Bentleys Wealth Advisors Weekly Update – 2 October 2018

From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors

In the United States, September Consumer Confidence surged to its highest level since the height of the dot-com craze in 2000. That’s worthy context for the genuine strength in US economic activity, but interestingly too, the highs back then coincided with the share-market’s peak.

With the economic guns firing it was entirely expected that the US Federal Reserve raised interest rates in the manner they did this week, and the statements from the central bank chairman reflected this optimism.

We should expect to see another hike to 2.50% before year end, but it would seem interest-rate markets still only foreshadow a further 1-2 hikes in 2019 to 3% at its highest.

This still seems a touch optimistic given the strength of US employment currently and the rising upward pressure on wages.

Locally there are a few remarks to make on stocks following share price moves this week.

Value in recent BUYS – BWX, AMCOR & IOOF

Firstly, we should reiterate our confidence in recent recommendations pertaining to each of BWX (BWX), AMCOR (AMC) and IOOF (IFL).

In the case of BWX, we think it’s great buying under $4.00.

We feel confident that with new management focused on both the integration of their US acquisitions and on growing the international sales channel for Sukin, that the future is bright for earnings growth.

The stock is now under 15x P/E for the current year – cheaper than the total market on 16x – and I think the earnings assumption used is very much a baseline estimate. For a company that ought to be growing its topline at over 10% annually, this is excellent value for money.

In the case of AMC, the stock is now back to its cheapest forward valuation in 5 years and importantly it feels like earnings momentum here is set to turn.

Our confidence in a bottoming of earnings estimates relates to the -20% fall in US polyethylene prices year-to-date, which should significantly ease the margin pressure inflicted on AMC’s substantial plastics operations and perhaps even allow for some earnings upside.

At around 15x earnings and with a significant offshore earnings presence, I feel very comfortable that the 3 years of market underperformance is set to turn. A weakening in the AUD as we expect in the lead up to the Federal Election could prove another trigger for AMC shares to bounce.

On IFL, it’s simply a case of trusting one’s instinct and knowing that with the quality of its operations and management, that 12x earnings is simply too low.

I feel very confident that patience will be rewarded here.

Nufarm – a potential opportunity

This week NUF surprised the market by announcing a 3 for 19 rights issue to raise $300m alongside their full year profit figures. The capital raise is designed to ease the working capital burden created by excess inventory build-up locally with the east coast drought.

We think the capital raising is likely to see the shares trade materially lower when they come out of suspension next week, and we think, pending price, it could create an opportunity for investors.

The company’s 2019 outlook was broadly in line with analyst expectations which is some encouragement.

This means that following the dilution from the announced rights issue, the stock would look reasonable value around the $6.00 mark, and with a balance sheet bolstered by the raise, arguably we could be nearer a trough than not.

Watch this space.

Vocus Group – take profit

Today we have elected to book profits on our VOC recommendation, having been pleasantly surprised by the +50% rise since March. In March of this year we recommended buying VOC at the $2.20 level as a restructuring play under new management.

The stock has since rallied 50% in that brief 6-month period, and we now believe the share price adequately reflects the potential changes afoot.

We do believe in time that VOC shares can trade higher, however we believe it appropriate to book profits at current levels and look for lower share prices at which to consider re-buying the shares for better risk/reward.

Wednesday 5pm values

Index Change %
All Ordinaries 6308 +31 +0.5%
S&P / ASX 200 6192 +23 +0.4%
Property Trust Index 1437 -1 -0.1%
Utilities Index 7726 +53 +0.7%
Financials Index 6073 -78 -1.3%
Materials Index 11931 +261 +2.2%
Energy Index 12329 +443 +3.7%

 Wednesday Closing Values

Index Change %
U.S. S&P 500 2906 -25 -0.9%
London’s FTSE 7511 +144 +2.0%
Japan’s Nikkei 24034 +359 +1.5%
Hang Seng 27817 +339 +1.2%
China’s Shanghai 2807 +78 +2.9%

  Key Dates: Australian Companies

Mon 1st October Div Pay Date – WBCPG
Tue 2nd October Div Pay Date – Boral (BLD)
Wed 3rd October N/A
Thu 4th October Div Ex Date – Nufarm (NUF)

Div Pay Date – Costa (CGC), Corporate Travel (CTD), SEEK (SEK)

Fri 5th October Div Pay Date – Caltex (CTX), Crown Resorts (CWN), QBE (QBE)