ASX Weekly Wrap 26/9 - 30/9

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.

As I anticipated at the conclusion of last week’s wrap this week was somewhat of a ‘nothing’ week for the Australian Market. We had little economic data out here and abroad and no major earnings to speak of. Movements on the XJO reflected this with the index finishing the week up a mere 4.6 points or 0.08% on 5,435.9. Our high was 5,473.30 on Thursday and our Low was 5,372.30 on Tuesday.

The main, and only real piece of data to come out this week, was released today in the Chinese Manufacturing PMI numbers. The headline number was 50.1, which was right on forecast. It’s a reassuring number and one which suggests the manufacturing sector in China has stabilized and could be heading towards growth again. Any number of 50 or over suggests the sector is expanding at above trend growth and this latest set of numbers is the third straight we have seen at or above 50. This is the first time this has happened since 2014. This gives us reason to be cautiously optimistic here in Australia over the short term.

There were two other major pieces of news that really drove markets during the week. The first is surrounding the German Bank Deutsche Bank (DB). DB had a horrible week with its share price going from one new low after another. This all occurred due to fears that the German government may have to bail the bank out as it was revealed that the $US14 Billion bank had estimated exposure to $US162bill in debt. It is thought the German’s would do similar to how the US government handled General Motors and AIG where they bought a large portion of the companies out. The bank has denied it’s in any financial trouble and says it’s in a very solid financial position.

Finally the bank was put under more pressure during trading last night as rumours circulated that clients were starting to pull collateral from Deutsche Bank. In particular hedge fund clients that had been rumored to have moved business to rival banks. The fear is once one major client starts pulling out money, others follow which can lead to a liquidity crisis and a major loss of trust. It will be interesting to see how it plays out as it has weighed down on the Australian banks this week.

The second bit of news to influence markets this week came out of the OPEC meeting on Wednesday night. In a surprise move the members of the meeting agreed to cut Oil production by 750,000 barrels per day to a target of 32.5 million. This is the first cut to production in over 8 years and will obviously help put upward pressure on the oil price. Energy stocks and the likes of BHP, whose profit is 1/3rd oil, all ripped higher this week on the back of this as it could be the catalyst to help the floundering sector turn around. It was only Tuesday night that Goldman Sachs cut its Oil price forecast by $7, so this decision came as a real surprise and one even the big boys didn’t predict.

Turning to the technical analysis now of the XJO. We seem to be consolidating around this 5,400 level before our next move up. Once again that 5,700 area is a target of mine before the end of the year. Not much else needs to be said here as its fairly evident in the chart above.

Obviously today is last day of September and the quarter. Who can believe its October already and only 12 Friday’s left until Christmas. Whilst October generally isn’t a great month for the Australian markets it is a very bullish month for our banks. This is usually because our banks (ANZ, NAB, WBC & MQG) report very early in November. This causes a run up in share price in anticipation of solid results and to capture upcoming dividends. Last year CBA was our worst performer for October and it still put on +3.4%. I went Bullish on our banking sector 1-2 months ago on the back of it being severely de-risked with the likelihood of further capital requirements almost diminished. This has played out perfectly and I believe when the banks report in a month it will be confirmed once and for all.

Other sectors I’m looking closely at are the Resources, and even energy now. In particular I have a close eye on BHP, RIO, FMG in the majors and am keen on gold, lithium, cobalt and zinc small cap stocks. Will have to do more extensive research in the energy sector but of the majors I do like OSH and WPL. As always the tech sector is still a favourite of mine and I believe there is a lot of value to be unlocked there amongst the small-mid caps.

A couple of stock in focus this week with one, in particular, keeping with a theme we find quite topical this week in South Australia:

AGL Energy Ltd (AGL) $19.05 – AGL is Australia’s largest electricity retailer of which many of you will already know. This week it released guidance for the 2017 financial year for a profit of between $720 - $800mill. This would be an increase of 14% on last year’s profit should it hit the upper echelon of the target range. This translates to a consensus EPS of $1.18 per share in 17. This grows to a forecast of $1.32 in 18 and $1.37 in 19. This means at current prices AGL is trading at 14x FY18 forecast. For a company potentially giving you 10%+ in earnings growth per annum, with very reliable earnings, I find this value.

On top of the guidance AGL announced at $600mill, or up to 5% of total capital, buy-back of its shares. Once again very bullish for its share price as it helps put a floor under it. Finally they also announced they will be raising their dividend payout percentage from 65% to 75%. This gives us confidence and security in earnings moving forward. This also means based on forecasts AGL is yielding 5.2% on FY18 dividends.

AGL is looking to keep its customer churn rate of around 2% and is tipping in $300mill on boosting its organic growth that is focused on the digital transformation of the company. It is also expected that AGL will benefit from wholesale electricity rates increasing across the industry over the next year. Overall I can see lots of value in AGL in the longer term with a low amount of risk associated with it.

HUB24 Ltd (HUB) $5.33 – HUB is a company I doubt many of you would know. In short it is a financial services company focused on the delivery of the HUB24 platform, which they charge fees for and receive commissions from. This platform is used by financial advisors, accountants, licensees, stockbrokers and institutions for financial transactions, reporting and portfolio management. Its platform has won many awards, is state of the art and is gaining a lot of traction within the Australian financial market.

HUB recently posted its first gross profit of $10.9mill for the 15/16 year and it also posted positive EBITDA in the 2HFY16, positive EBIT for 4QFY16 and positive monthly profit before tax for June and July. In what was even more stunning for the company was that it grew net funds under administration, so funds using the platform, by 102% to $3.78bill in FY16. Revenue grew 49% to $43.6mill and they reduced their loss by 78% to $1.1mill. It is expected that FY17 HUB will post its first net profit after tax with a forecast EPS of 5cps (100x PE). This looks very expensive at current prices but if you look further ahead at FY18 then EPS grows to 15cps and a PE of 33x. Still not cheap but with a company growing earnings at such a rapid rate this will come down substantially over FY19/20. HUB has a market cap of $280mill and no debt.

With HUB investors must take the perspective of what is not in front of them now but what this company could be in 5 years’ time. It’s in a very popular and rapidly growing fintech space where companies such as Xero (XRO) have flourished over the last few years. It already caught the eye of another financial services firm in IOOF in Oct last year when they made a $2.75 per share takeover offer. The company was able to defeat the offer in what proved to be a savvy move. HUB is not for the faint of heart and does have a higher risk profile than other stocks but it could also have big returns if they achieve what they are setting out to do. When I decided to write about HUB earlier this week it was sub $5. It has since climbed to well over $5, but I still see a lot of growth there to come.

Busy week of economic data next week. To start with Monday is a Public Holiday in a lot of states but the ASX will still be open. We have Aus, Jap, UK and Ez manufacturing PMI out Monday. ANZ job ads and the all-important RBA meeting on Tuesday. Aus, Jap, EZ, and US services PMI plus Aus retail sales out Wednesday. Thursday sees out trade balance released and Friday sees the US unemployment figures out that night. To top it all off the Chinese markets are closed all next week for their ‘National Day’ celebrations.

I am going to end it here whilst I still have power (he he). Looks like a wet weekend ahead which means staying indoors and watching Netflix. Almost finished with House of Cards. I believe I’ll be watching ‘Luke Cage’ after that, which is another super hero series. Also have the AFL grand final to look forward to. I think the Swans will get up by 4-5 goals in the end. Have a great weekend. Stay safe and dry and I will speak with 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.