ASX Weekly Wrap 20/11 - 24/11

Was a quiet week here and abroad as the US celebrated Thanksgiving and was totally shut on Thursday night and closed early on Friday. A strong start to the week, before a late week sell off, saw us gain 25.30 points or 0.42%. Our high was 6,067.50 on Thursday and our low was 6,028.00 on Monday. Overall there was little to guide the markets due to the US holidays, little economic news and queries over the US tax reform proposal. Will be a fairly short wrap this week due to the lack of stories worth covering.

Mineral Resources (MIN) held their AGM during the week and it was well received as the company updated the market on iron ore & lithium production and earnings. Concerns surrounded their DSOP Lithium production from Wodgina and whether or not it was actually was or could be used and wasn’t just being stock piled. Most of these fears were alleviated as MIN reiterated their commitment to the DSO operation by expanding production with an extra 15-20mt of extra crushing capacity to come online in 2018. They also noted their technical team was working closely with clients to make sure they got the best out of the products. They also mentioned the 6% Spodumene production rates from both Wodgina and Mt Marion lithium mines. Mt Marion was to be 450kt of the 6% concentrate by July 2018 with Wodgina to have a 750kt plant being ramped up between July 2018 and March 2019. They also added a 50kt lithium carbonate plant would be commissioned by mid-2020.

Most of the above information was already known by the market, but further confirmation that everything was on track and the DSO fears being alleviated, helped push the stock along. MIN is clearly a lithium focused stock now and the market is finally waking up to this. This was the whole reason I entered the stock and still hold to this day. MIN only trades on a 15x and 9x forecast earnings multiple for 2018 and 2019 respectively so is by far not over valued despite its 100%+ rise in the last 12 months. I believe earnings will continue to outperform over the next 2-3 years as lithium prices travel higher. A forecast yield of 3.5% at current prices is handy on a resources based stock as well. Forecast EPS for 2019 is around the $2.06 level. If you apply today’s PE of 15x to that you get a share price of $31. My thoughts are they end up trading at $35-$40 due to higher than expected EPS and a continued bullish focus on lithium. Management are also world class here always looking at ways to innovate, value add and bring production costs down. Their collaboration with Hazer Group (HZR) is evidence of this. I am happy to add to my position at current prices and add more aggressively should they fall.

Sticking with the resources theme, Monadelphous Group (MND), also held their AGM during the week with an earnings update as well. Whilst it was well received by the market there are some glaring concerns moving forward. The main take away was business was doing very well at the moment with 1H 2018 revenue +30% to date. They do expect second half sales to moderate along with margins moving forward. This is mainly due to the diversification of their mining services and engineering business. It also is to be noted they change of language in regards to the resources sector’s current environment by MND. Previously they had noted that it was ‘stabalising’ to now mention a ‘recovery’ suggest the sector is once again expanding.

I really loved MND pre-GFC entering the stock around $6 before eventually exiting around $30. Times have changed though and I’m not sure I’m willing to pay 32x current earnings for a business with a big hole to fill in earnings in 2019, due to large construction project ending, and beyond. To me it seems a big risk, but obviously the market feels they can fill that void by winning more contracts. Management do have a great track record and have steered the company well through tough times. If the share price were to fall 30% or so it would get me interested.

The final stock we will cover today is a favourite of mine in Sonic Healthcare (SHL). It will come as no surprise to you that they too held their AGM during the week with an earnings update, Once again their reaffirmed earnings guidance they released in August with EBITDA growth of 6-8% in constant currency terms. They also expect costs to be significantly lower due to all major infrastructure projects being finished. It seems as if it’s steady as she goes at SHL, which is what I love about the stock. The stock and industry are very reliable and consistent and whilst earnings growth won’t blow you away a consistent 5-10% growth per annum is enough to justify paying 20x+ earnings in my view. If the AUD keeps falling then I’d expect NPAT to surprise to the upside. It’s a core portfolio holding for me and one I think every long term portfolio client of mine owns in some capacity. EPS has grown from 73.5cps in 2008 to 105.5cps this year. That’s 44% increase in earnings in nine years, including the GFC and some regulatory head winds both here and abroad. I am happy entering the stock at current levels with a view it will surpass old highs within 12 months whilst picking up a handy 3.5% yield along the way.

Most sectors finished in the green this week as the banks, retail and utilities were the major drags. Amazon draws closer to a launch here in Australia and it is expected any day now hence the retail sell off. Banks were softer due to investors seeking better returns elsewhere now the three of the big four, plus MQG, have gone ex-dividend. Resources were the best performers as commodity prices had strong gains during the week.

As I mentioned previously commodity prices had a solid week, but none more so than iron ore. It rose 7.5% for the week as steel price increases in China pushed up demand. This is despite many steel mills shutting down for the winter or permanently due to environmental concerns. Steel prices remain at 6 year highs, thus whilst they hold up here, and they should, iron ore should continue to do well. My thoughts are the higher grade ore in 62% & 65% should continue to perform well as it is more efficient and pollutes less. Lower grade ores will continue to struggle as less steel mills will be able to use it. Don’t forget China produces a lot of iron ore itself, but it is mostly lower grade, lower quality product. This means they will have to turn to other supply avenues to keep their doors open. Iron Ore may see some resistance at $70t as it looks to break the downward trend there.

Oil also performed strongly during the week rising from $55 to almost $59 a barrel as the OPEC meeting this week approaches. Talk is current production cuts will be extended and maybe be increased to help ease the oversupply of oil. There is also word a lot of non-OPEC nations have been invited to the meeting as well to look at maybe getting them involved in production cuts as well. You all know my views on oil and where the industry is headed. In case you didn’t its sell oil and buy lithium.

Copper continues to surge and should shoot towards the top of that band ($3.31) in the weeks to come. Demand is increasing from electric vehicles and supply is shortening as older mines are shut down or producing lower grade concentrates. It is expected there will be a shortfall of copper supply around 2020. I am bullish copper long term and we have a lot of choice on the XJO when it comes to it.

The last of the AGMs are held this week as companies start to wind up for Christmas. We also have ALL with their earnings report this Thursday which I will be focused on since I recently entered the stock for many of you. Economically it is quiet again with Chinese manufacturing and services PMI reads out later this week. Personally I spent the weekend at the shops grabbing the last of the gear we needed for the new baby. It wasn’t all that much as the great thing about having multiple children is you can use most of the previous stuff again. Took advantage of some excellent Black Friday sales and got some great bargains. It was also nice just being out and about with the family, even if it wasn’t doing anything special. Still have a lot of work to do around the house to prepare for the new arrival. I may only produce a couple more weekly wraps for the year with the last likely to come out around the 11/12. There won’t be much to report on really and I don’t want to waffle on for the sake of it. It will return as per usual around mid to late January in 2018. Hope you all have an awesome week and stay safe. I’ll 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.