ASX Weekly Wrap 26/11 - 30/11

The XJO had another soft week falling 49.00 points or 0.86% and testing old lows. Friday saw a large 1.6% sell off on what was rumoured to be a large fund selling off some XJO futures contracts. This distorted things a bit as the rest of Asia was fairly strong overall on Friday. Friday literally was the difference between us having a positive or negative week. Given the events of the weekend that fund may be regretting their move on Friday. Our high was 5,778.80 on Thursday, whilst our low was 5,655.60 on Monday.

A quiet week all round for news as we saw little economic and corporate data released, thus it will probably be another short wrap today. China did release its official manufacturing and service PMI numbers for October in what were a soft display of numbers again. The manufacturing PMI came in with a read of 50.0 after a read of 50.2 was expected. Services PMI came in at 53.4 after we saw a read of 53.90 last month, so whilst still softer a much better figure than the manufacturing PMI. Overall we saw a continuation of the softness in Chinese economic figures. The trade war with the US is really weighing on China and other emerging markets then it is on the US, but that could change very quickly. As we have spoken about previously EM make up 60% of world economic growth, thus if that is slowing this will effect demand for goods from the US. We have seen lately that Apple is warning of lower phones sales due to conditions in the EM sector, which is probably the best example of what I have said.

This all leads me on to the next topic and the US Fed and their current language/mood change. Chairman of the Fed, Powell, spoke last week discussing the US cash rate, economy and world growth. There was a distinct change in his tone. He remarked that the US cash rate was getting close to a neutral level. Only a few months ago he signaled it was still a long way off a neutral level. This is a big change in their stance and may signal that the Fed is close to finishing its current rate hike cycle than previously thought. It was as a dovish statement we have heard from Powell since he took over, as he is generally a very hawkish operator. Previously it was thought we may get a rate hike in December and then another three in 2019. This may not be the case anymore as US equity markets ripped higher on both Thursday and Friday nights and the US 10 year treasury yields dipped below 3% for the first time since earlier this year. If the Fed were to pause rate hikes earlier than expected this would give great relief to EM. I did signal this a few months ago when I said the Fed would be looking to pause sooner than expected and to expect some language surrounding that come the end of the year. It seems that is likely to come to fruition.

Finally the big news to come out of the weekend came via the G20 summit and the meetings held via President Trump & Xi. Overall there was a very positive tone set and the two leaders came to an agreement to postpone any further tariffs or tariff hikes for 90 days from January 1st 2019. They would use this time to accelerate talks to help come to a trade agreement. This came as a bit of a surprise as markets didn’t really expect any sort of formal agreement to be made. This means current tariffs will remain in place at 10% and will not increase to the 25% as planned. This is big news for global equity markets as it may make way for the ‘Santa Rally’ we have all been hoping for.

That finishes us up for the economic news for the week. Next week there will be a lot more to chew on as there is a huge amount of local and international data to come out. Up next we have a couple of companies who reported earnings during the week. First up is Aristocrat Leisure (ALL) who reported their full year earnings. ALL is often a polarizing stock due to its business being centred on gambling. We did well out of ALL in 2017/18 as we bought around $20 in May/June 17 and sold half or all holdings for a very tidy profit around $30 around June again. Since then ALL’s share price has struggled to keep its head above water. A quick look at their recent results and guidance (below) may give us an answer as to why.

NPAT only grew 9.6% to $542.6mill, which isn’t too bad, but for a stock currently trading 21x earnings the market expects more. Profit before acquisitions rose 34% to $729.6mill and revenue grew 45% to $3.55bill. This is telling us acquisitions are currently the driver behind a lot of their growth. This isn’t always a bad thing if you are buying the right companies and don’t take on too much debt. ALL went on a spending spree and bought Big Fish and Plarium games in the last 12 months. This resulted in their debt increasing from approx. $1.9bill to $2.8bill. However interest cover has jumped to 11.4x from 10.8x during that time. Both these companies have seen ALL take a big leap into the online gaming sector which now represents 27% of their profits. They have also seen operating cash flow jump 22.8% from $585.6mill to $718.9mill.

US operations saw their profit lift 16% over the year whilst AUS/NZ saw an 8.9% lift reflecting the large growth opportunity in the United States. Recurring revenue as a group jumped from 52% to 65% providing more confidence and consistency in earnings. Margins remained stable across the board except in the online division which saw them fall from 41.5% to 32.8%. This was the major concern for markets, but one ALL have addressed and said is under control.

ALL’s outlook was vague, which I don’t think the market liked, as no forecast targets were set. ALL mentioned that you should expect to see growth in all forms, with a modest rise in costs and D&D to remain in line with this year in percentage terms. They did mention profit growth would be skewed to the second half in line with new games releases from their digital division. They also expect their tax rate to come off a further 100-150bps.

I like the ALL business and their shift towards online gaming. I also trust management and their choice of acquisitions as they have been able to consistently provide a ROE of well above 20% for the last 10 years. I like the fact ALL has fallen back a good 30% from our exit and 40% from highs. I am looking for another entry point as based on analysts’ forecasts ALL is trading on 18.9x and 16.5x PE FY19 & 20 respectively. The average target price amongst analysts is $30 for the next 12 months, representing a healthy 32% increase from today’s price. ALL has perked my interest again and I think the time is almost right to jump back in again, however I would like to see the chart base again before entry. ALL is all about growth, with only a 40% payout ratio and 1.8% yield, so doesn’t suit everyone. There is also the ethical concerns surrounding ALL due to the nature of their business. Given the sell off and if we see a basing in the chart I am happy to enter ALL again, however I am not looking to catch falling knives.

The second company to report earnings last week was Collins Foods (CKF), which is a stock I have never covered before, but its continual success demands some respect. CKF announced their 1H profit FY19 as we can see below:

After acquiring a heap of restaurant off of Yum! Brands last year CKF were able to have them reflect in this year’s results. NPAT grew 25.9% to $21.5mill, whilst revenue grew 27.6% and EBITDA grew 31.7%. KFC represents more than 80% of CKF’s revenues and across Australia they saw solid growth with a 3.1% increase in same store sales (SSS). Revenues grew 21.9% to $330mill, whilst revenue grew 23.5% to $56.0mill. Thus if you are investing in CKF you are banking on continued strength from KFC. CKF’s KFC stores didn’t fare as well as they saw SSS fall 2.5%. CKS cite unusually hot weather between June-August as the reason for the poorer performance.

CKF recently acquired the rights to build and operate a Taco Bell store in QLD. Taco Bell is a very popular restaurant chain in the US offering Mexican food. The store in QLD had been operating well ahead of expectations, hence CKF have now officially opened their second store, also in QLD. It has plans to now expand the brand across Australia with VIC, WA & QLD the focus. Outside of the Taco Bell expansion there will be further KFC restaurants built in Australia and Europe. There will also be an expansion of the home delivery service here in Australia and more investment into tech, such as the KFC app. CKF made no further comment for the rest of FY19 except to expect further positive growth.

Analysts are expecting strong EPS growth FY19 & 20 with forecast EPS of 39c & 42.8c respectively. This puts on CKF on a forward PE 18.6 & 16.9x, which aren’t too bad given the growth they are seeing. I haven’t looked too deep at CKF so won’t make much further comment on them. I am wary of the junk food market and the stigma that is comes with it. Studies are also showing newer generations are more health conscious and not eating as much KFC, McDonalds, hungry Jacks etc. I will reserve my judgement for now, but will say that any pull back to the $6.70-$6.90 range will provide a decent ‘trading’ opportunity.

A very busy week ahead for markets as they look to digest the events at G20 + Australia job ads, building approvals, company profits, house prices, manufacturing PMI, Q3 GDP, services PMI, retail sales & trade balance. On top of this we have Chinese Caixin PMI figures, US & EU PMI and US unemployment. Seems this week will have all the important data dumped before the Christmas festivities set in. No major corporate events are scheduled at this stage. I’ll save my technical analysis of the XJO for next week when recent/upcoming events have a chance to be digested by the market.

On a personal note you all know I had a mini holiday last week. We ended up hiring a town house on the beach at Encounter Bay down south. It was such a great time just being able to relax and spend time with loved ones. Also was healthy to step away from the markets a bit. Whilst I kept an eye on everything that was happening I wasn’t in front of a screen all day riding the ticks. What I enjoyed most is watching the kids just have the best time. They love spending time with us, but also with their grandparents and aunty/uncle, who also tagged along. Then the sheer joy and wonder on their faces as they got to feed/pet kangaroos, koalas etc. at the local wildlife park. Just seeing how much fun they had on our time away made it all the more enjoyable. Markets will rise and fall, but that unconditional love you give to, and receive from, your kids remains a constant. Makes it all worth it!

I hope you all have a wonderful and safe week ahead. I get to see my favourite band of all time tomorrow night in Bon Jovi. Should be a great night. Anyway 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.