IT stocks start the week on the front foot, A2 Milk turns sour (A2M, GMA)
WHAT MATTERED TODAY
The market started the week off on the back foot today, although it was hardly a disaster given the strong rally we saw on Friday led by the influential banking sector. Best on ground today were the IT stocks which fits our view that it’s a sector primed for some near term outperfomance (hence our overweight stance) while the banks gave back some of Friday’s explosive rally, but not worryingly so.
Property remains in the spotlight and was strong again today, we can’t help but think buying some of these high-quality REITs at big discounts to the value of their assets should yield decent returns. The market is clearly negative retail exposed companies, however I found myself walking through Warringah Mall on the weekend pondering the future of such a facility. One trend I see time and time again in the market is investors become too bullish at the top and too bearish at the low. For those that think retail malls and the like are not dead, then Vicinity Group (VCX) and Scentre Group (SCG) are two ways to play it. Perhaps we’ll review this sector again in the Income Note this week.
Asian markets were higher today, Japan the best of them up by +1.32% while US Futures also rallied during our time zone.
By the close, the ASX 200 was off -12pts / -0.21% to 5952. Dow Futures are trading up +212pts/+0.78%
ASX 200 Chart
ASX 200 Chart
CATHCING MY EYE
A2 Milk (A2M) -11.42%: shares hit today as the company talked down sales for the first half on the back of weaker daigou demand. Daigou sales are “a significant portion of infant formula sale in Australia & New Zealand” where local buyers export stock to China. While it hard to put a figure on diagou sales, A2 Milk is confident that demand for its products in China remains strong and the issue is logistical given direct sales continue to perform well.
At the full year result, A2 Milk flagged a weak first half on concerns pantry destocking would see lower demand and as a result, they did not provide guidance. The company now expects revenue of $NZ 1.8-$NZ 1.9b with EBITDA margins of 31%, a 10% miss at both the revenue and EBITDA lines. A2 has done almost the reverse of the rest of the market – shares performed well into the selloff but have underperformed since, particularly since the soft full year result. We suspect it continues to underperform here.
A2 Milk (A2M) Chart
Emeco (EHL) 5.06%: The stock rallied today, and it now looks like the shortfall shares have been taken care of. When stocks have large shortfalls during a capital raise, the overhang of selling can last a week or so, it looks to MM like the pressure on EHL is likely gone which sets up a good chance of a rally from current levels.
IOOF (IFL) 1.94%: We covered IFL in a recent MM Income Note – click here – talking about the prospect of the stock rallying once the shortfall shares have cleared. Last week, the stock price remained little changed on decent volume implying buyers and sellers were well matched. Like EHL, it looks to MM like the shortfall shares may have worked through and the stock could rally from here.
Boral (BLD) +5.83%: strength to strength for Boral – up to a 6 month high today on announcing Ryan Stokes and Richard Richards have been nominated to the board – Ryan being the MD and CEO of Seven Group Holdings (son of Kerry), and Richards being the current Seven Group’s CFO. We have noted Kerry’s interest in Boral a number of times over the past few months, and today cements the relationship with related parties of Seven Group now holding 19.9% of BLD shares on issue. It pays to have a wealthy supporter on the register – I can certainly picture a scenario where Seven Group takes Boral off the boards.
Genworth (GMA) +2.24%: The announcement last week around the availability of credit for the banks is bullish for Genworth. More demand for loans with higher LVR’s will increase the demand for mortgage insurance, which is obviously positive for such a provider like GMA. We looked at this for the Income Portfolio last week however unfortunately GMA is no longer in the ASX 200. This is a very cheap stock (trading 0.5x book) and a way of playing a ‘less bad’ outcome in domestic housing.
Genworth (GMA) Chart
BROKER MOVES
· Suncorp Raised to Outperform at Macquarie; PT A$11
· Iress Raised to Buy at Morningstar
· Medibank Private Raised to Neutral at Goldman; PT A$2.59
· Nearmap Rated New Buy at Jefferies; PT A$2.60
· Webcentral Grp Ltd Raised to Speculative Hold at Bell Potter
OUR CALLS
No changes today
Major Movers Today
Have a great night
James / Harry & the Market Matters Team
Disclosure
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