ASX Weekly Wrap 12/9 - 16/9
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.
A disappointing week overall where markets were again focused on the comments from Fed board members surrounding the possibility of rate rises in the US. The US Fed meets next week to decide on rates and at this stage it is 50/50 as to whether or not they will raise them. What is certain though is that rates will rise in the US before the year is out. We closed the week at 5,296.70 which was -42.50 points down or -0.80%. Our high was 5,317.00 on Monday’s open and our low was 5,192.20 on Wednesday.
It was a fairly quiet week in terms of economic data, just the two lots of important news. Chinese numbers were out the block on Tuesday and beat the market across the board. Industrial output was +6.3% v forecast of +6.1%, Retail Sales were +10.6% v +10.3% forecast and finally fixed asset investment rose +8.1% v +8.0% forecast. Despite these numbers the market peeled off during the day on Tuesday after starting +1% up we ended the day down. These Bullish figures also suggest that maybe the Chinese economy has bottomed out and is starting to turn. Of course one set of numbers cannot indicate a trend but it does give us hope moving forward.
The last set of numbers to come out during the week were the local August jobs numbers. Despite the headline unemployment rate coming down to 5.6% the numbers behind them were very disappointing. We ended up losing 3,900 jobs instead of the forecast +15,000. To break it down even further we added 11,500 full time jobs but lost 15,400 part time jobs. The only reason the unemployment rate fell is because the participation rate contracted from 64.9% to 64.7% meaning less people are out there were looking for work. Overall it’s a messy set of numbers and hard to read. We can only hope that as we get closer to Christmas the numbers become much more bullish.
Commodities again took a hit this week all peeling off against a strong USD. This was reflected in the share prices of BHP, RIO and FMG which all ended the week lower than where they started. The gold stocks were also soft despite Gold remaining stable in AUD terms. Iron Ore is a multi-week lows and Oil continues to trade in that $42 - $50 range. I still believe there is value to be had in selected resource stocks. As I have mentioned before on a decent correction I am looking to enter BHP, RIO and FMG. I already have positions in OZL and am on the lookout for more established gold producers as well. Cobalt, Gold & Lithium remain on the radar in the speculative end of the market.
A few important bits of news out this week on an individual stock level. JB Hi-Fi (JBH) came out on Tuesday and announced it was going to take over ‘The Good Guys’ with an $870mill cash offer. There have been rumors around for a few months JBH were keen on The Good Guys and finally this came to fruition. The offer will be funded by a $394mill renounceable entitlement offer and the use of a $500mill existing debt facility. JBH sees $15-$20mill in synergies with The Good Guys but it also helps expand its home appliance division and gives it more purchasing power. JBH went into a trading halt on Tuesday and resumed trading today. The market reacted positively to the news sending JBH shares up 8%. I see value in the JBH business model and their ability to compete with the likes of Harvey Norman (HVN). This take over only further enhances this view. However JBH is trading on too a high a multiple and I am waiting for a decent correction in the share price to gain entry.
Myer (MYR) released its full year earnings on Thursday doubling its net profit to $60.5mill on the back of $600mill program that involves reallocating in-store space to better performing brands and improving their digital experience. Sales rose 2.9% for the year and +3% on a like for like basis. Operating gross margin fell 1.64% to 38.7%. Overall it was a very solid report but the market didn’t like it too much and sold the stock off. MYR is not a stock I am interested in at the moment as I’d rather wait for corrections in the more reliable and stable retailers like JBH and HVN.
Platinum Asset Management (PTM) announced on Wednesday it was going to do an on market buy-back of its own shares of up to 10% of its issue. This saw the stock climb +12% on the day. The buy-back will only occur if they continue to trade a significant discount to value. PTM didn’t set a price for this. Over the last 14 months PTM has seen funds under management fall from $28bill to just under $24bill hence its underperformance. PTM has fantastic management and a proven long term track record. Now might be the time to look at it for some value. I will note there does seem to be a global trend of money moving out of big fund management and into ETFs. This is a concern for the likes of PTM.
Technically it was an important week for the XJO. We couldn’t hold the 5,300 mark on the bottom of that uptrend and fell straight through it. However by the end of the week we were back knocking on the door around that level. One of two things will happen from here. We will reclaim that 5,300 level and keep ourselves within that upward channel or hit resistance at 5,300 and come back down. If the later happens then we would then more than likely head towards 5,100 where a longer term trend is established. We did manage to keep above and hold the 200 moving day average (not on my chart) on the XJO which is important as to fall through that would be very bearish.
Only the one stock in focus this week and it comes from the small-mid cap space called Superloop Limited (SLC). SLC operate a Fibre Optic internet business out of Australia, Singapore and Hong Kong. It’s been a market darling for some time rising from $1.80 in July 2015 to $3+ now. At this stage it only has 378km of fibre cable laid but with a very specific focus on business districts that can benefit from having super-fast high speed internet. In 2016 it only brought in just under $7mill in revenue and made a $7.1mill loss. In 2017 they are expecting just under $12mill in revenue as its Hong Kong fibre comes online in December. Just based on the above facts it looks expensive and to be honest I felt even with high earnings growth it looked too pricey around the $3 range.
However on Tuesday SLC announced it was to takeover Big Air Group (BGL) in a script or script/cash bid (investors choice). BGL are also in the internet business but mostly utilize a fixed wireless broadband technology to clients across all Australia’s major capital cities. It also offers other internet services such as Cloud, managed and campus services to schools and retirement homes. In 2016 BGL revenue was $80.7mill and a NPAT of $10.3mill. It even paid a 1.3cps final dividend. The takeover has been recommended by both boards and with likely little regulatory hurdles looks set to go ahead before the end of the year.
This takeover will dynamically change SLC. There are a lot of synergies to be had in terms of costs (i.e. saving $4mill pa) but also from a technological point of view as both forms of technology can piggy back off the other. This gives them greater scope to increase their fibre rollout to attract clients and a better quality offering. Expect earnings to also accelerate aggressively over the coming 3-5 years. SLC also have quality management backing the company.
Bevan Slattery is the CEO. He currently also operates Australia’s largest Independent data center provider in NEXTDC (ASX: NXT). NXT currently has a market cap of over $1.1bill. Mr. Slattery also founded PIPE Networks which was sold for $420mill to TPG in 2010 and built the Sydney to Guam fibre cable. It also owned 1,500km of fibre optic cable in 5 major cities. Mr. Slattery has proven he can build an IT company up from the ground and is very experienced in fibre optic infrastructure and data center management.
All these factors make SLC a very favorable long term proposition. Due to the takeover and a capital raising by SLC it will end up with roughly 193mill shares on issue (currently 103mill) when all is said and done. This means in the coming weeks and months there could be some dilution and share price weakness. I would be looking to take a small position now around the $3 mark, in case it does take off, and then top up if it were to fall to around the $2.80 level which is support in the chart above, as a previous high, and along the longer term upward trend line.
In the coming week we turn to the US for some very important data. Housing starts figures are out on Tuesday night our time and the Fed meets on Wednesday to make its rates decision. We also have the Bank of Japan meeting on Wednesday to make their rates decision as well. Locally we have Q2 house prices and RBA minutes out on Tuesday and that’s about it for us. No doubt though the market will have all eyes focused on the Fed on Wednesday evening and I doubt we will see much action in global markets until the result is known.
Well Spring is here in Adelaide, but you wouldn’t know it. Earlier in the week we didn’t get above 13 degrees for 72 hours. I also saw a stat that Mt Lofty had recorded 1000mm of rain already. Its wettest year since 1971. It’s great to get out reservoirs and waterways filled before we hit a long hot summer. It’s also great timing for our farmers who should pump out record crops. The only downside to that is wheat prices are at their lowest in some time. However I am still very keen for the warmer weather to get here. After markets close today my attention will turn to the Crows game Saturday night. My heart says they can win but my head says they won’t. Regardless of what you are doing this weekend have an enjoyable one and stay safe. 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.
