ASX Weekly Wrap 15/08 - 19/08

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.

It was all about earnings this week as 100 major companies revealed how they had gone over the last 6-12 months. The XJO traded in a very tight range having a high of 5,549.80 and a low of 5,498.70. We finished the week -4.20 points or -0.07%. As you can see we really went no where.

The only major economic news out for the week was the Australian Jobs numbers for July. We ended up with +26,000 and an unemployment rate of 5.7%. On the surface the numbers looked strong but when broken down were ordinary. In the end we lost about 40k+ full time jobs but added 70k+ part timers. This reflects the lack of confidence we are seeing from business at the moment.

With so many company earnings out I will only touch on the majors. If you have a query on anyone else who reported, and my thoughts, let me know and I can do that. Also instead of talking about a few stocks I’m focusing on I’ll make some small comments regarding those who have reported below.

Annsell (ANN) was first out the blocks and the market lapped it up. It was a weak report but not as weak as everyone thought it would be. The market got excited by talk of a restructure and the possible sale of its condom business. Being a heavily shorted stock also helped with its +17% move on Monday as short sellers scrambled to cover their positions. Headline numbers were Revenue -4% ($US $1,573mill) Profit -15% ($US 159mill) and the dividend of $US 0.235. ANN is not a stock I am looking to enter. Currently trading at 17+ times pe (with EPS expected to be roughly the same in 16/17) and with so much uncertainty around a restructure and business sale I’d prefer to sit out on the sidelines on this one.

JB Hi-Fi (JBH) was next out of the blocks and it really did blow the market out the water. It seems it has really benefited from the demise of Dick Smiths, its expanding white goods division and a strong housing construction industry. Revenue was +8.5% ($3.95bill) Comparable Sale +5.3%, Profit +11.5% ($152.2mill) and an EPS of $1.538. As you can see some really strong numbers. However the market was more buoyed by forecast numbers. JBH stated that sales in July were +13% and +9.5% comparable on the same time last year. This is a result of further store upgrades to incorporate white goods and the aggressive roll out of new stores. It expects sales to rise to $4.25bill over the 16/17 year. On current earnings JBH is trading 18x pe. This falls to 16x on 2018 forecasts. Currently JBH looks a bit expensive, but I am looking for an entry on any sign of weakness.

NAB was the last of the four big banks to update the market on its earnings. As was the theme with the others earnings were soft, $1.6bill, down 3% on last year. Its Tier 1 capital ratio was 9.5% above its target rate of 9.25% and above the required regulated level. Expenses fell 1% and bad debts were +21% to $228mill for the quarter. As I mentioned in last week’s wrap the banks look long term value here as they have been severely de-risked.

All eyes were on BHP on Tuesday as it reported after market. If you were to just read the headline numbers it seemed an awful report. BHP turned in a $US6.4bill loss with $US7.7bill in impairment charges. The div was cut to $US0.14 from $US0.62 last year. Debt was up slightly to $US26bill. However if you flip the book this is what was hiding under those numbers, a $US1.2bill cash profit with $US3.2bill in free cashflow. Also they are now forecasting free cashflow of $US7bill for 16/17 if commodity prices remain stable. Hence it looks as if BHP is trying to turn itself back into the cash box monster it was pre-GFC. Further cost cutting and capital management will see them save a further $US5bill by the end of 2017. As I spoke about a couple of weeks back I am looking for an entry into BHP and this report further enhances my bullishness on it. BHP is concentrating on what it does best. Becoming that very low cost, highly efficient commodity producer.

On Wednesday two healthcare giants in CSL and Sonic Healthcare (SHL) reported earnings and they couldn’t be further apart. CSL disappointed the market with its profit -10% to $US1.24bill and a dividend of $US68cps. Sales were up 8% to $US5.9bill. The profit fall is attributed to their acquisition of Novartis during the year which won’t be profitable until 2018. This adds riskier revenue to their books but hopefully in the end higher earnings. The market slammed the stock down from $120 to the $108 range where it sits now. CSL is a market darling but even darlings will be punished if they don’t live up to expectations. Especially those who trade on such high PEs. If CSL can hold these levels then I will be looking to add to holdings for longer term portfolios. However if it can’t then $95-$100 looks like the next entry point.

Although CSL disappointed SHL flourished despite regulatory headwinds here in Australia. SHL’s profit rose 30% to $451mill. This was on the back of acquisitions and more diversified earnings as international revenue now makes up more than half of the total. They expect EBITDA to rise +5% for 16/17. SHL is a stock most of you own on the back of my recommendation over the last 2 years. I will be looking to add to those positions going forward.

One of my favourite small caps in Amaysim (AYS), who I’ve spoken of before in these wraps, released earnings today. The market seemed to like it as it pushed the stock up +17% to $2.09 as we speak. Important numbers to take out of their report are the subscriber numbers which sit at 966k. Well within guidance and ahead of prospectus forecast. Revenue was +20% to $253mill and Gross Profit +43% to $85mill. NPAT was $20mill +115% on 2015. Statutory profit was $12.3mill which accounts for listing expenses and tax expenses with the acquisition of Vaya. The final dividend is 5.3cps taking total divs for the year of 8.3c and a yield of around 4% at current levels. AYS is a favourite of mine and I see plenty of growth/value in it as it continues to gain market share, have low customer churn (2.5%), high revenues per customer, high cashflow and an increasing subscriber base. However it does come with a high level of risk.

The final company I will touch upon is Woodside Petroleum (WPL) which released its earnings today. As expected profit fell 50% to $US $340mill for the half on the back of lower energy prices. Production was 45.9mmboe +9% on this time last year. They have also almost halved dividends as well aiming to pay $US0.34 for the half. WPL also noted that it only had $US125mill in debt maturing before 2018 and also went on to the say it would be happy to extend its debt position to diversify its earnings base and make fitting acquisitions. WPL is trading on current earnings multiple of around 30x, which is obviously expensive. It doesn’t look much more attractive going forward. I am not looking to enter WPL at these levels.

Just touching on Oil itself, it is starting to appear a lot more bullish. In recent weeks it dipped below that $US40/b mark and looked in trouble. However of late it has rebounded strongly to $US48/b on the back of US inventories, increased Chinese consumption and the talk of some OPEC and non-OPEC members getting together to talk about freezing production. $US50/b is the next big test. If it can break that and hold above it oil looks very healthy from there. To me much of the sector on the ASX looks to have priced these movements in and are far too risky at current levels. However I am keeping a close eye on Oil Search (OSH) and Origin Energy (ORG). Both expect massive amounts of cashflow to come in over the next 18 months from new projects and they could have significant upside.

Other major companies to report this week that I haven’t reported on here, mainly because I don’t want this to turn into an edition of War & Peace, are AMP, CPU, IAG, STO, BXB, CGF, IVC, SGP, NCM, TTS, SYD, LLC, CWN and a few others. If you would like my comments on any of those or others who have reported please feel free to email me or give me a call. Always happy to discuss my thoughts on matters regarding the markets.

Due to the lack of movement in the market I will skip the technical analysis this week. It’s much of the same. A lot of sideways movement with a potential breakout to the upside in my opinion. Check last week’s wrap for a more comprehensive analysis.

Next week is the busiest week for earnings. Of those of significance the following are reporting: FMG, SEK, CTX, OSH, VOC, A2M, AWC, QAN, QUB, TRS, WES, WOR, WFD, WOW, PPT, CAB, CCL, HVN, QBE amongst others. No significant economic news is out next week either.

Well as I look out the window it’s looking pretty grim with rain coming down hard. Let’s hope it clears up for the weekend and especially for the showdown on Saturday night. You all know who I will be backing. Have an enjoyable and safe weekend and I’ll speak to you all next week. 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.