ASX Weekly Wrap 26/03 - 29/03

In a shortened Easter trading week the XJO was sold off 61.30 points or 1.06%. Trade war fears between the USA and China lingered and the tech sell off continued after the Facebook data leak debacle and Trump’s anti Amazon comments. Our high was on Tuesday at 5,837.50 and our low was on Thursday at 5,752.70.

As I mentioned last week it was always going to be a very quiet week leading into Easter with no real economic data of note released and also very quiet on the corporate news front. Expect this week’s wrap to be very short.

Infant formula stocks such as A2 Milk (A2M), as seen above, were sold off heavily last week due to rumours that one of the world’s largest food companies, Nestle, were to enter the Chinese market and start selling their infant formula range there. With an estimated retail market of $US20billion it would have to be expected they would eventually enter the Chinese market with their well-established range. A2M shrugged off these concerns as its focus on the A1 protein gave it a niche and a strong brand loyalty would hold it in good stead. It also basically said the market is big enough for many players. China makes up roughly 30% of A2M EBITDA and is growing strongly (+252% in FY16/17). A2M shares fell by up to 9% on the news. Other infant milk producers such as BAL -4%, WHA -3%, and BKL -2% were also hit hard.

Although this news comes from yesterday, and not last week, I feel it was worth covering today due to the importance and lack of corporate news around. Oil & Gas producer, Santos (STO), received another takeover bid from US based private equity firm Harbour Energy Ltd. This time around Harbour are offering US$4.98 per share or approx. $6.50 in Australian dollar terms. This was a 28% premium to the closing price last Thursday and values STO at $US10.4billion. The bid is made up of a $US4.70 cash component and a $US0.28 special dividend component which is said to be fully franked. Harbour first approached STO last August with a bid approx. worth $5.50 per share, which STO quickly rejected and only made public when speculation surfaced it had received such a bid. This time around STO have opened up their books to Harbour to do their due diligence and are open for discussions. Of course Harbour Energy would also have to satisfy the likes of Chinese natural gas producer ENN Group who took a 15.1% stake in STO last year. Without their approval the takeover would not simply happen.

STO have become attractive to the private equity firm due to their heavy weighting towards LNG, which has a very bullish outlook by the industry. They are also very unique as their market cap is so small compared to other LNG producers across the world making them a highly sought after target. US based private equity firms have been encouraged to diversify away from US shale plays into LNG in recent years. As I wrote about in my ‘2018 preview’ newsletter, Oil and Gas producers have become highly efficient and profitable after very low oil prices during 2014-2016 forced them to cut costs and improve extraction technology. With oil now sitting well above $60/b they have become heavily cash flow positive. Will be interesting to see if this latest bid if large enough. My thoughts are it gets rejected again before one final offer is made within the next few months.

What a pitiful sight it was last week with all but property trusts, utilities and industrials ending in the red. The selloff was broad based and no one sector stood out more than the other. The XJO is now down 5%+ for 2018 with most of last year’s late gains wiped out. However we did start 2017 in similar fashion before a consolidation period and hard run up to finish the year. I would expect maybe something similar in 2018 as well.

From a technical basis the XJO has broken below that uptrend we established in December 2016 and still resides below the 200dma. If we are unable to reclaim that shorter term trend we will fall towards the longer term trend in green around the 5,550 level. Short term the market remains in a bearish mode, but we zoom out (below) you see that we still remain in a very bullish longer term up trend established early in 2009.

Like I said a real short wrap this week. I doubt next week’s will be filled with much more information as we have another short week after the Easter long weekend. We do have the RBA monthly meeting, retail sales, Manufacturing PMI and US Jobs data to cover among other notes next week, so at least we will have something to write about. I hope you all had a relaxing Easter weekend and didn’t eat too much chocolate. As I mentioned last week I stayed home and didn’t go away. Spent most of the weekend with family. Went to Hahndorf on Sunday for lunch and a picnic near the beach on Monday. The weather couldn’t have been any better but we are in desperate need of some rain here in SA. Also enjoyed watching the Crows expel some demons Thursday night as they pumped the Tigers. Wish we could have done that at the MCG last year. Hope everyone has an enjoyable and safe week ahead. I will speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

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