ASX Weekly Wrap 06/08 - 10/08

The XJO made some modest gains last week, which was in stark contrast to other global markets which were generally weaker. The XJO was up 43.60 points or +0.70%. Our high was 6313.60 on Thursday and our low was 6,234.80 on Monday.

The only meaningful economic data to release last week came from China. They released their trade balance and CPI figures for July. The trade balance came in at a very strong $USD28.05bill, below the $39.33bill expected and last month’s $441.47bill. Exports grew +12.2% (10.0% exp) and imports grew +27.3% (+16.2% exp). Obviously a much higher than expected imports figure saw the surplus narrow, but it still points to a very strong Chinese economy. I would expect that exports figure to grow at a faster pace if the Chinese continue to devalue their Yuan against the USD, making their goods and services cheaper.

CPI figures also came in much stronger than expected with a read of +2.1% (YoY) when a +1.9% figure was expected and we had a figure of +1.9% last month. The producer price index (PPI) was also stronger than expected at +4.6% with +4.4% expected, but lower than last month’s +4.7%. Again I dare say this comes down to the Yuan being devalued against the USD making goods and services more expensive for China to import and hence prices going up.

Before we move onto the corporate news side of things I wanted to discuss the situation unfolding in Turkey at the moment that you may have heard about in the media. Turkey is one of those emerging economies and part of the BRICs group we spoke about a few weeks ago. Their story is not too dissimilar to the situations we spoke about then. In short Turkey’s economy has been running hot the last few years, fueled by foreign debt, mostly USD denominated. In the past six months or so it has started to struggle and concerns surrounding their economy started to emerge. Just over a week ago Trump threatened to impose tariffs on Turkey due to some break down in diplomatic relations. This obviously worsened the current situation which saw a dramatic sell off in their currency, the Lira, and a sharp rise in their bond yields. For example their 10 year bond yields have almost doubled in the last couple of weeks rising to 9.40%, when they were around 5.5%. Again with a lower Lira vs the USD this increases the size of Turkey’s debt pile and increases risk of default. Now the major fear here is one of financial contagion, whereby this situation spreads to other emerging economies as well. This has seen a continued sell off in commodities and emerging market currencies and has even seen the AUD being sold off as well. This is not because we are an emerging economy but more so the fall in commodity prices and extremely strong USD. This about sums up the situation unfolding in Turkey at this point in time.

Moving on to the corporate news of the week now we saw some of the big heavy hitters of the XJO report their earnings last week. Commonwealth Bank (CBA) released its full year earnings for 17/18 in what was a generally well received report. The headlines numbers are below:

All of the main metrics came in pretty much on consensus except for NPAT which was a little lower than expected. Most had it about 3% higher. This came from higher than expected costs and the $788mill provision for the AUSTRAC case for AML breaches. Without those provisions NPAT would have been +3.7% higher. Net interest margin fell by only 2bps compared to last half. This is a trend we are seeing with most banks that NIM is stabilizing and in some cases starting to rise again. The full year dividend of $4.31 was slightly higher than last year’s $4.29 and CBA’s payout ratio has climbed to above 80%. I will note management preferred payout ratio of 70-80% so either earnings have to rise or dividends cut for it to remain in that bracket in 18/19. As we can see from the above CBA’s ROE fell 160bps to 14.1%, but climbs back to 15.3% minus one-offs. This is where CBA used to have the edge over the other major banks. ROE used to have a 35+ premium to the other banks when it came to ROE, which in turn caused it to trade at a higher PE over the years. Well now their ROE premium has dropped to half of what it was and their PE premium has followed suite.

CBA story moving forward is one of cost reduction and simplifying the business. They are demerging their wealth management business (Colonial First State), mortgage broking, life insurance and leaving South Africa. They are reviewing their general insurance business and Vietnam/Indonesia arms as well. The CBA we see in a couple years will be vastly different to the one today. Their focus will continue to be retail, business and institutional banking moving forward. As for their investment case? Like the rest of the big four banks I like CBA longer term. History shows us at current PEs (13.6x FY19/12.9x FY20) they are good value. Along with a 5.7% yield I’d expect some extract returns to come the way of shareholders due to the demergers as CBA will be flush with cash in the next 12 months. Overall the result was as expected with no real change expected in the near term in banking conditions, but possible upside to come from a discounted sector.

Up next is Tabcorp (TAH), who report their first results after the integration of Tatts Group which happened on 14th December. Thus this result only has about 6 months’ worth of Tatts Group earning embedded with them. Overall they were a very strong set of numbers.

A few key points to take away from the TAH results. Their wagering and media business continue to struggle pro-forma (before TTS) with EBIT down 1.7%. Lotteries and Keno was where most of the growth came with a +12.7% rise in EBIT. Even with the full integration of Ubet from Tatts, the wagering business is still only supposed to see modest gains as the area sees high competition, low margins and heavy regulatory scrutiny. The growth will come from the lotteries and keno division where regulations are favorable and competition minimal. This is the whole reason TAH ended up merging with TTS. For their favourable lotteries/keno division.

The story moving forward is growth in the fore mentioned sector plus integration/synergies between the two groups. TAH have forecast that over $50mill in savings FY19 (+$5mill EBITDA), $78mill FY20 ($19mill EBITDA) and $130mill FY21 ($50mill EBITDA) to occur over the coming years. This will come by the way of digitally transforming the business and taking advantage of the move towards technology in the industry.

For those with no problems investing in gambling, I believe TAH will provide some decent capital growth and strong dividends (5%+ yield) moving forward. Trading on a forward PE of 23x FY19 and 20x FY20 with 100% and 16% EPS growth expected in those corresponding years. Despite its struggles the wagering division is a perfect fit for the modern digital world with many savings are to be had moving forward on top of the robust lotteries division.

The last company I wish to cover is Magellan Financial Group (MFG) who a lot of you held recently but exited during the last sell off. MFG surprised the market with a much better NPAT than expected and also increasing its dividend payout ratio as well. Below is a quick summary of their performance:

As you can see from the above it was an outstanding year for MFG all round. Revenues increased on the back of increased management and service fees from existing funds and new inflows + extra performance fees than 2017 due to the excellent performance of their funds under management. Now overall profit increased 8% on 2017, but this is mainly due to them listing a new fund on the ASX so when you discount those costs and amortization NPAT was +37% to $268.9mill.

Over 17/18 MFG reported a 29% growth in management services and performance fees when compared to 16/17. The encouraging thing is that 72% of that was contributed to existing funds under management (FUM) and 21% to net inflows for the year. The last 7% came from the Airlie acquisitions. This means that most of their profit has come from the fantastic performance and management of their funds. For example their global equities fund has a +14.9% return per annum for the last 10 years and +11.6% pa since inception. These guys are quality fund managers.

The second leg to the report was the increased dividend payout ratio lifting to 90-95% of profits from up from approx. 75%. For the 17/18 they will pay out a dividend of $1.345 in total (fully franked) which gives them a current yield of 5% at current prices. This may help a re-rate in the stock moving forward. The only downside is future dividends are likely to be only partially franked. Also ongoing capital requirements are only forecast to rise by $4mill to $105mill for 18/19 which is very encouraging. One could assume once funds are established and with today’s technology, costs can be kept very stable. Your highest costs will come from marketing and staff requirements, which come down to your discretion.

I liked MFG a while ago and was backing the ability of their fund managers to consistently outperform and trading at 17x PE whilst providing a 37% increase in NPAT seems cheap to me. The question has to be asked can this sort of growth continue. I would suggest +37% can’t but in the longer term 10-20% I would assume could be if their funds keep performing the way they have for the last decade. If that is the case I am happy to pay 17x earnings with a 5% yield. Technically the chart is a bit messy so I will wait for it to clean up before I jump in again. On the back of their earnings report it jump from around $24 to $28 and has since settled back down to around $27. I am keeping a keen eye on it and looking for a decent entry point in the weeks ahead.

A big week ahead for earnings with BEN, BSL, JBH, COH, DMP, CPU, IAG, ILU, MIN, WES, WPL, ASX, IVC, OZL, SHL & TLS all reporting earnings of some sort. On top of that ANZ gives us their quarterly report as well. China releases their monthly data set of retail sales, fixed asset investment and industrial production and we have the Australian wage price index for Q2 and unemployment figures for July as well being dropped. Next week will be another earnings filled wrap.

On a personal note I have been struggling with the new platform and challenges that are associated with that over the last few weeks and hence why recent ‘Weekly Wraps’ have been late or non-existent. I do apologise for this. I am investigating another potential platform to move clients across to and will update you all on this in the near future. Until then I will have persist with what I have. As I have mentioned before I do have Commsec to fall back on, but they don’t have a dynamic platform as good as what ANZ used to offer and for what I need. Their service is high quality though and I have had no problems with the performance of what they do have to offer in the 5+ years I have been using it. I will keep you all updated moving forward. I also have had my annual audit, by my licensee, in the last week or so to make sure I am still keeping myself compliant and doing the right things by my clients. I am happy to report I passed with flying colours. At least this one less thing to worry about for another 12 months.

I hope you all have a wonderful week and stay safe. I look forward to speaking with 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.