ASX Weekly Wrap 08/08 - 12/08

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.

Seems like I am on repeat a bit in this weekly segment as the market has shown us little volatility overall as we had a high/low range of roughly 70 points this week. The XJO closed out the week in the positive at 5,530.90 a gain of just +33.5 points or +0.61%. It reached a high of 5,553.80 on Tuesday and a low of 5,483.70 yesterday.

Last week I spoke of earnings bringing us volatility. What I should have explained further was that I expect volatility on a per stock basis not market wide. Carsales (CAR) is a prime example of this. When it reported on Tuesday it fell to a low of $11.51 before rallying to a high of $12.88 and closing at $12.54. That’s a range of $1.37 or 11%. Huge amounts of volatility.

It was a fairly quiet week for economic news this week however we were bombarded with company earnings results. Hence with so many to cover we will get straight into it. I do want to quickly touch on the US jobs numbers last Friday night. There was a big beat with +255k jobs added for July v +180k forecast. More importantly the hourly wage rose +2.6% v 2.4% a year ago. This is important as it does show some wage inflation and gives credence to the Fed raising rates again later this year. However I digress.

Three of the big four banks updated their earnings this week. CBA gave their full year results whereas ANZ & WBC updated their quarterlies. The theme was the same across the board. Margins were slightly squeezed or flat, Bad debts were slightly up but still low, Dividends were maintained, Tier 1 capital was very healthy across the board (ie 10%+) and finally earnings were very soft. There are a few important points to take away from these and it comes mainly from the Tier 1 capital levels. These surprised most as being so high. It also signaled that the banks shouldn’t have to raise more capital to satisfy APRA regulations. This is a very bullish signal as this is what was holding the sector back. Investors were afraid banks were going to have to raise further capital, hence dilute shareholder value. The banks have bounced a bit off their lows due to this but are still a long way off their recent highs (ie ANZ still -41%).

Whilst we are still in a low rate environment and the economy isn’t racing along earnings will continue to be subdued for banks, however they now look value here on a long term basis with a major risk all but eliminated. Now it hasn’t been confirmed by APRA that further capital won’t be required but it’s pretty much accepted industry wide this is a foregone conclusion. ANZ (11.74x), WBC (12.45x), NAB (10.97x) & CBA (13.94x) are all trading at low price to earnings ratios on a historical basis, so as long as you are comfortable with low earnings for 12-24 months but happy collecting a 6%+ yield the banks look solid long term value here.

As you can also see from the chart above the XFJ (Financial Sector) has broken its long term down trend and broken out into a new uptrend further signaling the sector has bottomed and is starting to recover.

Transurban (TCL) provided some solid earnings number on Tuesday as it swung from a loss last year to profit this year. It was buoyed by new toll roads and upgrades along with higher toll rates across the board. As a result it was able to lift its dividend by 11% to 23cps. TCL should continue to outperform in a low interest rate environment. As it is involved in infrastructure it carries a lot of debt. This means with low rates their margins expand as their debt is cheaper.

One other top 20 stock that released earnings was Telstra (TLS) and the bottom line looked fairly soft here. Earnings are coming under pressure from increased competition in Australia. Companies like TPG, Vocus Communications, Amaysim etc. are all eating into margins and forcing prices lower. The dividend was maintained at 15.5cps but the overall outlook is negative. One savior is a $1.5bill share buy-back TLS will conduct which will help keep the share price up. They are also spending $3bill upgrading their networks over the next few years. For mine TLS is nothing but a solid yield earner within your portfolio. Earnings will continue to come under pressure from squeezed margins and loss of market share. Much like Woolworths is suffering from too. I believe TLS holding should be reduced here and a movement into a Vocus Communications (VOC) who are growing earnings and stealing market share from TLS is wise. However a portion of TLS should be held for its earnings stability and yield.

A market darling in Cochlear (COH) released a cracker of an earnings report. Profits rose 30% to $188.9mill AUD. However in USD terms it was fairly flat at $144.6mill. Hence the benefit of holding US denominated stocks like COH and diversifying within your portfolio. COH have benefited from being able to stave off competition and sell more of its bionic ear products. It has done this by providing a better product and innovating. COH is a world leader in its industry and you should look to enter it on any weakness. COH increased its dividend by 20% to $1.20 and its share price rose from $125.00 to $140.00 per share since its results were released. They do look expensive here trading at 42x current earnings but that falls to 31x current earnings when forecasting out to 2018.

Market favourites in CAR, SEK & REA also released earnings this week and they were are generally very bullish. Finally Oz Minerals (OZL) brought out a much better than expected earnings result this week which surprised the market. Profit was up to $55mill for the half, Operating cash flow was $116mill, EBITDA margin was 45%, Cash on hand $564mill, no debt and it also paid a 6cps dividend. I will talk a little more about OZL later but I believe it is great value here for higher risk portfolios.

Fairly uneventful week technically speaking as we really just were treading water. We are still respecting that upward trend and haven’t tested the upside of the trend yet. With so many big names releasing earnings next week we may get more of an idea of our direction after that. Market is still looking fairly bullish going forward.

On the back of some earnings updates and some significant changes in sector dynamics I have the following stocks I am focusing on:

OZ Minerals (OZL) - $6.94 I haven’t been this bullish on a resource stock since the GFC as OZL has quickly become one of my favourite stocks. OZL has come a long way since almost going bust during the GFC. It has turned over management, sold non-core assets and become a highly efficient, low cost Copper/Gold producer. OZL is not for the faint of heart though. It does carry a fair amount of risk with it. However I feel the stock is going to be re-rated by the market. Its forecast to produce 115-125k ton of copper for the year and 125-135k ounces of Gold. It’s currently sitting on an EPS of 18cps for the half which should be a lot more for the second half as there is more production to come. It has been able to build its cash reserves to $564mill with no debt, a continued share buyback and a dividend of 6cps. The real value I think will come from a project no one is talking about, Carrapateena. This will be a large scale, low cost, copper/gold mine itself. Whilst it hasn’t been given the final go ahead its looking very favourable. The box cut for the mine starts this month as the scoping study continues however it looks likely it will be brought into production within the next few years. This will help offset the decline in production from OZL famous Prominent Hill. Capex for the project will be roughly $1bill, however OZL will be able to fund this without debt or going to the market as it has sufficient cash flow and cash on hand. I see OZL being a stand out, in the resources sector for years to come.

ANZ, CBA, WBC & NAB As I mentioned earlier I believe the worst is over for the Big Four banks here in Australia. The threat of further capital raisings has dissipated which significantly de-risks the sector. Margins are being maintained even if they are coming down slightly & Tier 1 capital levels are high. Earnings growth will be soft to non-existent for the next couple of years, however value is to be had in the sector with all four trading a low valuations on a historical basis and high sustainable dividend yields. Most will have some exposure to the big four within their portfolio already, however it looks as if now is an opportunity to add to those as long as you are willing to hold longer term.

Another quiet week next economically with RBA minutes out and a few sector specific numbers out in the US. Earnings season really beefs up with a majority of big names reporting. ANN, GPT, JBH, NAB, NCM, BHP, CGF, DMP, IVC, SCG, CSL, CWN, QBE, SGP, SHL, AMP, ASX, BXB, ORG, TTS, TWE, IAG, LLC, STO, WPL are all reporting. Might be a longer than usual weekly wrap up next week.

Have earned a couple of days off. Looking forward to relaxing. Enjoy your weekend. Go Crows!

- Heath Moss

heath@hlminvestments.com.au

(08)8212-9632

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.