the disappearance of overseas VIP as a profit source is positive.

Origin Energy (ORG, +2%) told a tale of two very divergent businesses. Its LNG division is benefitting from higher prices and lower costs, generating a lot of cash flow. However its energy markets business is under enormous pressure from falling prices, which are not being fully offset by costs.


Gold stocks were hit hard on the rise in real yields and were the market’s worst performers. This was not helped by poor communication from Evolution (EVN, -10.6%) on the development of its recently acquired Red Lake mine.  

Coles (COL, -9.6%) disappointed. Like-for-like sales growth slowed to 3.3% in the first six weeks of 2021 – sooner than most expected. There is a positive read-through for our preferred position in Metcash (MTS, -4.6%). COL management called out their large CBD stores as the key source of weakness. In contrast, regional and convenience-style stores continue to do well. This is helpful for MTS’s IGA franchise.  

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