ASX Weekly Wrap 22/08 - 26/08

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.

There was a bit of Groundhog Day about our market movements again this week as there was little to no economic data out here or abroad and company earnings dominated the headlines. Once again we traded in a very tight range which saw a high of 5,574.00 on Tuesday and a low of 5,508.70 on Monday. We closed the week -11.20 points down or -0.20%. As you can see once again there was little lost or gained.

Earnings season comes to a close next Wednesday (31/8) so we will find our market will start to focus on the big macro issues again on hand rather than concentrating on an individual stock level. Once again due to the raft of earnings I will just comment on each individual stock rather than put together another stocks I’m focusing on segment. That will return next week.

Fortescue (FMG) was the first major out of the blocks on Monday with a report which was pretty much already known by the market due to their quarterly update in July. The raw numbers were Revenue -17% ($US7,03mill), Profit +210% ($US984mill) and the dividend $0.12 up from $0.02 last year. The important numbers for me were the C1 operating costs which were down to $US 14.31 per wet metric tonne, net debt down to $US 5.2bill, $1.6bill in cash and a very strong operating cashflow. As a result the stock rallied to $5+ but quickly pulled back as much of this information was factored in. As I have stated before I am looking for an entry into FMG at some point. If they continue the way they are the debt will be gone in 2-3 years and they will become a giant cash box. At current prices I see them as fully valued and will wait for a correction in price.

Oilsearch (OSH) was the last of the major oilers to report and it wasn’t pretty. Like the others they suffered due to the lower oil price. Revenues fell 33% to $US580.8mill, Profit was down 89% to $US25.9mill and the dividend was cut to $0.01cps down from $0.06cps last year. Production was +5% for the year but the realized price they got for oil was -27% and -40% for gas. Osh is one of my top two oilers. If the oil price can stabilize above $50 then OSH does look good long term value here.

My favourite IT/Telecommunications stock was next to report on Tuesday in Vocus Communications (VOC). Much like FMG most of the result was already known and factored in due to their update when they announced the takeover for NextGen. Still these were a very strong set of numbers. Revenue was +455% to $830.8mill, Profit +461% $101.7mill and an underlying EPS of 29.87cps. Final dividend was 8cps fully franked, a little lighter than expected. These numbers include a full year with Amcomm incorporated into the business but only a few months with M2 communciations. The company stated the Amcomm integration is basically done but they have a little ways to go with M2. EBITDA was $215.6mill (+318%) this year and is forecast to grow to approx. $495mill next year. As you can see VOC still has a lot of growing to do. The stock has come off a little of late which I believe represents an excellent opportunity to enter. The stock is of a higher risk nature bit also represents the opportunity for significant growth.

Qantas (QAN) soared (pardon the pun) to a record profit on Wednesday +85% to $1.03bill. This is two years after it posted a $2.8bill loss. A strategy to focus on its 65% share of the Australian domestic market, aim to cut $2bill by end of 2017 and some smart fuel hedging has bolstered its profits. Thus far QAN have cut $1.66bill in costs and have upgraded its cost cutting plans to $2.1bill. It also states that fuel hedging saved it $664mill more when compared to other years. It has reinstated a dividend paying policy starting with a 7cps final dividend. It also announced a $366mill on market share buy-back. Finally is positive forecasts for 2017 QAN announced it is increasing capacity by 4% to accommodate for more visitors to Australia due to the lower AUD. QAN is still well off its recent highs around $4.20. Like VOC to me it represents excellent value for a growth stock, however it does carry some risk as well. So far 2017 looks like it will be another $1bill+ profit. Most brokers are valuing it anywhere from $4-$4.80 so barring a major oil spike we should see a favorable next 12 months for the stock.

Wesfarmers (WES) & Woolworths (WOW) also reported this week and they were at polar opposite ends of the spectrum. WES cash profit was -7.1% at $2,251mill and -83.3% at $407mill after impairments taken on Target and the Curragh coal mine. The final dividend was also down at 95cps compared to $1.11 last year. However the good news to come from the report surrounded Coles. Like for like sales were +4.1%, really outpacing WOW numbers. WES are trading on a 20x multiple mainly because people were happy to be in them over WOW. At these prices thought I don’t see much value unless you were desperate to get exposure to Bunnings. If that were the case though you are better in BWP the Bunnings property trust.

WOW, as expected, had a disastrous result, but as the good news was factored into a FMG & VOC the bad was factored into WOW and the stock bounced 4% on the back of it. It was a case of the underlying numbers being not as bad as everyone thought. Total sales fell -0.8% to just over $60bill, its cash profit was down 64% to $803mill and underlying loss was $1.2bill on the back of write-downs to its failed Masters chain and restructuring costs. Its final dividend declared was 33cps down from 72cps last year. WOW is a tricky stock to gauge. At these prices I see more down side than up. There is more clarity out there with the disposal of Masters now confirmed. Big W still hangs over their head and margins continue to come under pressure from the likes of Aldi, Costco and Coles. It’s a wait and see how they perform over the next 12-24 months and how the restructuring helps turn the ship around. Like for like sales were -1.1% in the last quarter compared to -1.3% for the year. Also they do state that like for like sales for the first eight weeks of the year are +0.3%, so there are signs things are turning around. Like I said though at current prices I am not looking to enter. If they were to fall to the $20 range again then it would be a consideration.

Just a quick technical update for you all. We are still trading in a tight range within the larger upward trend band. In fact we have formed a mini uptrend/wedge (green lines) within the larger trend with consistently higher lows in August. It’s my view we are in for a Bullish end to the year and we will see 5,700 on the XJO soon. We still may see a small amount of weakness and a fall to the 5,350 level before then. If this is the case then this is the point I would be topping up on my large cap stocks. However at this stage we have little to worry about on a Macro level and I feel the financials and resources still have a lot of upside to give if commodity prices remain fairly stable and APRA doesn’t force more capital management, which is highly doubtful.

Next week is very quiet on the earnings front (fist pumps the air). It’s a lot of information to take in and anaylise in a very short amount of time. Most of the larger cap stocks report an hour before trade and in that time you have to consume the information and then trade it. This is why we see such volatility come earnings season. Stocks have a wild move either up or down on the headline numbers and as people delve deeper into the earnings and wrap their head around them during the day they tend to correct the opposite way. This is one area I feel the US has right. Major company’s usual report after market in the US. This gives investors time to digest the report overnight before making a trading decision. Hence you see less volatility and more of a stable move up or down in the share price.

Some important economic news returns next week. We have the Fed Chair Janet Yellen speaking tonight at Jackson Hole where there is a central banker’s conference taking place. People will be looking for clues on the direction of US monetary policy from the speech. Other than that we have Australian construction PMI and retail sales out Thursday and US unemployment figures out for August out Friday night. Chinese manufacturing and services PMI are also out on Thursday. Can you believe its basically September already!?

This is where I leave you. I am off to the glorious Adelaide Oval tonight for the footy then hopefully can enjoy some decent weather on the weekend by getting out and about. Enjoy yourselves and I will speak to you 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.