Australian Investment Blog

WHAT MATTERED TODAY

Surely not…! It’s now being reported that Tony Abbot may throw his hat into the circus when the Liberals vote on a new leader at high noon tomorrow. Could it be that Tony Abbott has used poor old Peter Dutton as a sacrificial lamb before rising up from the back bench to take back what was rightfully his? This would all be comical if not for the fact these are our political leaders. Sportsbet have the current odds playing out at 4.12pm this afternoon….interesting to see the 12^th Man (Simon Birmingham) at $91 and Mark Bouris at $101 - highlights what a joke this is all becoming!

It seems Turnbull has fallen on his sword, however Dutton doesn’t have the numbers by the look of it, even with the added support of his good mate Mathias Cormann. Interestingly, as we alluded to in the am report today, Julie Bishop is now looking for support and may have a crack at the title along with Scott Morrison. These two were firmly on Team Turnbull and a victory by either would be seen as a slight consolation prize for the outgoing PM. More to play out tonight, and again tomorrow. I’ve had more than enough already, however Julie Bishop as PM would certainly throw a spanner in the works for Labor.

The market today was partly driven by the political circus in Canberra which prompted decent selling within the banking stocks. A combination of Labor’s policies around negative gearing (which is bad for property) and the abolition of cash franking credits put pressure on the financial sector, CBA down -1.57% to $70.75, NAB off -1.67% to $27.66, ANZ down -1.71% to $28.72 while WBC was hit by -2.54%. The big four took ~24points off the index.

Elsewhere, reporting was in focus and again, there were some strong moves in both directions, but more so on the upside today. We owned IRESS (IRE) in the Growth Portfolio leading into today and took a ~17% profit following a good set of first half numbers. Webjet (WEB) had an exceptional move rallying +18% on results and guidance while there was some significant volatility from Qantas (QAN) after they booked a record profit today. More on these below.

Overall, the ASX200 found it hard going today with the index down -21 points today or -0.34% to close at 6244– Dow Futures are currently trading flat.

Reporting hit its peak today and peters off somewhat tomorrow with the following companies out; BXB, CHC, MPL, MYX, SCG, SGM, SGR, WPP . For a full list of company reporting dates – click here

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; I’ve seen a lot of positive commentary out today on Santos (STO) as they rose to the highest in more than three years. They announced first dividend since 2016, less than a day after announcing a $2.15 billion purchase of fellow Australian oil and gas producer Quadrant Energy. The Quadrant deal will raise Santos’ reserves by more than a quarter and annual production by nearly one-third. Here’s what Shaw’s Analyst (Stuart Baker) penned today… After three years of asset sales, capex reduction and balance sheet repair, Santos is back on the front foot. Growth requires capital investment and this deal looks very good.

The first half result is overshadowed by the announced acquisition of WA gas and oil producer, Quadrant Energy for US$2.15B, plus bonus & incentive payments. Financially and strategically, this appears to be a very good transaction and addresses at least 4 critical E&P metrics (1) 2P reserves increased 220 MMboe, up 26% (2) Production increase +19 MMboe, up 32% (3) reduction in opex and break-even due to a lower cost base in the acquired assets compared to Santos current average. STO claims a $4/bbl reduction. In 2017 the Quadrant EBITDAX margin was 75%, higher than STO’s average of 50% in the same year (4) significant earnings and cash flow accretion. The deal is funded from existing cash & debt, and due to strong profitability and cash generation, the accretion is material. He’s been negative on STO (and very wrong for some time) and is now changing tact it would seem! The stock closed today up 11.32% to $6.98

Elsewhere;

· St Barbara Upgraded to Hold at Deutsche Bank; PT Set to A$4.20

· St Barbara Upgraded to Outperform at Macquarie; Price Target A$5

· St Barbara Raised to Overweight at JPMorgan; Price Target A$4.60

· St Barbara Upgraded to Hold at Canaccord; Price Target A$4.35

· Corporate Travel Downgraded to Neutral at UBS; PT A$32.20

· Corporate Travel Cut to Hold at Morgans Financial; PT A$32

· Cleanaway Downgraded to Neutral at UBS; PT A$2.15

· Altium Upgraded to Neutral at UBS; PT A$22

· Coca-Cola Amatil Downgraded to Sell at UBS; PT A$8.30

· Coca-Cola Amatil Cut to Neutral at Credit Suisse; PT A$9.80

· Coca-Cola Amatil Raised to Equal-weight at Morgan Stanley

· Inghams Downgraded to Underweight at Morgan Stanley; PT A$3.40

· Inghams Downgraded to Neutral at Goldman; PT A$4.20

· Trade Me Upgraded to Neutral at Macquarie; PT NZ$4.91

· Adelaide Brighton Downgraded to Neutral at Macquarie; PT A$6.45

· SmartGroup Upgraded to Outperform at Credit Suisse; PT A$12.10

· WorleyParsons Cut to Equal-weight at Morgan Stanley; PT A$20.13

· Reject Shop Upgraded to Buy at Goldman; PT A$6.70

· Charter Hall Cut to Neutral at JPMorgan; Price Target A$6.90

· Western Areas Upgraded to Overweight at JPMorgan; PT A$3.60

· Imdex Downgraded to Accumulate at Hartleys Ltd; PT A$1.36

IRESS (IRE) $13.46 / +11.06%; IRESS (IRE) was out with their first half 2018 result today and the market sent the stock sharply higher in early trade (+14%). While consensus numbers are brief given it was only a half yearly result, they have produced a very strong outcome in the first 6 months which would imply that the market is now too conservative on full year estimations. For the half, profit was up 8% at $32m.

In terms of the outlook, they maintained their current guidance of 3-7% segment profit growth despite the strong first half, however we’d expect some upgrades to full year numbers to flow through on the back of today’s results.

IRESS (IRE) Chart

Qantas (QAN) $6.53 / -2.53%; A volatile day for QAN after they released full year earnings this morning – the stock trading in a ~10% range. An early sell off but some strong buying into the weakness as CEO Alan Joyce allayed concerns around higher fuel costs, saying they should be able to “more than cover” higher fuel costs in the domestic market! He didn’t match that pledge for the more competitive international market, saying only that Qantas will “substantially recover” the higher cost of jet fuel on those routes.

In terms of earnings, it was a record full year profit for QAN at $1.13b which was broadly in line with market expectations while the dividend was stronger than expected. Clearly this is a good result for QAN however the stock has run hard into it, plus they’ve now got the added headwind of higher fuel costs. To give some context here, QAN will spend around $3.92bn on fuel in FY19, which is up by about A$690 million on FY18.

QANTAS (QAN) Chart

Webjet (WEB) $17.12 / +18.23%; FY18 earnings from Webjet hit the ticker this morning with a big beat to analysts’ estimates across the board. There is a lot of optimism built into Webjet at the moment however the online bookings company continues to meet and beat the markets lofty expectations. EBITDA grew 71% for the year and margins continue to expand as the company increases its offerings and drives growth.

Flight booking volume grew 10%, while hotel transactions more than doubled over the year. Cars & motorhome bookings also saw numbers rise while cruise was the only segment where bookings fell due to the slowdown in the cruise market. Margins across the group continued to rise despite the introduction of the ‘Netflix tax’ with GST charges for online services.

Webjet (WEB) Chart

OUR CALLS

We took a ~17% profit in IRESS (IRE) today in the Growth Portfolio

Have a great night

James / Harry & the Market Matters Team

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