Kogan misses delivery (KGN, ILU)
WHAT MATTERED TODAY
Today was the 13th trading session where the index oscillated within a 100 point trading range, upside resistance sitting at ~6300 on the XJO with support at ~6200 – the market simply feeling like its treading water as resources perform one day and banks the next with a coordinated thrust remaining elusive. A positive move on the US Futures this morning courtesy of a strong earnings beat by Google (Alphabet) saw our market outpace the futures print (+17pts) early on, and despite some selling in the banks from early highs, there was enough strength elsewhere to offset. Kidman Resources (KDR) was strong adding 7.05%, a frustrating move given we’ve contemplated the switch from ORE in recent times however stayed on the sidelines given the relative underperformance in the sector. Looking elsewhere, some of the go-too stocks of the past few months came back into vogue, Treasury Wine Estates (TWE) for instance was up strongly (5.51%) while A2 Milk (A2M) also enjoyed a good session rallying from early weakness, adding 1.98% to close at $9.77.
QBE Insurance copped an upgrade from Citi last week with the broker slapping a buy and $11.20 PT on the perennial underperformer, the stock was up smalls as a result however added another +2% today thanks to rising bond yields in the US overnight. We’ve remainder patient on this stock for some time now, however the tailwinds continue to build…
Overall, the ASX200 added 38 points today, or +0.61 % to close at 6265. We remain neutral here, with the trigger to turn more bearish at 6140 on the XJO.
Our Primary Contributor James Gerrish is on Sky Business at numerous times throughout the trading week. This morning he focussed on the Kogan (KGN) update which was out before the market opened, along with the Iluka (ILU) production numbers. Click here to view (or hit the image)
ASX 200 Chart
ASX 200 Chart
CATCHING OUR EYE
Broker Moves; the benefits of a broker rating to a small cap was on show today as encryption technology company Sentas rallied 6% on an upgrade from Bell Potter. Other broker news was muted.
- Hastings Technology Metals (HAS AU): Rated New Buy at APP Securities
- Mayne Pharma (MYX AU): Upgraded to Hold at Bell Potter; PT A$0.84
- Senetas (SEN AU): Upgraded to Buy at Bell Potter; Price Target A$0.13
- Western Areas (WSA AU): Upgraded to Buy at Argonaut Securities; PT A$3.40
Kogan.com (KGN) $5.84 / -11.78%; online retailer Kogan appears to have hidden a small miss to FY18 earnings within this morning’s quarterly cash flow & trading update announcement. The company released unaudited figures for the financial year, implying revenue to be $404mil and EBITDA just shy of $24mil, while the market was looking for $415mil and $27mil respectively. Although EBITDA is expected to grow 90% for the year, it still represents a ~10% miss to expectations, and as we have seen in the past, growth companies are stung by the market when results fall short. Coupled with the miss, the announcement was light on detail however more commentary and clarity is expected in next month’s full year result.
We remain cautious of Kogan, however the market is heavily discounting the company over fears of Amazon’s competition. We see the full year result as a short term risk, however we see upside in the stock if they continue to execute their strategy well, and the Amazon impact is lower than expected. Kogan shares have also been under pressure recently after it was leaked that founder Ruslan Kogan & CFO David Shafer were unsuccessful in offloading a large sum of shares before selling $42m worth at a deep discount to the market.
Kogan.com (KGN) Chart
Iluka (ILU) $11.29 / +1.62%; Mineral Sands miner Iluka released their 2Q production numbers, and while production was strong, much of the numbers were driven by pricing tailwinds. ILU is producing strong free cash flow given a work down in stockpiles and that’s helping them pay down debt. The negative part of the update was guidance which missed by ~2%.
Key points from Shaw & Partner’s very good resources analyst Peter O’Connor…
· Sales revenue up strongly – 1H revenue was up ~21% YoY despite lower sales volume (3%) and adverse currency rate (2.4%) suggesting that underlying commodity price trend was favourable and the expectation is for further gains in 2H.
· Selling price trend still up – Average selling prices (ASP) increased in 1H;
- zircon price (excluding concentrate) up 47% from first half 2017
- first half rutile price up 20% from first half 2017, second half 2018 rutile price increase of 14%
· WC unwind still .. Sales volumes continue to exceed production in line with the working capital unwind of the company’s large (although now declining sharply) inventory position. YTD sales (Zircon + rutile + synthetic rutile) of 438kt was well ahead of production at 351kt – similar trend in JQ as well.
· Cash position higher, almost back to net cash. Net debt reduced further to $34 million, from $183 million at 31 December 2017, reflecting strong free cash flow in the first half of $226 million (annualised FCF yield of ~10%) and payment of $69 million for the 2017 final dividend. This level of FCF is well ahead of our expectations.
The outlook for Iluka remains positive with commodity price tailwinds driving earning’s higher. Production outages from RIO and increasing demand have meant realized zircon prices rose 21%, and rutile prices up ~10% over the half. We like Iluka, and although prices are beginning to incentivise other suppliers, demand is still outweighing supply and should do through 2019. We are looking for further weakness before considering a buy in ILU.
Iluka (ILU) Chart
Mineral Resources $17.00 / 3.28%; A stock that triggered on a technical scan this morning and had a good session today – while we’re reluctant to buy strength, this one looks great on the charts for run to new highs…
Mineral Resources (MIN) Chart
OUR CALLS
We sent an alert out today to buy Healthscope (HSO) around $2.20 however the stock spiked after we sent the alert up to $2.27and we were not filled. Cimic (CIM) was a buy below $47 and it did not trade there today. We’ll continue to update out views / actions on both stocks. Generally, a ‘buy around’ alert such as HSO would imply +/- 1% implying $2.22.
Have a great night
James / Harry & the Market Matters Team
Disclosure
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