ASX Weekly Wrap 16/04 - 20/04

The XJO had its third successive week of solid gains, although it doesn’t feel like it, with a 39.70 increase or +0.68%. Our low was 5,836.20 on Monday and our high was 5,902.90 on Thursday. Fears continued to ease surrounding the potential ‘trade war’ as both US and China softened their stance again during the week. We also had a host of bullish earnings and production reports across the XJO to help drive our market up.

All the focus was on the deluge of China data that was dumped on Tuesday, mainly because it contained the all-important GDP figures for Q1 this year. The annualized GDP figure came in at +6.8%, which was bang on target and well above the Chinese target of +6.5% for 2018. The quarterly figure did come in at only +1.4%, down from the +1.6% last quarter and below consensus of +1.5%. This could be an indicator that China is slowing, but as I have said all along Q1 data from China is generally softer, so we won’t know until Q2 figures if this is the start of a trend of again just seasonal.

Retail sales +10.1% (+9.9% forecast), industrial production +6.0% (+6.2%) and fixed asset investment +7.5% (+7.6%) all came in around forecast with the latter two just below and retail sales well above. The above data really showed more of the same when it came to the Chinese economy in that it is still expanding at a solid pace. There is a slight risk to the downside, but China have already indicated this with their +6.5% target so I feel this is all factored in.

Bank of Queensland (BOQ) kicked off the banking earnings season with a weak print, which saw it sold off heavily. Headline figures were soft with cash profit +4% to $182mill, EPS +2% to 46.5cps, net interest margin +1bps to 1.97% and Tier 1 Equity +3bps to 9.42%. BOQ decided to maintain its half year dividend of 38cps.

It seems the market was disappointed with the lackluster growth, no increase in dividend and no recovery seen in net interest margins. This continues the theme we have seen in the last few years for the Aussie banks with nothing exciting to write home about. In fact, once again, a lot of BOQ’s increase in profit can be attributed to the 19% fall in its loan impairment expense, which fell to $22mill or just 10bps of gross loans. Whilst it shows improved loan quality it does further enhance the view that overall growth in still limited. One bright spark for BOQ was the turnaround in its lending book. BOQ saw total lending growth of $671mill in 1H18 compared with a drawdown of $157mill in 1H17. This is encouraging to see, especially when most of BOQ business comes from Queensland where new apartment construction is falling hard. Once again though due to the low rate environment margins will be thin on this business as the banks are competing hard with each other on their rates.

BOQ is not a stock I am looking to add to portfolios in the near term. That goes for all the regional banks as well. I feel they will struggle the most moving forward if this Royal Commission does impose new legislation and regulation. This will only increase banking costs and hurt their bottom line. Also the smaller banks don’t have the pricing power the larger ones do so cost of debt is higher. I know the government tried to narrow the gap here with the bank levy, but I don’t think it will be enough. You then will also have the technology race where the big four will spend billions improving upon the tech offerings to customers that the smaller banks won’t be able to match. Even at just over 11x PE and a 7.9% yield, at current prices, BOQ doesn’t do enough to entice me.

Few of the big miners released their quarterly production reports last week and first up is BHP. We saw mostly positive reports from the BHP quarterly with Oil, Met & Energy Coal guidance remaining unchanged. Copper guidance saw a lift on the lower end from 1.655-1.79mt to 1.7-1.785mt, but with reduced output from Olympic Dam. Iron ore was revised down slightly from 275-280mt to 272-274mt due to unplanned maintenance. For the quarter Copper and Iron Ore production was up 37% and 2% respectively whilst Oil (-8%), Met Coal (-2%) and Energy Coal (-4%) were off from the same time last year.

No real surprises from the BHP report, except for maybe the slight iron ore downgrade. The consensus EPS forecast for FY17/18 stands around $AUD2.239 meaning BHP is trading around 13.9x forward earnings and 4.9% forecast yield. These numbers look very attractive given the recovery we are seeing in commodity prices and the possibility we are at the start of another commodities upswing. BHP has become a very efficient, low cost producer with massive operating cash flows. With very few major projects available for acquisition I see major returns for shareholders moving forward in the form of increased dividends and buy backs. I did recently top up a few client accounts with the latest pull back into the $28-$29 area. I am holding here in the hope it pulls back to around $30 (to fill the gap), in order to grab some more. If Trump is able to pass his infrastructure plan later this year it’s not out of the realms of possibility we see BHP trade above $40 again, which would give it a foreword PE of 17.8x.

Like BHP, RIO Tinto (RIO) also released their quarterly production report last week. Copper (+65%), Iron Ore (+5%), Bauxite (+12%) all saw improvements on the first quarter of 2017. Aluminium (-5%), Coking Coal (-30%) and Titanium (-12%) all saw production fall compared to the same period. Copper’s increase was attributed to strikes occurring this time last year at the Escondida mine and coking coal was material lower due to maintenance and changeover at one of their mines. You also have to remember that RIO is getting out of the coal game so expect production rates to continue to fall.

Like BHP a very straight forward report by RIO with no nasty surprises. Its main money earner, iron ore, saw a lift in production so this could increase earnings ahead of forecast if this continues for 2018. I am as bullish RIO, perhaps more so, as I am BHP. I am holding at current prices and expect RIO to fill that gap on the charts down to $78 where I will be a buyer again. As I did with BHP I did top up on RIO around the $73 level. RIO is trading at 11.1x forecast earnings with a 5.1% yield. I would also expect a lot of capital management moving forward in the form of increased dividends and buy backs as RIO too has massive operating cash flows. Overall very positive for RIO with its latest production report.

The final company I will cover this week is copper and gold producer Oz Minerals (OZL). It was able to produce 27,466t of copper and 30,873t of gold for the quarter. OZL states it still is well within 2018 production guidance of 100,000-110,000t of copper and 120,000-130,000oz of gold. OZL remains cashed up with $646mill in cash and no debt.

Current cash costs of $US0.97 were 12c higher than usual due to the fact that Prominent Hill is closing its open pit mining and moving towards 100% underground. OZL remains on track for C1 costs of US75-85c for the year. Their new mine, Carrapateena has progressed well and is expected to be commissioned in late 2019 to further add to OZL copper and gold production levels.

OZL remains my preferred pure exposure to copper on the ASX. They are in the lowest cost quartile of copper producers in the world and will be expanding their production via their new mine and the recent acquisition of AVB. They remain debt free with a lot of cash up their sleeve for further expansion. I am happy to add here given that OZL is trading 11.6x forecast earnings with a 2.6% yield. It has recently pulled back to $9.00, from $10.00, which I feel represents an excellent entry opportunity. I feel upside from their new mine and acquisition are not being factored in at the moment as well as the copper price maintaining current levels or possibly moving higher.

Another solid week of gains saw most sectors finish in the green. Top performers included energy, as oil prices hit 3 year highs, and resources, as commodity prices were very strong last week. The worst performers included telecommunications and financials as the banks and other financial institutions are hauled before the Royal Commission.

Will skip the XJO technical this week as not much has changed from last week. We are still trying to hold above that 200dma and consolidating around there before our next move up. The week ahead is quieter than last with Australian CPI the only local economic news of note to be released. Q1 GDP is due for release on Friday night in the US as well, so I will cover both next week. On the company front we have quarterly production and sales numbers from BPT, WES, FMG, BKL, RMD & SFR.

The Australian markets are closed tomorrow Wednesday 25th April for the ANZAC Day public holiday. I am lucky enough to have never been part of, or lived through, a major war in my life time. It’s only because of those brave men and women who laid down their lives before us that this is so. Tomorrow is a day we should all remember these people, and be grateful, for those who sacrificed their own lives so we could live ours in freedom.

‘They shall grow not old, as we that are left grow old; Age shall not weary them, nor the years condemn. At the going down of the sun and in the morning We will remember them.’

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.