ASX Weekly Wrap 07/05 - 11/05

Another strong week for the XJO as we entered our sixth week of gains in this unexpected Bull Run. We finished the week +53.30 points or +0.88%. Our high was 6,145.20 on Thursday and our low was 6,063.20 on Monday. Some selling coming into the market late on Thursday & Friday may suggest the market is in for a breather around here. We also have dividend money coming out of the market in the next few weeks with ANZ & MQG going ex-dividend today (14/5), NAB Tuesday (15/5) and WBC Thursday (17/5). Usually after the bank dividends we have a lull in the market until July when those dividends are paid into investor accounts. However the old adage of ‘sell in May and go away’ has not rung true this year as we performed strongly for the month. Who knows we may see continued strength to finish the financial year.

Economically there is not much to mention this week, but china did drop a few bits of news of interest. First up was their trade balance figures for April which mostly came in stronger than expected. They printed a surplus of $US28.8bill, with $24bill expected and $5bill unexpected deficit in March. Imports were +21.5% (+16.0% expected) and Exports were +12.9% (+6.3% expected). Now some economists believe that the stronger than expected figures may be due to some businesses preparing for a potential trade war between China & the US as their negotiations start to heat up. Regardless it’s a strong sign of solid economic growth in China and the March deficit was just a one off anomaly.

The second set of figures that China released came the way of their CPI & PPI numbers. The YoY CPI figures were softer than expected with a +1.8% read when +1.9% was expected and we saw a +2.1% read for March. PPI figures did, however, come in higher than last month with a +3.4% read vs a +3.1% read in March. It means producers are paying more for their input materials, but it seems this is not being passed onto consumers yet. CPI once again shows no reals signs of life which is important for Australia as we import a lot of our inflation.

Finally Australian retail figures came in for March and saw another weak read of no growth (0.0%). This was after an expected +0.3% and a read from February of +0.6%. This means retails sales will add little to our GDP figures for Q1 due later this month. Most media and ‘economists’ again went with the line of consumers are not spending, which I believe to either be lazy reporting or reporting with a specific agenda in mind. I tweeted a few figures late last week of some of the retail (yoy) figures around the globe. China +10.1%, USA +4.5%, Australia +2.6%, Canada +2.3%, Spain +1.9%, Germany +1.3%, GBP +1.1%, Japan +1.0% and Eurozone +0.8%. As you can see from those figures Australia is performing very well when compared to its peers and their retail spending figures. My theory is consumers are buying the same volumes of products/items as they have done in the past but due to price deflation, via increased competition and ‘the Amazon effect’ we are just paying less for those items. You just need to look at your weekly budget to see proof of this. From food to textiles to electronics products are only getting cheaper. Just read an earnings report from a retailer or WOW/WES they also mention price deflation. Just a week ago WOW noted prices were down 1.3% for the quarter and fruit and veg lead the way down 5%+. We have also become more intelligent shoppers due to technology. At the few clicks of a button we can see the price of an item from anywhere in Australia, or even the globe. This forces us to shop smarter at the lowest prices and for retailers to price match. Finally the figures themselves are not supportive of the evolving economy as they don’t include online sales and don’t account for price deflation. Thus the next time you hear that consumers are not spending remember what I have written above.

Commonwealth Bank (CBA) were the last bank to declare earnings this reporting season, albeit just a third quarter update. Overall figures were soft with a net operating profit for the quarter of $2.3bill, which is down from $2.6bill reported at the same time last year. Operating income declined 4% on the back of two shorter days in the quarter and softer conditions. Finally expenses were up 3% as higher provisions were made for compliance and regulatory costs. CBA did report a higher Tier 1 capital ratio of 10.1%, which is 37bps higher than the December quarter and loan impairment expenses remained low at $261mill.

The market did not like the update at all and sold CBA off heavily. CBA trades just 12.5x current earnings, plus a 6% yield (fully franked) as the premium it used to have vs the other banks has been lost due to its troubles in the past 18 months. Of the big four banks I prefer ANZ & NAB over WBC & CBA, and CBA would probably be the last of the big four I would jump in to now. It seems it is being punished the hardest when it comes to the Royal Commission plus its other problems thus could have further to fall. However for longer term holders you can’t argue with the value here at the moment in Australian banks, including CBA, it’s just a matter if they can withstand more selling pressure if it were to come.

CSR is next up with the company reporting full year earnings last week. Full year net profit was +16% (before significant items) to $212.7mill whilst after significant items it was +6% to $188.8mill. EBIT grew 9% to $323.8mill and revenue grew +6% to $2.6bill. CSR decided to pay a 13.5cps (75% franked) final dividend, which was up from the 13cps final dividend last year. This is a 64% payout ratio which sits on the lower end of their 60-80% target.

Overall the result was positive with the building products division EBIT +6% ($214.1mill) and some healthy property division gains with an EBIT $47.8mill, up from $15mill last year, the main drivers of profit growth. The Aluminum division saw EBIT fall to $79mill from $93mill due to higher material costs and power prices.

CSR didn’t provide any guidance for FY19 but did comment that the building products division is expected to see solid growth again as detached building approvals in Australia remained at two years highs. Property is also expected to come in roughly in line with 2018. It was the Aluminum division that was a cause for concern with input materials still expected to go higher and power prices are expected to have a negative effect on EBIT. Given that the production of Aluminum is very power intensive this is a big problem for CSR. This is the main reason CSR was sold off so heavily from approx. $5.80 to $5.20 the day of earnings. Investors are saying the current profit cycle for CSR has peaked and this is as good as it gets. If CSR are able to get these power prices under control then it can become an attractive investment opportunity again. CSR is only trading 12x PE here with a 5.2% yield, but with profit likely to fall the market has discounted it heavily. There is a case we see an outperformance in their building products division if detached house construction continues to surge, but this is purely speculation. I will wait and sit it out on CSR preferring construction companies with infrastructure exposure such as BLD & LLC.

Pendal Group (PDL), formerly BT Investment Management, is the final stock we will discuss today as it reported its half yearly results. It saw NPAT +30% to a record $114.5mill on the back of base management fee revenue, which was +18% for the half. The fee revenue increase was due to a +14% increase on funds under management (FUM) to $98.6bill and higher fees of 51bps, +2bps on the same period last year.

Whilst it was a very strong result PDL also saw operating costs increase 20%, whilst margins remained flat at 45%. Thus the investment decision with PDL is whether or not they can keep growing FUM at a rate faster than operating expenses and keeping margins flat or growing. This of course comes down to their investment performance in the long run, which will in turn attract more FUM. It is noted PDL saw a +70% growth in performance fees for the half as well suggesting they hit their KPIs easily. 96% of PDL’s FUM have exceeded the benchmark on a 5 year basis or 72% on a three year basis suggesting they are decent investment managers.

A lot of uncertainty surrounds the financial services sector, including PDL. A lot of consumer confidence has been lost in the bigger companies, so will there could be a movement of funds to smaller managers. WBC also still own 10% of PDL, so there is a chance they will look to dispose of this as a result of the Royal Commission findings. Despite PDL’s PE trading at five year lows I feel the risks surround the industry, at the moment, remain to the downside. It is likely PDL sees increased costs in their compliance and regulatory divisions which will impact earnings moving forward. Like CSR I am sitting out this one until future earnings growth are clearer.

As you would expect with such a solid week on the XJO we saw green across the board from a sector point of view. The best performers were Gold & Resources as the AUD tumbled vs the USD hence improving resource and gold company’s bottom lines. IT and health care also saw strong returns due to the same reasons. Most sectors are also positive for the year as the XJO entered positive territory as well for 2018. We are now roughly 400 points above our lows we saw in February, thus I wouldn’t be surprised to see a drift lower over the coming weeks.

I will skip the technical analysis for the week as it’s more of the same as last week. A quiet week for news moving forward with Chinese retail sales, fixed asset investment and industrial production figures due out tomorrow. The Australian wage index is out on Wednesday which isn’t expected to reveal any surprises and jobs figures are out on Thursday. DLX reveal earnings this week and MYR also have an earnings update to present.

I hope all the Mothers out there had a wonderful day yesterday. We celebrated by having a picnic in the park with the family. It was a wonderful day and I made sure my wife was spoilt rotten. The less said about the footy on the weekend the better. I suppose for us Crows supporters we just forget that one and move on. Hope you all have a very pleasant week and stay safe. I will 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.