ASX Weekly Wrap 06/11 - 10/11

Despite the Dow Jones having its first negative week in a few months the XJO performed strongly and maybe was playing a bit of catch up with its US counterpart. The XJO finished up 69.50 points or 1.17% and managed to bust through, and close above, that magical 6,000 mark. It’s the first time we have been above that level since early 2008. It’s been a long time between drinks. However it really means nothing as our breakout levels were below, around the 5956 level. It’s just a nice big round number people like to focus on.

There was little in the way of economic news to cover this week, but a lot in terms of corporate news. We had a few earnings results/updates plus a host of AGMs with new information to digest. I will get stuck into the two majors first in WBC & CBA.

Westpac (WBC) released its full year results early last week in a report that was mostly well received by the market. I feel I am on repeat a bit with the banks, but it was the same story with WBC as it was with NAB and ANZ. Profits were on the rise, but mainly due a fall in bad loans and cost cutting. Net profit grew 7.3% to $7.45bill from a year earlier as revenue also climbed 3.9% to $21.8bill. Costs increased 1.9%, but the main driver of the profit growth was impairment charges which fell 24% to $853mill from a year earlier. As with the other banks their net interest margin fell by 4bp to 2.06%. WBC tier 1 capital stood at a healthy 10.6%.

As I stated with the other banks WBC are yet to see any real organic growth as most of the increase in profits are coming from a reduction in impairment charges and cost cutting. However like the others WBC does look a good longer term investment as rates will eventually rise and help their bottom line. In the mean time they will have to contend with a cooling housing market in the eastern states and minimal growth. WBC has kept its final dividend steady at $0.94cps (Fully Franked) and has a 5.8% yield at current prices. It trades on an earnings multiple of roughly 13.85x, which historically suggests there is value to be had. WBC will be a solid income earner over the next 24 months, but don’t expect anything spectacular on the earnings growth side of the equation.

The Commonwealth bank (CBA) updated the market on their Q1 earnings for the 17/18 financial year last week and surprised the market with some strength. Cash earnings rose 6% to $2.65bill when compared to the same time last year. This followed a 4% rise in income, but they also saw a 4% rise in costs. They also noted that net interest margins increased during the quarter, which the market was most surprised by. This saw the stock climb 3% for the day as investors were encouraged by the turnaround in banking conditions CBA was seeing. At 14.5x earnings and 5.2% yield CBA is one of the most expensive banks and pays out the least when it comes to income. I will note they were the only ones from the big four that increased their final dividend though. I feel there is better value to be had in the other banks especially with the money laundering scandal and class actions hanging over CBA’s head.

Flight Centre (FLT) conducted its AGM last week with some earnings guidance for 2018 revealed. As we already knew the first half of 2017 was very soft for FLT but the second half was very strong. FLT announced that the strong earnings momentum had continued through into 2018 and said it was tracking from a first half profit of approx. $120 - $135mill or a 6 – 19% increase on last year’s corresponding period. They also noted this should flow through to full year results which they now expected to sit in the region of $350 - $380mill, a 6 – 15% increase on last year. This is obviously great news for FLT, but good news that was already factored in. FLT already trades on a high multiple so it would be expected to hit solid growth numbers. If they were to upgrade earnings again I’d expect to see the share price increase more substantially. Growth is coming from their international sector with the European and North American business already contributing 30% of profits in 2017. This figure is expected to grow again.

FLT continues to defy the odds with its bricks n mortar strategy. Many travellers and corporates still turn to them to set up packages and arrange their holidays and business travel. Once again the high PE of 20x earnings puts me off in a sector I’d expect to be disrupted eventually by online competitors. It’s one I’m happy to enter on significant downturns, but could also be a company to look at if you want exposure to global growth. Having said that I am not sure what FLT’s niche is and what keeps them ahead of the pack, but if I find something worth investing in you will all be the first to know.

Chemicals and explosive manufacturer, Orica (ORI), provided the market with their full year earnings early last week. Profit and revenue both fell 1% to $386.2mill and $5.2bill respectively as higher input prices that they couldn’t pass on hurt their bottom line. The market smashed the share price down from $21.50 to around $18.50 where they sit now. ORI benefit from a strong mining sector as most of what they make is used there. Their commentary was much more upbeat as they did say they expected a strong recovery in the mining sector over the coming years, but mentioned there could be a lag when it comes to flowing through to the mining services sector. ORI decided to pay a 28cps (unfranked) dividend which was slightly lower than last year’s 29cps.

ORI is a stock none of you on my books own, but is one I am looking closely at. As I am a believer of a commodity recovery story ORI should benefit from this in a big way. Recent share price action may have provided us with an opportunity to enter a better prices. On current earnings it trades on a 20x PE and 2.7% yield, but if we look at forecasts for the next two years this drops to 15.5x and 14.2x times. I would want to see the share price base for a while before jumping in, but ORI could provide a diversified global exposure to the mining services sector in the future.

It was a solid all round performance from most sectors last week with Property Trusts, Utilities and health care being the stand outs. All these sectors benefiting from a lower AUD and lower for longer rate expectations. Much like the yearly performance the telecommunications sector was the only sector in the red as the market continues to sell off TLS. As you can see from the table at the start of this week’s newsletter the XJO has now provided a return of +6.42% for 2017 thus far. If you add in a conservative 4% yield that takes returns to over 10% for the year, which is solid and above average for the last 30 years. It could get better yet as we could still have a ‘Santa Rally’ that increases those returns again.

The XJO continued its bullish move last week and made new multi-year highs. As I stated earlier the close of 6,029.40 was the highest we had seen since early 2008. Some real perspective in that considering the S&P500, in the US, passed its old highs in early 2013. Regardless we continue to look strong and have outperformed the US in the last few weeks. I would expect us to retest that 5956 breakout level again (approx. 5956) in the next week or so as money exits the market due to the banks going ex-dividend. I would then expect a final push higher to end the year. I still believe we crack our hold highs towards the end of 2018 or in the first quarter in 2019.

This week is again dominated by AGMs as companies such as AST, OFX, ELD and DLX release earnings as well. Economically China release its monthly data updates on retail sales, industrial production and fixed asset investment. We have our jobs numbers out on Thursday.

The upcoming arrival of baby no.2 got more real on the weekend as we picked up a new pram. We had to upgrade our old one to a double so both of the little ones can fit in. Have more scans later this week to check the growth and make sure everything is moving along nicely still. Very exciting every time we get to see the baby, even if it is just on a screen. Will be taking my son to the Christmas pageant this Saturday. Weather looks perfect, so I’d expect there to be a big crowd. It should be fun. Anyway that’s enough from me for another week. Please enjoy your week and stay safe. Speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

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.