Market Matters Afternoon Report Tuesday 17th May 2016

Afternoon Report 17/05/2016

Market Matters Afternoon Report Tuesday 17th May 2016

Good Afternoon everyone

Market Data

What Mattered Today

Oil prices rallied overnight and were up again (+1.2%) in Asian trade today which supported energy stocks + we saw BHP (+3.5%) outperform RIO (+1.46). NAB went Ex-Divi for 99cps and dropped 89c so a decent performance. Ditto for Macquarie (MQG) which went ex for $2.40 and dropped just $1.06.

The RBA released minutes from their last board meeting which showed the decision to cut rates was a reasonably well debated one – as it should be. The AUD rallied on the back of it, stocks were sold for a short time then resumed their uptrend. The RBA is now fixated with inflation and their forecast suggests more cuts in the offing. Nothing today changed that in our view.

Bellamy’s (BAL) was sold from the Market Matters portfolio today, ahead of our previous stated target, and is thus worthy of greater explanation. Bellamy’s had a high on the 30th Dec 2015 of $16.50 only to fall from grace following news of changing legislation in China around imported food products. It based out around $9 and we purchased in the low $10’s. New import taxes started flowing through from April 8 however there are growing murmurs that another round of new regulations on imported food products are soon to be announced.

This morning the AFR ran a report about a number of couriers that had stopped sending infant formula from Australia to China until China's Customs Bureau adjusted its systems to accommodate new import taxes. The time frame is not known, and coupled with the potential for new, more comprehensive regulations that may be announced shortly, we took the view of a ‘bird in the hand’… Sell now, lock in a profit, and re-asses when greater regulatory certainty prevails. We remain keen on the company and its future prospects however given its reasonably expensive, priced for strong growth and now has greater potential regulatory risk, in addition to being thinly traded, we took the opportunity to exit today.

We became more positive on Origin Energy (ORG) today – adding another 5% into the stock after it broke out through $5.50 resistance. We had purchased 5% on Friday around $5.35. Oil is entering a seasonally strong period in the U.S and this is combining nicely with a number of current supply disruptions globally. The trend is reasonably strong and energy companies are likely to follow the oil price higher. We’ve traded Oil Search (OSH) in the past, however Origin (ORG) looked a clearer trade in this instance.

OFX (OFX) – the old Oz Forex & Dulux (DLX) reported first half earnings today – and both closed lower. OFX off -3.07% and DLX fell 2.96%. Both have issues around growth, but are coming off differing bases.

OFX will double revenue by 2019 according to the company, however it will cost them to do it. They’ll suffer some near term margin pressure which will flow through to weaker earnings in the hope of growing quickly. The stock looks cheap if they can grow as quick as they say, but therein lies the risk.

In the case of DLX, they’re priced for growth – trading on 20x earnings yet they’re struggling to grow the top line (revenue). The business is running well, costs are coming down, yet it’s difficult to own/buy a company on such a multiple without top line revenue growth when arguably, market conditions have been very support for it.

Stocks & Sectors Today

Source; Bloomberg

ASX 200 Movers

***What Matters Tonight***

European leads are positive with the FUTURES on the FTSE up+33, DAX +70 & CAC +28
DOW FUTURES are up +33pts while the S&P 500 FUTURES are up +2

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney, NSW 2000.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 17/05/2016. 4:30PM.

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