From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
At the end of a manic week, and with a heavy focus on corporate earnings, I think I am going to try and cover of all the points at hand in bullet form.
I hope this is OK, but we have a significant amount to cover. On the whole however, it was a constructive week for portfolios and we were pleased with the performance of most stocks.
Before we do the company results piece however, perhaps a few observations on politics and then the relevant macroeconomic data from the week.
Federal Politics – A NEGATIVE. A potentially big negative too if you happen to be an ‘asset owner’. This week was a bad one for the Federal Government and the Prime Minister, and by default that means a bad one for any investors in a negatively geared property or reliant on excess franking credits for their income.
The week saw significant negative press for the government on both the Great Barrier Reef Foundation and the National Energy Guarantee, and on the latter, there were even reports that senior Liberal Minister Peter Dutton might resign from Cabinet and even challenge for the party leadership.
Hardly, inspiring news if you are an investor in the ASX or in residential property since the Labor and Green opposition are both united in their desire to repeal negative gearing perks, and Labor’s shadow Treasurer Chris Bowen has affirmed as key policy a plan to reduce the distribution of excess franking credits should Labor be elected.
Interestingly, the August consumer confidence numbers released this week showed that respondents over the age of 45 have seen their outlook fall to a 12-month low.
Coincidence? I think not.
On top of this, Labor leader Bill Shorten has made it clear he intends to repeal legislated corporate tax cuts for medium-sized businesses.
This is not a political statement, this is an observation that as we draw closer to the next Federal Election in mid-2019, asset markets will be directly impacted by perceptions as to the outcome of the election.
A change in government would be a significant negative for asset-owners, and for the Australian Dollar.
Some might say that a re-set of Australia’s cost of housing is a long time coming and would be a significant long-term benefit to the country, but that’s not my place to opine. Either way, any increasing prospect of a change in government is a marginal negative for housing, hybrid-securities and for well-owned, high-yield Australian shares.
Australian Business Confidence – the NAB Business Confidence report was a little disappointing, with current Business Conditions falling to a 12-month low and forward orders and profitability measures falling to their lowest levels since Q4 2016 (almost a 2-year low).
It’s a weird one this because it sounds rather dramatic, but it probably isn’t. We are still growing, but it seems to me that the construction slowdown is now upon us, and as the fastest growing major sector of the economy for the past 5 years, it is understandably starting to impact.
Construction makes up around 11.5% of all full-time jobs in Australia, making it the second largest industry by full time employment after health care and social services. A slowdown here will definitely take the top of the recent economic strength.
Downer (DOW) – GREAT STUFF. A terrific set of figures from DOW and a jump in the share price to its highest level since 2010.
Spotless made a better contribution than pessimistic analysts had expected, and the groups wider ‘work-in-hand’ jumped +7% in 6 months, fueled by a +30% rise in Transport work, a +40% rise in Mining work and a +21% rise in Utilities activity.
Most analysts are pushing back expectations for ‘peak infrastructure’ in Australia to 2020-21 or even a year later, meaning that companies like DOW still have the ability to surprise positively for at least another year on the activity front.
We want to be sure not to extrapolate beyond that as DOW and other infrastructure exposed stocks will peak well in advance of the height in activity, but we feel there is at least another 12 months and another +10% or more in the share price before we would consider this.
Telstra (TLS) – A NICE SURPRISE. TLS shares rose +8% this week for a few reasons this week.
Firstly, and symbolically, there was no cut to the dividend. This doesn’t mean there isn’t one coming, but in the here and now it is reassuring. Company cash-flows were excellent, so by no means is it a given that TLS cut it again in 2019.
Second, the results did remind investors that even though it’s a ridiculously easy target to criticize as a former government monopoly, it is also still the dominant Australian telecom. Though mobile market share across all areas for TLS was low at around ~16% in the 2nd half of the year, in the 4th quarter the numbers suggest TLS took some 70% of post-paid new mobile subscriber growth (the good, high value subscribers that is).
We are happy we stuck it out and the stock has bounced a little, though there is still a long way to go.
It feels like TLS have upped their game on costs, and perhaps have even been overly conservative on their guidance for 2019 earnings. 2019 brings closer the prospect of 5G mobile services and the additional revenue that could create, and there is even some chance of a less onerous NBN pricing regime ahead, both of which could lead to improving perceptions of this unloved stock.
I still see $3.30 as a fairer value for the stock.
National Australia Bank (NAB) – OK in that, like the CBA result a week earlier, it wasn’t any worse than analysts forecast.
NAB actually saw a small revenue rise, which is rare in the slowing market, and probably unsustainable in the medium term. They also guided to rising costs (+5-8%) and on top of that some one-off compliance charges to boot.
As per the CBA comment from last week, I think the NAB and its peers are simply biding time before they continue lower.
Housing and property markets are only now starting to get a head of steam up on the downside, and it isn’t changing anytime soon. The Spring auction clearance rates will continue to disappoint as banks withhold credit – the interim Royal Commission report isn’t even due until September and the final report with its findings and recommendations isn’t even due until early 2019, so no banker worth his salt will be easing their lending criteria ahead of this.
That means that this is simply the calm before the storm again.
Challenger (CGF) – TAKING A HIT. But, it is getting more interesting.
CGF is a good company with a great medium-term revenue story based upon changing legislation and the increasing focus of government and financial advice on long-term, predictable annuity streams.
However, in the very near term, CGF earnings have had to take a hit as the company has elected to lower its portfolio risk by reducing its property asset holdings in preference for lower risk cash and fixed income holdings.
This is a sensible move, but it comes with a hit to near term earnings that many in the market failed to predict.
The stock has fallen just under -10% on the week as analysts have re-based forecasts lower. This does open up the potential for CGF as an investment, however it would have to fall further to really attract our interest, so for the time being we remain unmoved. Perhaps in the mid-$10’s.
Next Week – more to come. We get numbers from AMCOR (AMC), Healthscope (HSO), Vocus (VOC), Woolworths (WOW), BHP (BHP) and Oil Search (OSH) amongst others.
HSO is probably the main focus for me.
I expect we will see the M&A game again heat up as the market will get the chance to consider management guidance for 2019, commentary around releasing value from their property assets and an update on the launch schedule for the Northern Beaches Hospital.
Private equity players BGH and Brookfield Partners (and maybe others) are not going away, and nor is HSO’s largest shareholder Australian Super, who with just under 15% of the company have declared their intention to be long-term holders of the stake even under private control.
That’s a pretty significant mark of confidence in their belief in this business, and along with other factors makes me feel very comfortable in the assumption that M&A is set to heat up on this share again in the coming weeks.
VOC could be interesting if only because the new CEO Kevin Russell has been in the job now for 4 months and could deign to articulate his plans for cost removal and wider network business integration.
VOC hold their AGM in November and I wonder if we might be directed to that timing for the release of a fully-formed business plan, and something value investors such as ourselves might be able to get our teeth stuck.
If you haven’t bought VOC yet, I think you should talk to your advisor about its appropriateness (or not) for your portfolio, but over the next couple of years I think it will get to $4.00 (currently $2.35).
That’ll do it for this week. Fingers crossed for the week to come.
Thursday 5pm values
|S&P / ASX 200||6328||+31||+0.5%|
|Property Trust Index||1448||-10||-0.7%|
Thursday Closing Values
|U.S. S&P 500||2841||-12||-0.4%|
Key Dates: Australian Companies
|Mon 20th August||Earnings – Fortescue (FMG), Woolworths (WOW)
Div Ex Date – IOOF (IFL), Dominos (DMP), Wesfarmers (WES)
|Tue 21st August||Earnings –AMCOR (AMC), BHP (BHP), Healthscope (HSO), Oil Search (OSH)
Div Ex Date – REA Group (REA), Computershare (CPU), Fairfax (FXJ), Insurance Australia (IAG)
|Wed 22nd August||Earnings – Carsales.com (CAR), Lend Lease (LLC), Sydney Airport (SYD), Vocus (VOC)
Div Ex Date – AGL (AGL), AMP (AMP)
Div Pay Date – WBCHB, SUNPD
|Thu 23rd August||Earnings – Flight Centre (FLT), QANTAS (QAN), QUBE (QUB), SANTOS (STO), Afterpay (APT)
Div Ex Date – JB Hi Fi (JBH), Woodside (WPL)
|Fri 24th August||Earnings – Medibank (MPL), Brambles (BXB)
For more information on the above please contact, Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.