ASX Weekly Wrap 01/08 - 05/08

Welcome to the ASX Weekly Wrap. A weekly email that will be sent out to clients, and also made available on my website, with a brief description of the events that moved the local markets during the week and also what I am watching on an individual stock level. Feel free to provide feedback and alert me to any topics that you may want covered.

The market started the week on a bullish note cracking the 5,600 mark with an intraday high of 5,611.20, which would end up being the high for the week. Then on Tuesday & Wednesday the market peeled off 2%+ after the RBA’s decision to cut rates was largely factored in. In the end we finished the week with a couple of positive days gaining back some of those losses. Overall thought the market lost -64.90 points or -1.17% for the week and had a low of 5,465.70. We closed at 5,497.40 today.

The biggest news of the week was the RBA decision on Tuesday. The RBA decided to cut the official Australian cash rate 0.25% to 1.50%, a historical low. It seems the markets had factored such a cut in as the XJO peeled off approx. 120 points in the next two sessions. I feel this is where the cash rates stays for some time. The US still looks bound to raise rates before the end of the year and with the Jobs numbers out tonight we will get an idea of the health of their job market. The RBA may allow the Fed to do its heavy lifting for them in the future as by raising the US cash rate it narrows that gap between our rates. This hopefully forces the Australian dollar down and starts creating some inflation locally.

The RBA wasn’t the only one cutting rates. The Bank of England decided to cut rates by 0.25% to a rate of 0.25% itself. This is the first cut in 7 years. Rates in England look bound to join the negative rates bandwagon as the threat of recession looms after the Brexit vote.

Chinese PMI numbers were also released during the week. The manufacturing PMI came in at 49.9, slightly below the 50.0. This shows the manufacturing industry in China is still struggling to gain momentum. In better news the non-manufacturing PMI came in at 53.9 from 53.7 in June. This means their services industry etc. are expanding at a healthy rate.

Locally again the Retail Sales number came in very weak for June, coming in at a paltry +0.1%. Forecast was +0.4%. One would have to think a looming election, which always has a dampening effect on consumer confidence, had a huge say in this. I would expect them to rebound strongly in the second half of the year as confidence rises again.

On a stock level we had some big names report earnings this week, none were bigger than RIO. It was a fairly uninspiring report. It was solid overall but didn’t wow. Their profit came in at $US 1.76bill right on most forecasts and up from $806mill last year. They are paying a $US 0.45 dividend down from the $US 1.075. In the most positive news they had reduced net debt by 6% to $US 12.9bill. Obviously the biggest weight on earnings for RIO was its Iron Ore division where earnings were down 17% on lower prices. At current prices RIO looks expensive trading on roughly 27.1x estimated 2016 full year earnings. As I have mentioned in the previous weekly wrap I see an opportunity in Iron ore stocks but want to wait for a pullback in prices to enter.

Suncorp (SUN) and Tabcorp (TAH) were the other majors to report this week. SUN’s report was a tad soft. It reported a full year profit of $1.089bill, EPS 84cps, and a second half dividend of 38cps. Insurance and general margins all missed forecast and the div was slightly lower than forecast also. At current prices Sun is trading 16x current year earnings. A little expensive for my liking. If you are looking for exposure in the financial sector I still prefer Macquarie (MQG) over SUN. Forecasts were slightly more positive as they are looking to keep costs flat, keep ROE at 10%+ and lift NPAT. However I feel at the moment they are one bad storm, flood or fire away from missing those targets.

Just quickly on TAH. Profit was down 49% after one offs. However cash profits rose 8.5% on year to $185.9mill. Its biggest growth came from the Keno side of the business with sports betting and media only rising +0.9%. With further pressure coming from a ban on greyhound racing in NSW and a potential 15% tax on gambling revenue here in SA TAH are looking to diversify their business. They announced a takeover of INTECQ Ltd an Australian gaming company for $128mill. Overall it’s not a stock that’s on my radar at all.

As you can see from a technical perspective the market is behaving exactly how we expected it to this week. Some steam has come out of the market as we have seen it pull back from that 5,600 mark to just under 5,500. We got as low as the 5,450 mark but didn’t test that 5,400 former resistance just yet. If we see earnings start to disappoint next week then we could see that 5,400 tested. Otherwise solid earnings will see us explode to the upside and test the top of that band. Either way it’s hard to say once earnings are in play as there can be a bit of volatility. We are still on track to crack that 5,700 before the year’s end either way.

Gold has been given lots of attention over the last few weeks and rightly so. The metal was on the cusp of falling through $1,000 US/ounce less than a year ago only to come roaring back to be $1,300+ an ounce now. Many Gold stocks have risen 100%, 200%, 300%+ on the back of this so a lot of the sector has lost a bit of value. As for Gold itself. It looks as if it has further to run. If it can hold above $1,360, a key long term break of a downward trend, then it will see $1,400+ soon. Thus this week I have listed some Gold speculative stocks I am watching that I believe have lots of value left in them and have not seen the value add others have. My main aim when looking at Gold stocks is to look for Australian based projects. This is because it may cost them $AUD 1,000-$1,100 an ounce to produce but they are receiving $AUD 1,700+ an ounce in revenue. This is opposed to say a US based producer where it might cost the same to produce, but in USD, but are then only getting $USD 1,300+ an ounce in revenue. I must stress the stocks below are not for everyone and are extremely speculative and high risk in nature. However the returns can also be very high.

Alto Metals Limited (AME) - $0.13 AME are a gold explorer in WA. Acquired some of the discarded Gold assets off of Troy Resource that were producing up until 2010. They are aiming for a resource of 1mill+ ounces. Are close to infrastructure. Tiny market cap of $22mill fully diluted with $4mill of cash and liquid assets on hand. Exploration under way. At least 2-3 years off looking at producing. JORC resource upgrade due soon.

Anova Metals Limited (AWV) - $0.155 AWV have 1mill+ ounces of gold in Nevada in a highly fertile gold province. Looking to start producing as soon as this year. Low capex to start production but only have $1.3mill in cash so may have to raise some more by the end of the year. Market cap of around $58mill so are larger than AME but much closer to production.

Kin Mining NL (KIN) - $0.255 KIN maybe are the sweet spot out of all these Gold specs. Again their main deposit is in WA called the Lenora Gold project. Not far from DCN’s 3mill ounce project. They have 722k ounces of resource currently at Lenora and are obviously looking to add more. Including other projects they have 1mill+ ounces in gold resources all up. They plan to commence production in the first half of 2019 so some time away. Market cap of only $28mill with only $1.3mill in cash. However they are currently raising money via a rights issue to the tune of $5mill at $0.22. For mine this is holding the stock back a bit and gives a decent entry opportunity.

Oklo Resources Limited (OKU) - $0.205 If you don’t mind the sovereign risk of their main Gold project being in Mali, in West Africa, OKU may have the most long term upside. They have 1,300kmsq in Mali’s most prolific Gold belt. Their main project Dandoko has no defined resource as of yet but they have 11,000m of drilling that will define it very quickly. News flow should be plentiful and frequent. Highly experienced management, who know Mali well and have overseen over 40mill ounces in gold discoveries in Mali alone. Well-funded with $10.8mill in cash and a market cap of $53mill fully diluted. Like AME is a long way off production but with huge potential upside.

Important night tonight with US Jobs numbers being released usually around 10:30 pm EST our time. Will be looking for +180k jobs added and an unemployment rate of 4.8%. Also will be watching the hourly rate of pay looking for that all important wage inflation. We have a big week of reporting next week ourselves. BEN, NWS, ANZ (Quarterly), COH, TCL, AGL, CBA, CPU, JHX, TLS, CAR, REA, FXJ are some of the majors that report. Bit light on for economic news next week locally and abroad. Consumer and Business confidence is out locally whilst US retail sales are out Friday night. Chinese Industrial Production and Retail Sales figures also out on the weekend.

Going to try and enjoy some decent weather on the weekend. Speak to you all next week. Go Crows!

- Heath Moss

heath@hlminvestments.com.au

(08)82129632

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.