From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors.
Markets had a better tone to them this week and were led by a rebound in sentiment in Asia.
Gains in Chinese and other Asian share-markets helped fuel positive sentiment in the local miners, reversing 2-3 months of underperformance from that sector.
Yes, we had news on tariffs, and yes, we had Trump promise that he might raise the soon-to-be-imposed 10% surcharge on Chinese shipments to the United States, but none of the rhetoric seems to be having any impact on the global economy as of now, albeit it feels like China might be beginning to feel a slightly chilled wind.
In the US, growth is straining at the leash and US treasury bonds are starting to widen. US 10-year bond yields have crept up to be just under their recent highs and are now at 3.06%.
US real interest rates are now at their highest level since the GFC and just short of 1%.
Stronger economic growth and the ongoing reduction in the US Federal Reserve’s balance sheet is a contributing factor, and from next month the Fed will again up the ante by targeting a $50bn monthly reduction in its net asset base.
For context, the Fed balance sheet has fallen by US$300bn from US4.5 trillion a year ago, however the pace of reduction has steadily increased. It will only take half that time to reduce the balance sheet a further US$300bn, and at the current pace, we should expect to see US$700bn+ of liquidity removed from the US and global economy by the middle of 2019.
That’s a big number.
As you know, we feel this will surely have an impact on asset prices at some point in the months to come.
Local Equity Opportunities – BWX (BWX) and Afterpay (APT)
On stocks this week we flagged BWX (BWX) as a name for investors to consider.
As expected, the indicative $6.60 bid from Bain Capital and the former CEO and CFO was pulled, and the shares are now trading at what we believe is an attractive level under $4.00.
BWX is still a high-growth company, however it is failed to execute on recent acquisitions in the manner it and the market would like. With the bid now being pulled, we think the internal focus of new management will return to operations and the tremendous growth available to leading brands such as Sukin.
On a market multiple of 16x heavily downgraded earnings, we think there is a lot of negativity priced in to the shares. Moreover, we would highlight that this week AFTER the Bain proposal was shelved, the two largest shareholders of BWX both added to their holdings and the largest shareholder avowed his firm’s commitment to the strategy and new management appointed.
I would point out that the 2 largest institutional shareholders now own 33-34% of the company and were buyers this week.
The founder and former CEO John Humble owns a further 8-9%.
I would be very surprised if we did not see further takeover activity emerge in this company in the coming 12 months.
On APT, the recent share price weakness throws up the potential for those that missed the rally to acquire shares at more attractive prices.
The next news-flow from APT will likely arise at the November Annual General Meeting, and with the successful launch of its service in the US in May, I would like to think the update will be constructive.
Since our BUY recommendation in April, analyst forecasts for 2021 and 2022 profits have jumped hugely. On 2022 operating cashflow forecasts, expectations have now doubled from around $200m to $400m, and we feel confident that these numbers will continue to push higher.
We feel very confident that APT will again rise above $20 in the months to come.
Banks – more news next week
The interim report from the Royal Commission into Australian banking will likely be handed down next week, and it feels inevitable that we will see further restrictions placed on banks abilities to lend.
Already owner occupier mortgages are running down -6% annually and at the lowest rate since 2011, and investor demand is equally pressured by the prospect of a Labor Government by mid-2019.
Auction clearance rates hit a low point last week at 55% and as I have said time and again, the Spring selling season will be ugly.
In an environment of weaker housing and tight liquidity, it is very hard to see anything but the underperformance of the sector continuing for at least another 12 months.
Healthscope (HSO) – a clock has now been set on takeover activity
This week HSO’s bankers began soliciting for property investors to partner with the company in realizing 49% of the groups $1.6bn+ property portfolio.
By commencing this sale process, bankers for HSO have effectively set a deadline for private equity bidders to formalize any firm bids for the group since any completion of a property securitization by HSO management effectively undermines the potential value that could be created in a takeover.
We still feel expectant that HSO will see formal bid activity re-emerge in the weeks ahead and that investors can expect to see a takeout price in the region of $2.40 to $2.60.
Short and sweet.
Thursday 5pm values
|S&P / ASX 200||6169||+40||+0.7%|
|Property Trust Index||1438||-22||-1.5%|
Thursday Closing Values
|U.S. S&P 500||2931||+42||+1.5%|
Key Dates: Australian Companies
|Mon 24th September||Div Ex Date – Carsales (CAR)
Div Pay Date – ANZPE, ANZPF, NABPC, WBCPE, WBCPF, WBCPH
|Tue 25th September||Div Pay Date – BHP (BHP), Oil Search (OSH)|
|Wed 26th September||Div Pay Date – Challenger (CGF), Regis Healthcare (REG)|
|Thu 27th September||Div Ex Date – NABPD
Div Pay Date – Downer (DOW), Medibank (MPL), SANTOS (STO), Telstra (TLS)
|Fri 28th September||Div Pay Date – AMP (AMP), Commonwealth Bank (CBA), Healthscope (HSO), Ramsay Healthcare (RHC)|