Australian Investment Blog

WHAT MATTERED TODAY

The local market did very little in the first hour of trade, and was actually trading marginally lower by 11AM only to turn the corner sharply, bid strongly throughout the rest of the session. Buying found its way in following the FOMC meeting in which the Fed turned noticeably more dovish, pointing to further rate cuts. The market does have three priced in for the year, while the Fed sits at 2 – room for the market to be surprised to the downside here.

Energy was the only sector to finish in the red for the session, dragged by a downgrade from Caltex which also dragged Viva Energy (VEA) down with it. IT finished over 2% better as the tech names continue to see buying with AfterPay (APT) rebounding from panic lows at $20 earlier in the week.

Materials were a mixed bag today – iron ore names slightly softer on the back of Vale’s announcement that it had received the go ahead to restart production at their Brucutu mine, and also dragged by Rio Tinto (RIO) which downgraded production numbers. The full story on RIO below, however it highlights the volatility we will continue to see in the commodity. Bank of Queensland (BOQ) – a stock we own both portfolios – was marginally softer, but well underperformed the financial index after announcing their CFO would leave the bank after their FY19 results. Twice overlooked for the top job, he has moved in search of a CEO role.

Overall, the ASX 200 added +39 points or +0.59% to 6687. Dow Futures are trading up +78pts / +0.29%.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Caltex (CTX) -13.27%; Today’s biggest loser on the back of disappointing guidance ahead of the half year result. Early in the day, shares fell to new 5 year lows, crashing ~24% to the day’s low. EBIT is expected to fall in all segments of the business compared to the first half of 2018 with NPAT falling by more than 50% on the previous comparable period. Refining margins and outages will see their Lytton facility less than 10% of the EBIT than pcp to contribute less than $10m to the half. Convenience retail has suffered with the struggling consumer spending environment and is projected to post $75m-$85m EBIT, around half on last year’s effort.

While there are a number of issues with the performance of Caltex here, the focus will now be on the retail focussed strategy which has not helped the result. Competition is rife in the space and there is little to suggest that retail spending will pick up anytime soon. The market will be forced to put through downgrades here, with the consensus full year NPAT at $485m likely unachievable – there would have to be a 25:75 skew to the second half to go near achieving this. We aren’t excited by the Australian consumer market and hence not excited by Caltex.

Caltex (CTX) Chart

Rio Tinto (RIO) -4.07%; A surprise cut to Iron Ore production guidance has seen the stock sold off fairly hard today after they said Pilbara shipments for 2019 would be between 320M tonnes and 330M tonnes (previously between 333M tonnes and 343M tonnes) implying a about a 7% downgrade. This is clearly a surprise announcement given: (1) it adds to recent down grades post 1Q cyclones and (ii) it looks like a more sinister grade/quality issue at RIO which may be a bit more problematic in the medium term.

The company saying that they are experiencing mine operational challenges, particularly in the Greater Brockman hub in the Pilbara which is resulting in a higher proportion of certain lower grade products, partly to protect the quality of their flagship Pilbara Blend. To me, that seems like a more sustained issue than something one off + obviously the higher achieved prices currently mean that a loss of 23mtpa is significant.

Rio Tinto (RIO) Chart

Clydesdale Bank (CYG) +7.12%; rallied today after outlining some fairly aggressive targets across their business at an investor day in the UK. They reckon they can achieve the following financial performance targets by FY22:

1. Statutory ROE greater than 12%;

2. high single digit annual growth in current accounts (which are the lowest cost funding);

3. above system asset growth; and

4. 13% common equity tier 1 (CET1) ratio.

These are bullish / optimistic targets from CYB and if achieved the share price would be significantly above todays level. As an investor, we have two options. To trust or to track. Trust is generally built over time from companies delivering what they say they will and unfortunately, CYB hasn’t delivered in the past, meaning that we’re trackers rather than trusters of these new targets. One to watch but the company has certainly become bullish on themselves!

Clydesdale (CYB) Chart

Broker moves;

• Coles Group Downgraded to Sell at Morningstar
• Seven Group Downgraded to Sell at Morningstar
• Perpetual Downgraded to Sell at Morningstar
• Star Entertainment Downgraded to Hold at Morningstar
• AusNet Upgraded to Buy at Goldman; PT A$2.10
• Mercury NZ Downgraded to Sell at Goldman; PT NZ$3.85

OUR CALLS

No changes today

Have a great night

James, Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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