ASX Weekly Wrap 14/05 - 18/05

The XJO broke its six consecutive weeks of gains to finally pull back over the last week, albeit a very minor one. The XJO saw a 28.80 point fall for the week or 0.47%. Our high was 6,146.80 on Tuesday and our low was 6,077.60 on Thursday. During the week we saw the AUD bottom out, despite further USD strength, and bounce which halted the resources sector and US denominated stocks run. We also saw concerns over the China/US trade talks breaking down lead to some profits taken off the table. Finally MQG, WBC, ANZ & NAB all went ex-dividend during the week which saw a few points shaved off.

A few minor economic data points to cover this week, which we will kick off with the usual Chinese monthly data dump for March. Retail sales saw a +9.4% rise vs +10.0% expected. Industrial production lifted +7.0% vs +6.3% expected and fixed asset investment also saw a +7.0% increase vs +7.4% expected. Again a solid set of numbers despite the two misses versus forecast. It’s nice to once again see industrial production ticking up. Could mean we are in for another healthy PMI read next time around. Not much else to say here again, as it still shows a solid Chinese economy.

Back home we saw some jobs related data come out with employment numbers for April and the Q1 wage index results. April saw +22,000 jobs added overall which was slightly ahead of the +20,000 expected. We added 32.7k full time jobs whilst losing 19.9k part time jobs. The unemployment rate ticked up to 5.6% on the back of a higher than expected participation rate of 65.6%. We are still experiencing a healthy jobs market with solid growth again shown in 2018, although a lot slower than 2017. It’s likely to continue as ANZ job ads remain very strong, however the slack in the employment market still remains and it will take some time to work through this. It is my belief, however, that in 2019/2020 we will see a major boom in the jobs market with wages to increase significantly as well. This will be on the back of a major uptick in jobs throughout the construction industry on the back of infrastructure and resources. Just as the excessive demand for tradies etc. forced wages up pre-GFC it will do again. We won’t see the capital expenditure we did for resources projects we did during that boom phase but commodities like lithium, LNG, copper will provide some above average spend.

In correlation with these April jobs numbers we saw the Q1 wage index released. Again we saw a read of +2.1%, which was forecasted and the same as last quarter. A soft number again, but it was expected with the large amount of slack in the jobs market. I doubt we see any major lift in wages until Q4 this year. I wouldn’t be too disheartened about these figures though as it’s not like wages are taking off anywhere around the world. In the US, who have a 4% unemployment rate and are considered fully employed, they only have wages increasing +2.6%. In the UK, where unemployment is at a 42 year low of 4.2%, wages are increasing by +2.8%. Yes both figures are much better than ours but for countries with such low unemployment they are hardly super strong. I believe it once again comes down to things such as ‘the Amazon effect’ and automation. Many manual tasks are being automated and having humans removed. Even online shopping removes most of the human input as it’s all done via a screen and robots in a warehouse instead of someone behind a checkout. This means for lower end jobs, humans are needed less to carry out these tasks keeping demand low, and hence wages growth low. Since most of the population are in lower paid jobs this has a negative effect on wages growth overall.

Treasury Wine Estates (TWE) came under fire earlier last week after media reports suggested there may be an oversupply of their cheaper wines in China, and hence less growth in sales moving forward. TWE came out with a response to this and said it was experiencing no such oversupply in their wines in China and it was best not to listen to a select few Chinese customers. It reiterated they have strong control over supplies in China, and disciplined approach, and choses how much of certain brands are sold and when to release inventory into the country.

In a separate issue they did note that, like other Australian brands, they are experiencing a slow down when it comes to their goods being cleared by customs in China. It noted it believed this is to be a short term issue and will be cleared up soon.

The market savaged TWE’s stock heavily selling it off 11%+ at one stage before a recovery the next day as broker reports backed the stock again. Whilst TWE did not say the current problems were going to have an impact on earnings they didn’t say they weren’t and didn’t confirm guidance either. For a stock trading on such a high multiple that then gave the market reason to sell it off.

The question is, is this an opportunity to invest in TWE or are alarm bells ringing? I am leaning towards opportunity due to management’s track record, the expansion of the Chinese middle class and consumption of Australian food products and TWE brand portfolio model. On an investor call the next day TWE did confirm EBITS guidance for FY18 of $524mill and 25% growth expected for FY19. This would support TWEs current PE of 33x FY18 earnings and 26x FY19 estimates. I will be looking to add TWE to portfolio’s as soon as the price consolidates and stabilizes. Most of my clients did enter TWE around $12 on their initial entry. It’s been a very good stock for us over the last 18 months and I believe it gives great exposure to the food & beverage sector in China and USA.

Market darling, CSL, came out with some bullish news for investors during the week upgrading its profit forecasts for FY17/18. It lifted its profit guidance from $US1.55-$1.6bill to $US1.68-$1.71bill. This was on the back of better than expected sales from two drugs in Idelvion, which treats hemophilia, and Haegarda, which treats Angioedema. It also mentioned its flu vaccine was performing well following a tough flu season in the northern hemisphere.

On the back of this CSL received many broker upgrades with one lifting its price target to $215 over the next 12 months. CSL has probably been the best performer in our top 20 for the last 20 years. It consistently outperforms and beats market with earnings. At the same time it has always traded on a huge PE (currently 40x) and looked expensive, but I guess you have to pay a premium for such quality. CSL is one of those stocks you look to enter or add upon any decent pull back and confidently put away for a few years. I’m not a buyer here but will be on any weakness. This could come from any AUD strength.

The final bit of corporate news I will touch upon this week comes the way of Kidman resources (KDR), which I have spoken about at length in previous newsletters. KDR announced it had secured a binding offtake agreement with Tesla for 25% of its anticipated lithium hydroxide production (its portion) from its Mt Holland lithium project in WA. The term is for 3 years with two further 3 year deal option which means it could possibly extend for 9 years. It is also a fixed price and a take-or-pay basis. This means Tesla has to either take the product and pay for it or forfeit the product and pay a penalty. These details and the agreed upon price have not been released and remain confidential in nature. It will cover roughly 5,000tpa of lithium hydroxide, which is currently worth approx. $95mill pa, at spot prices (19kt). KDR also mentions it is in talks with other parties regarding lithium offtake agreements.

The importance of this announcement can’t be underestimated for KDR. Elon Musk’s Tesla is the most well-known and one of the largest producers of electric vehicles in the world and it shows great confidence in KDR’s project and their product to sign this deal. This will also make it easier for KDR to obtain financing for the project after they decide whether or not to go ahead with it later this year.

KDR is my favourite exposure to a near term lithium producer on the ASX. It has a market cap of $800mill but also shares (50%) one of the world’s largest lithium resources with SQM. When compared to a peers such as Galaxy Resources (GXY) it seems undervalued. GXY market cap is $1.3bill but its project is very small, grades are inferior, cost of production is high and recoveries also weak. The benefit of GXY is it is producing now and taking advantage of high lithium prices now, but with fixed priced offtake agreements KDR almost negates that. I feel as KDR’s project is upgraded and the DFS is revealed later this year we will see the stock re-rate and become one of the highest capped lithium stocks on the market. I have entered clients into KDR from $0.58 & $1.80-$2.00 (current price $2.30) and happy to add to those holdings on the back of this news and what is anticipated to come.

Some heavy losses in telecommunications, utilities, gold and industrials is what weighed on the market last week for various reasons. Health care and energy performed best due to the CSL upgrade and oil’s continued bullish performance.

The XJO looks toppy up here as it tests the previous highs we made in January this year. I can see our first test of support around 6,050 and if we hold there I dare say we go to fresh, recent, highs over the coming months. I feel we will eventually tag the top of the trend later in the year, currently 6,250, as we get a bullish earnings season is August and September. The lower AUD will help boost earnings for those companies with a lot of earnings overseas or in denominated in USD. Banks are the only drag I can see on the index, but believe we should get some relief there eventually.

Very quiet week ahead on the economic front with the Fed rate meeting the only news of note due out. Corporate wise we have ALL releasing earnings on Thursday. Next week’s newsletter may be short and sweet due to lack of news.

Personally it’s our eldest son’s second birthday on Tuesday. We had some family come around on the weekend to see him for it and it was wonderful watching his eyes light up as he ripped into his presents. They all had a heavy dinosaur and car theme, which he loves at the moment. Can’t believe the little guy is two already. He has brought such joy to our lives and I can’t remember a life without him. He’s developing into such a sweet little boy, with a wonderful nature and makes us laugh every day. He and his brother have made our lives so much better and I will forever be grateful for being blessed with two healthy and happy little men. Hope you all have a wonderful 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.