Australian Investment Blog

WHAT MATTERED TODAY

The market came back online after two sessions off and rallied strongly from the outset pricing in 2 bullish days overseas in one go. Financials and other cyclical areas of the market leading the charge while the higher value areas of IT and healthcare lagged. It was another session where the two heavyweights CBA +5.05% versus CSL -2.39% had divergent paths however when banks and resources do well its hard for the market not to look bullish.

Asian markets were also well bid today, Hong Kong up ~1.50% while China edged higher, Japan the only index finishing lower. US Futures were flattish during our time zone.

Overall, the ASX 200 added +146pts / +2.39% today to close at 6262 - Dow Futures are trading up +49pts/+0.18%.

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE:

Tyro Payments (TYR) +1.99%: As you know, we’ve been using the helpful weekly updates from Tyro Payments as a guide on how the economy is bouncing back post COVID-19. This is a high level summary as TYR was/is the fastest growing terminal provider in Australia with a heavy exposure in tourism / hospitality. Even my friendly Thai takeaway has had to install a Tyro system during CV-19 given they only took cash before. In any case, this week’s transactional value results point to a steady increase in volumes and economic activity. TYR volumes could be back to pre-COVID levels by August based on a large step change and jump in the past week (weeks).

Key takeout’s

· Weekly TV to June 5^th was $52m a day. This is up 19% on the prior week, a significant increase to the prior weeks (~3-4% WoW) and continues weekly improvements;

· Transaction Value (TV) per day bottomed in Mid-April (week of 17^th) at $27.8m.

· On current TV recovery run-rate Tyro volumes are on track to recover to pre-COVID levels in ~8-9 weeks or by August 2020.

Overall TYR is a strong bellwether for the domestic recovery, particularly in offline and retail/hospitality.

Transaction value chart (source: Shaw & Partners)

Wesfarmers (WES) +0.14%: the retail side of the business provided an update to the market today, part of which highlights why they recently bit the bullet on Target with some decent write-downs. For the 2^nd half to the end of May, Target sales fell 2% while Kmart saw 4% growth compared to the same period last year. While sales were strong, they did flag that higher costs and temporary closure of NZ stores would impact the full year result. The same goes for Bunnings and Officeworks too though sales were a for stronger given the rush to buy both home improvement gear and home office equipment. Bunnings second half saw total sales growth of 19.2% while Officeworks added 27.8% for the first 5 months of the second half. Bunnings alone saw cleaning & security costs of $20m, while the shut down in NZ and a few small format store closures will also take $70m worth of gloss off the full year result.

The fortunate timing of the Catch acquisition which was completed in August last year is another boost to Wesfarmers FY20. The online focus of Catch helped generate growth naturally as consumers were pushed for the internet bargain. Catch saw gross transaction volume rise a huge 68.7% for the first 5 months of the calendar year. Online sales was a driver of a large part of the sales growth in Wesfarmers in general, up 60% even before the inclusion of Catch. The business will be one of a handful to see growth in revenues despite the COVID impact. Combined with an exceptional balance sheet and a keen management team looking to bolster the business, it’s hard not to like WES. Trading today was disappointing with the stock finishing well off the day’s highs and only marginally ahead despite the broader market’s strength. We hold in the Income Portfolio

Wesfarmers (WES) Chart

Banks: Rallied hard again today and are now starting to price in a better bad debt experience given the better health outcomes we’re experiencing in Australia, a topic we covered in last week’s income note. – click here The table below is courtesy of Brett Le Mesurier, our Banking Analyst at Shaw and I’ve circled his FY22 forecast PE’s for the banks. Two points worth making.

1. On his forecast, bad debts don’t normalise until FY22 hence the impact on valuations at that point. I think this assumption is fairly conservative and those sort of P/E’s could well be a FY21 reality as banks realise they’ve over provisioned for this economic shock. Most other economic metrics have been better, surely the bank’s bad debt experience will follow suit?
2. The improvement in valuations is a direct consequence of lower bad debts improving the ‘E’ rather than strong top line revenue growth. It implies banks have more room to move on the upside, however the upside is capped to the combined benefit of lower bad debts overlayed with the multiple the market is prepared to pay.

MM remains bullish the banks

Westpac Bank (WBC) Chart

Sydney Airports +8.80%: Hard not to mention the travel companies today after a really strong session. Flight Centre (FLT) putting on +13% while an 8% rally for Sydney Airports clearly catches ones eye. We hold in the income portfolio however this group is clearly typical of the optimism building throughout the market. I can’t help but think the market bottomed the day the lockdown was announced, hence we should be getting cautious as the market becomes more bullish, particularly in names that will actually see a financial impact for some time to come, like SYD.

Sydney Airports (SYD) Chart

BROKER MOVES:

• Zip Co. Cut to Neutral at UBS; PT A$5.60
• Fletcher Building Cut to Hold at Morningstar
• Bendigo & Adelaide Raised to Overweight at JPMorgan; PT A$8.10
• Bluescope Raised to Buy at Goldman; PT A$14.95
• CSR Reinstated Sell at Goldman; PT A$3.94
• James Hardie GDRs Reinstated Buy at Goldman; PT A$32.65
• GWA Group Reinstated Neutral at Goldman; PT A$3.35
• Boral Reinstated Neutral at Goldman; PT A$3.65
• Adbri Reinstated Neutral at Goldman; PT A$3.39
• Charter Hall Long WALE Raised to Overweight at JPMorgan
• BWP Trust Raised to Overweight at JPMorgan; PT A$4.40
• Infigen Cut to Sector Perform at RBC; PT 80 Australian cents
• Healius Raised to Outperform at Macquarie; PT A$3
• Kogan Cut to Sector Perform at RBC; PT A$11.50
• South32 Cut to Neutral at Exane; PT A$1.99
• Rio Tinto Cut to Neutral at Exane; PT 4,380 pence
• Worley Raised to Outperform at Credit Suisse; PT A$10.50

OUR CALLS

No changes today

Major Movers Today

Have a great night

James, Harry & the Market Matters Team

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