ASX Weekly Wrap 17/09 - 21/09

The XJO managed to squeeze out some modest gains last week rising 29.30 points or 0.48%. Commodities rallied despite concerns over trade wars lingering with the likes of copper, zinc and aluminium seeing large gains. Our high was 6,209.60 on Friday and our low was 6,142.30 on Monday.

Again it’s been a quiet trading week over the last several days. There is literally no economic data to speak of and corporate news is also lacking. It probably means a very short wrap this week, which may not be a bad thing since I am still trying to get over this ‘man flu’.

The only macro news I’ll touch upon are yet again the ‘trade wars’ between the US & China. US tariffs on $US200bill worth of Chinese imports are due to start this week, however they will only start at 10% and not the 25% originally threatened. Trump has stated that the 25% will kick in early next year if China can’t come to some sort of agreement. This is a softening of his original stance of 25% as he may be worried about his support from corporate America leading up to the midterm elections this November. China also cancelled their latest trip to the US for further trade negotiations. Basically they don’t want Trump to come off too positively and help him with the midterm elections to come.

Also just quickly Standard & Poors (S&P) ratings agency has lifted Australia’s credit outlook for the first time in two years. We have an AAA rating, and are one of only 10 countries to have so with all rating agencies, but our current outlook according to S&P was negative. During last week they upgraded this to stable given that we will be returning to surplus much earlier than expected, record employment growth and spending restraints. It is to be taken with a pinch of salt but it considered important for debt markets.

It was a few weeks ago that Rio Tinto (RIO) announced the sale of $US3.2bill worth of coal assets that’s would be settled before the end of the year. At the time they just stated they would be returned to shareholders in some form. Well last week RIO announced that the full $3.2bill will be returned via share buy-backs. Up to $2.7bill will be offered via tender off-market whilst the rest will be added to their current on market buy-back. The off-market portion will be sent to all shareholders over the coming weeks and will allow you to sell some of your RIO shares back to the company at various levels of discount to the market price. Now you may say why would I want to sell my shares at a discount to market? The way an off-market buy-back usually works is instead of offering it to you all in capital a large portion of will be offered to you as a fully franked dividend. Hence let’s say RIO is trading at $75 on market and the off-market buy-back offers you a price of $65. Well of that $65, $45 may come back to you as a fully franked dividend whilst the rest it capital. This makes it very tax effective for investors who are sitting on large holdings of RIO shares with large capital gains. It gives them a very handy way of disposing of the shares. Of course this is only a very simple example and by no means officially what will happen or advice in any way. I will discuss with each of you the implications of the buy-back when the offer is received in the mail/email.

It’s also a positive for RIO as by buying back shares at a discount and then cancelling them they are able to get them for a cheaper than market price whilst also disposing of excess franking credits off their books. It’s also accretive for earnings per share (EPS) statistics as you are taking some share dilution out of the market thus increasing your EPS. This in theory should then lead to a gain in the share price on market.

Since covering Premier Investments (PMV) at their last earnings call the shares have performed very well. They have moved up from around $14.50, touching $20.00 at one stage. I was waiting for a pull back to jump in but it didn’t eventuate. I should have just bitten the bullet. During the last week PMV released their full year earnings for FY18 with what was a very solid report. The main details are below:

As you can see from the above most, if not all, key metrics were up strongly. Digging deeper PMV saw like for like (LFL) sales grow +3.3% on FY17 with 2H18 LFL sales +4.2% and fourth quarter LFL sales +6.8%, showing a very strong momentum. Smiggle and Peter Alexander were the two outstanding divisions with over sales up +22.7% & +14.5% respectively. Margins continue to rise with margins as a percentage of sales +25bps on FY17 to 12.7% and the cost of do business as a percentage of sales continues to fall, with a 90bps drop to 49.9% this year. Costs are mainly coming down via store closures and a heavy concentration towards online sales.

As mentioned before Smiggle continues to impress with sales +22.7% on a year ago to $293.0mill. It is also to be noted that 10% of Smiggle’s sales now come from online and that 67% of its total revenue is sourced outside of Australia. This is a brand gaining huge global momentum and recognition. Smiggle opened 50 new stores globally during the last 12 months with 31 of them in the UK alone. The UK is where PMV is seeing the most success for Smiggles as they are quicker to adopt online purchases with 15% of all UK sales done online. This compares to 7% here in Australia. PMV has also announced they have entered into several wholesale agreements to sell the Smiggle brand into countries where it can’t set up a shop or chooses not to. Thus it will allow someone else to sell their products for them. It is PMV strategy to see Smiggle sales exceed $450mill by FY20

Similarly Peter Alexander is experiencing strong growth with sales +14.5% on FY17 to $219mill with an aim to his $250mill in sales by FY20. PMV opened 21 new stores in FY18 with a further 19 planned by FY20. New expansions into the plus size and bath & body sectors should help drive future growth.

PMV’s online roll out is well ahead of schedule with online sales growth of +65.3% on last year to $112.5mill. They had originally wanted to hit $100mill by FY20, but have obviously hit that well in advance. Online sales now account for 11% of total sales at PMV.

Looking forward to FY19 it’s been a strong start to the year for PMV. Global sales for the first five weeks of FY19 were +10.2% on this time last year with gross margins also rising. Sales across the UK & Ireland are +29% as it has incorporated the back to school period which is obviously a big time of the year for Smiggle.

I have spoken glowingly about PMV before and this result only increases my fondness for them. I am still dirty on myself for not biting the bullet and jumping in at the $15-$16 level. It means if I wanted to buy now I would be paying a couple of dollars more. The attraction of PMV remains in smiggle, peter alexander, the Breville investment, online focus and management by Solomon Lew. I believe eventually Smiggle will be spun out into its own listing as it enables it to attract a better value than it being held under the PMV banner. We have seen huge success with niche retailers listing on the ASX similar to Smiggle, such as Lovisa, who have gone from strength to strength. The only negative with PMV appears to be their Myer investment, which they co-incidentally, wrote off $30mill of in this report. This caused the stock to drop to around $18 from $19.50. I believe this gives us a solid opportunity to enter PMV at these levels with a forecast PE of 21x and yield of around 4%.

Just a quick note on Oil. You will have noticed petrol prices are at really high levels here in Australia. This has been because of a combination of factors mainly from a falling AUD, but also a very strong oil price. I spoke about the possibility of this exact event only month or so ago and the risk was very much to the upside in the oil price. Well it seems as if this is starting to play out. Trump has torn up the nuclear treaty with Iran and hence imposed sanctions on trading with Iran. This has meant countries will not buy oil off Iran. As you can see from the chart above, Iranian oil exports peaked at nearly 3mb/d in April and have already fallen by about 1million to 1.89mb/d. Sources say Iran is investing heavily in floating storage and already has 12 million barrels of oil sitting off the coast. This has taken a huge chunk of supply off market in what was an already tight situation. Thus stronger demand and capacity constraints are forcing oil prices to go higher. OPEC can ease the burden a little by releasing more supply but even then their last round of supply boosts failed to have any impact on price. Once again capacity is an issue with no one outside of Saudi Arabia having much else to offer. I’d expect oil to be in the $80s before the year is out, unless something dramatic happens on the supply side or we have another GFC style event.

This is where I will leave it this week. Another quiet week ahead for planned economic and corporate news. A host of ASX companies do go ex-dividend though, so be on the alert for this. Personally my household has been struck down by a flu again. It has swept through the house hard with no one being spared. Thus we kept a very low profile over the weekend and proceeding days. It’s hard seeing your kids sick like that and knowing there is nothing you can really do. Hope you all have a wonderful week, stay healthy and safe. I will speak to you all soon. Go Crows!

PS I am all aboard the West Coast bandwagon in the AFL grand final. Hope they give the Pies a flogging.

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.