Demerger talk sparks rally in BHP
A very interesting session for Aussie stocks with the market opening higher but getting more bullish throughout the day with talk of a BHP demerger putting the cherry on top of the cake! We saw a range of +/- 46 points, a high of 5912, a low of 5866 and a close of 5912, up +50pts or +0.86%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart – Todays close over 5890 is very constructive and we are now targeting 6000 in the near term
BHP – the BIG mover late in the session with the stock putting on ~+$1 in the last 20mins of trade following a press release from Elliot International, a U.S based hedge fund that speaks for 4.1% of BHP stock, outlining what they call a ‘value unlock’ plan for BHP . They have created a website, sent a letter to BHP Directors and articulated a path that – on their numbers could increase the value of shareholdings by ~50%...here’s a quick overview
1. Dual Listed Company structure should be collapsed – simplifies and sole listing in Australia
2. Demerging US petroleum assets to be spun off
3. Capital management targeting Australian shareholders only to enable “franking credit unlocking” by way of Off market buy backs.
4. Current structure highlights the lack of contribution for the “old Billiton” = some LATAM copper and coal assets (Australian and Colombia).
Source; http://www.valueunlockplanforbhp.com/
The presentation details BHP’s relatively poor performance in recent times and sets out a plan for unlocking shareholder value through a staged three step process. More details can be found on the website above, however clearly this is a very well researched take on the future of BHP. The market liked the proposition and we saw some very big lines of stock trading in the last 15mins and in the match + we also had some very big option lines go through after the announcement.
As shareholders of BHP, we like this sort of activism and critical evaluation of the status quo. Often companies find themselves with a structure / suite of assets that have been acquired over time, and may not be optimal now. They might have legacy structural issues, legacy projects that get ‘managed’ at best, but don’t offer a lot to overall performance to the group. Management / the board simply don’t want to rock the boat / generate extra work by undergoing a big corporate restructure + it can be very expensive. This is all understandable and we’re not suggesting this is the case with BHP , however it’s something to ponder. No doubt more to come on this proposal from Elliot and we wait to see how this all plays out, content that we have 5% of our portfolio in the stock. BHP closed up +4.64% to $25.73
BHP Daily Chart
Vocus (VOC); Clearly the thorn in our side for some time was sold today, with 5% of the portfolio switched into CYBG. As we wrote in the alert that went out today, this has been a very disappointing position however given the developments last week, we feel it is best to cut our position and move on. We tolerated a number of earnings downgrades following issues with the integration of Amcom, M2 Telecom, NextGen and others, and we see continued risks around earnings in the near term.
The stock is cheap relative to the market and the sector, however the risks around it have incrementally grown with each negative piece of news. Last week it was a competitor announcing plans to build a new subsea cable between Australia and South East Asia, directly competing with VOC’s Australia Singapore Cable (ASC). This compounds existing uncertainty created by the NBN on pricing, churn, margin compression, new entrants entering the market and turnover of key staff.
We have given this position a lot of room in the last few months, too much in hindsight and unfortunately it has failed to improve. For these reasons, we are taking our medicine and cutting the positon from the portfolio. We sold today at $3.77
Vocus Communications (VOC) Daily Chart
CYBG (CYB); The UK bank spun out of NAB in early 2016 looks appealing and today we allocated 5% of our portfolio to the stock. In simple terms, the stock trades at a steep discount to peers, has a lot of available leverage by stripping out currently high cost structures (cost to income ratio around 74%, with the company targeting ~50%), is leveraged to higher interest rates and an improving UK economy. Technically, the stock looks strong and we see better risk reward by purchasing CYB than was obvious by Vocus, hence the switch.
CYBG Daily Chart
Have a great night,
The Market Matters Team
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