Australian Investment Blog

WHAT MATTERED TODAY

As mentioned in the AM missive today, SPI Futures were optimistic printing +10 points higher early on, however selling quickly kicked in and the market tracked lower throughout the session, the resource stocks providing the biggest drag with a few very noticeable themes;

1. The Nickel stocks were hit hard, Western Areas (WSA) down -4.72% to trade near $3, now 25% below its April highs – Independence Group (IGO) followed suit down -2.76% and sits a similar distance from its recent highs.

2. Lithium names are feeling the pinch with the argument that recent supply will outstrip near term demand clearly winning out at the moment. Kidman (KDR) pumped another -8.06% on the downside today while Orocobre (ORE) lost ~5% and is clearly causing us some pain within the Growth Portfolio

& 3. The large cap miners are now in correction mode with BHP down –1.22% to $33.31 and RIO was off 1.55% to $74.20. We’re seeing a move out of the cyclical commodity names which is unsurprising given the bullishness towards the sector only a month or so ago – seems like buying the rumour, selling the fact of the capital return story was the play. We are currently underweight the miners. On the flipside, while the banks were lower overall today, they did outperform the broader market / showed relative strength.

In terms of our positioning overall, we tossed around turning more defensive in the Growth Portfolio today even though we have negative facing ETFs (around 11% short exposure) + we also have ~15% cash in the Growth Portfolio. Ideally we’re sellers of strength however today felt wrong and given the tightening trading range of the local market – a theme we discussed in the Weekend Report, our gut feel targets a likely break to the downside – we’ll give it another day then start to take some more aggressive action with our current plan being;

1. Increase our BBUS (short US ETF) position.

2. Reduce stock exposure by reducing SUN by another 2%, and taking our medicine on Janus Henderson (JHG), selling out for a loss.

On the weekend, we mentioned about buying 1 – 2 resource stocks into ~5% weakness, one candidate is RIO but because the stock went ex-dividend $1.71 fully franked last week our interested buy level has dropped from around $74 to under $73 which will be ~16% below the highs of 2018.

Overall, the ASX200 lost -26 points today or -0.42% to close at 6252– Dow Futures are currently trading down -91pts.

Australian Reporting season is underway – for a full list of company reporting dates – click here. Tomorrow the main companies out with results are Challenger (CGF) and Whitehaven Coal (WHC). In terms of CGF, consensus for FY profit sits at A$402.4 million on EBIT of $535m and a final dividend of 0.175cps, and importantly the market for FY19 has profit growth pencilled in of 7.45% to $454m.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; REA copped a few upgrades today from MQG and Morgan’s – the stock up +2.79% as a consequence.

· REA Group Upgraded to Neutral at Macquarie; PT A$90

· REA Group Upgraded to Add at Morgans Financial; PT A$95.41

Domain Holdings (DHG) $3.31 / +3.76%; After a choppy open, the real estate listings website Domain traded higher through the day following their FY18 results announcement. The result was mostly in line for the period, however commentary was more upbeat that the market was expecting. This result was the first full year report since demerging from Fairfax late last year, whilst also the first opportunity for the market to review the company’s progress post the departure of Sam Catalano but come before new CEO Jason Pellegrino commences later this month.

The result did include some large one-off costs that skew the statutory results to a net loss of $6.2m however the market is becoming more bullish on the ability for Domain to deliver in FY19. Key to this is Jason’s expertise in growing a digital business, whilst the merger of Nine Entertainment & Domain’s majority shareholder Fairfax is seen as a positive “through additional marketing and audience reach of the combined business” the company said. Although the Nine-Fairfax merger assists the business, we see the merger as unlikely, and the potential upside to Domain limited in the short term as well as headwinds in the housing market.

Domain Holdings (DHG) Chart

JB Hi-Fi (JBH) $23.38 / -0.38%; This morning JBH reported their full year results and they were slightly ahead of market expectations and the stock initially rallied 5.67% to an intra-day high of $24.80 before the retail bears sold the strength with the stock ending lower. Revenue was close to expectations however they’ve done a better job in terms of cost control in a tough retail environment which dropped down to a +1.15% beat at the profit line. Relative to FY17, the FY18 result showed reasonable growth in the business with earnings per share up by ~7%, and profit up by ~11% on the year.

The company was happy with the performance of the business across the board although they did note a tough second half period for the Good Guys. FY19 Guidance was thin on the ground however in terms of top line sales (revenue) they expect the group will do $7.1b, up 3.6% on the year which was close to the $7.126B the market was already expecting pre-result. In terms of current market expectation, EBITDA is expected to be $425.5m up 3.36% on the year while profit is expected to be 3.03% higher at $240.3m in FY19. The market isn’t asking a lot of JBH here, however the retail environment remains tough and store count growth has slowed significantly reducing the company’s ability to generate growth.

JB Hi-Fi (JBH) Chart

Capilano Honey (CZZ) $19.62 / +25.37%; the Australian honey company jumped on news of a takeover in a joint effort by private equity firms ROC Capital from Sydney, and Wattle Hill of Hong Kong. The deal offers cash to Capilano’s shareholders at $20.06/share – 28.2% premium to Friday’s close - or scrip into the new controlling entity. The offer has been recommended by the board, and the largest shareholder, Kerry Stokes’ investment company Wroxby has indicated that it will vote in favour of the offer.

An unusual term to the takeover deal relies on at least 15% of shareholder’s electing to take up shares in to the new entity rather than the cash offer. This, along with the involvement of ROC Capital and their backers (mostly Australian Superfunds) ensure that much of the company will remain in Australian hands. The Chinese interest for Capilano stems mostly from their manuka honey operations which the Chinese market sees medicinal benefits and the deal will likely see an increase in exports of the honey into Asia.

CZZ closed 2.2% below the offer level with the market pricing in a small discount for the risk that the deal is derailed by the FIRB.

Capilano Honey (CZZ) Chart

OUR CALLS

No trades across the MM Portfolios today.

Have a great night

James / Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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