Stocks hit, QBE in the firing line, more competition in BNPL (Z1P, QBE)
WHAT MATTERED TODAY
A poor start to September for the ASX with the market giving back 80% of August’s solid gains on day one. Initial weakness came from a sell-off overseas in the sectors that dominate our index - financials / resources / healthcare, however the resilience of US tech failed to support our technology stocks with BNPL companies taking one on the chin after a solid few weeks.
Locally, building approvals data was very strong at 11.30am this morning, up 12% MoM v -2% expected and that helped stocks exposed to that sector (BIN +1.35%) while the RBA kept rates on hold as expected at 2.30pm, they did announce an expansion and extension of its Term Funding Facility ensuring credit continues to flow - as it talked again about the recovery likely to be “uneven and bumpy” with the latest lockdown measures in Victoria meaning that a rebound in Australia’s labour market is likely to be some months off – all pretty much expected and the AUD edged back above the 0.7400 handle following the meeting,
At a sector level today, IT stocks were hardest it, while the defensive utilities did best, however the selling was broad based as the red in the table above implies, just 16% of the ASX 200 finished in the green. Worth also noting though that we did have a large number of stocks trading ex-dividend today which put an added weight on the market.
The sell-off today was very Aussie centric with US Futures holding firm during our session while Asian markets were generally all higher.
Overall, the ASX 200 fell -107pts / -1.77% to close at 5953. Dow Futures are trading up +67pts / +0.24%%
ASX 200 Chart
ASX 200 Chart
CATCHING MY EYE
Paypal: News overnight that payments heavyweight PayPal is launching a Pay in 4 Solution, effectively copying current BNPL platforms. The move obviously brings competition back to investors’ minds; however it shouldn’t be a real surprise. Other large payment/credit companies have made similar announcements over the last year and rising competition, particularly in the US is an obvious bi-product of the success Australian companies have had in the space. In Australia, 25% of the population have BNPL accounts however less than 5% of Americans do + the size of the pie is bigger.
Zip also announced today the completion of the Quadpay acquisition. Overall, the sector was sold off reasonably hard on the back of the PayPal news, Afterpay (APT) -8.04%, Zip Co (Z1P) -12.77%, Openpay (OPY) -7.18%, Sezzle (SZL) -14.7%, Splitit (SPT) -7.26%. The sector taking a breather is not a reason to run for the hills – yet! Zip Co (Z1P) likely to be added to the ASX 200 in the rebalance that happens this week
Zip Co (Z1P) Chart
QBE Insurance (QBE) -6.31%: Hit today after the CEO was stood down by the Chair following inappropriate / unethical communications with a female employee – not good. CEO Pat Reagan was known as a hard nose granular sort of operator that had started to turn the QBE ship around, however todays update was poor on a number of fronts. Simply no need to be there in our view. As an aside, subscribers that are familiar with our Insurance Analyst at Shaw, Brett Le Mesurier may find his summation of today’s news interesting.
From Brett Le Mesurier…Good night, sweet prince …one of his finest diatribes on the insurer to date…
As Hamlet lay dying poisoned by treachery, his friend Horatio uttered the words “good night, sweet prince”. It is cruel to refer to the departure of QBE’s most recent CEO with such a Shakespearean quote. Hamlet’s motivation, character, thoughts, and actions have kept scholars engaged for centuries. Such ongoing interest will not extend to QBE’s latest act.
Hamlet was consumed with identifying and exposing those responsible for the death of his father, against an international threat lurking in the background. The consequences of his quest were tragic. QBE’s quest has been to provide hope for shareholders that the forces responsible for its poor international performance would be tamed. The outcome of that quest appears to be tragic for many shareholders thus far. The prince of Brilliant Basics will not be there to complete the task.
He leaves with the combined operating ratio (COR) at an astoundingly high 109.5%, an insurance loss of US$584M, an insurance margin of minus 10.6%, a net earned premium (NEP) decline of 3% in 1H20 and raised over US$1B in capital after taking investment risk which has proved to be excessive. This has occurred as premium rates have escalated.
It’s this premium rate escalation that delivered hope but it’s that same escalation that delivered the poor returns. The link that shareholders have ignored is that premiums respond to claims. This means that claims increase before premiums and when claims stop increasing so do premiums.
The new CEO may not only understand this connection but effectively communicate it to ensure that the market’s expectations reflect the most likely outcome rather than an overly zealous interpretation of the value of such rate increases. Profit expectations could be lowered, and claims reserves may increase. QBE has recently been reporting adverse claims development.
Today’s market release from QBE referred to an “investigation concerning workplace communications that the Board concluded did not meet the standards set out in the Group Code of Ethics and Conduct”. A review of that code suggests that the offense may have been a breach of the following paragraph. While the company has provided insufficient details to be sure of this, the last part of the excerpt is probably relevant. “Go bid the soldiers shoot” (Hamlet Act 5, Scene 2). Source: Shaw and Partners
BTW, he has a SELL & $8.00 price target
QBE Insurance (QBE) Chart
Starpharma (SPL) +12.21%: positive news for SPL today saying it has applied its DEP drug delivery technology to create a long-acting, water soluble version of remdesivir. The benefits are apparently strong hence the pop in SP today…
BROKER MOVES
· Cooper Energy Raised to Buy at Bell Potter
· Gr Engineering Raised to Buy at Moelis & Company; PT A$1.28
· AGL Energy Raised to Neutral at Macquarie; PT A$14.98
· Insurance Australia Raised to Outperform at Macquarie
· Panoramic Resources Rated New Buy at Foster Stockbroking
· Fleetwood Cut to Hold at Moelis & Company; PT A$2.09
· Temple & Webster Raised to Buy at Canaccord; PT A$10
OUR CALLS
No changes today
Major Movers Today
Have a great night
Harry & the Market Matters Team
Disclosure
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