From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
There was the most almighty buy-up of Australian shares this week, and it caused the vast majority of market players to ask questions as to why things moved the way they did.
Huge out-performance by Australian shares this week
In the last week, Australian shares in constant currency have outperformed their US peers by a staggering 4.2%, and for precisely no reason at all.
I don’t say this lightly, but it’s more to make the observation that sometimes really large orders can move markets in ways that they otherwise might, and lead to shares moving in directions that can be perplexing to anyone trying to rationalize them.
Sometimes, we just need to remember that the ASX is a market, and that really big orders move shares in ways and to levels that raise the eyebrow.
I have to say, I expect this bout of out-performance from Australian shares will fall straight back to where it has been in the coming weeks, simply because I think the post-Royal Commission outlook for Australian housing looks a lot worse than it did previously. Fortunately, the underlying economy remains sound and buoyed by global economic tailwinds and the ongoing government infrastructure impetus, but incrementally, the emergent risks of a credit crunch is new news and reason to be a little more cautious.
Let’s see where things end up in a week, but in the meantime there are opportunities to be taken advantage of.
Wonderful opportunity to SELL Woolworths (WOW) and Wesfarmers (WES)
Firstly, with the squeeze higher in broader local markets, Woolworths (WOW) and Wesfarmers (WES) are both again at attractive levels at which to SELL.
WOW is back above $28 and WES at $44. WOW announced more strong sales figures this week, with like-for-like food sales rising by +4% after adjusting for Easter, however this momentum is well known and in our opinion still isn’t being adequately reflected in operating profits.
WOW now trades 20x 2019 earnings and with a dividend yield in the mid to high 3% range. This is a full valuation for a food retailer and represents the same peak valuation WOW traded on in its heyday when margins were near twice those currently. It is also similar to the peak multiple WES has traded on in recent years when its Coles division was dominating WOW.
This is your chance to sell WOW well.
On WES, there are different drivers, but the endgame remains the same. WES is on a shade over 17x next year’s earnings numbers and is in the process of significant restructure. The loss-making Bunnings UK business could be jettisoned, and Coles is most obviously on the block for de-merger, but in the end, this is all financial jiggery pokery and unlikely to drive real shareholder value for WES shareholders.
Beyond the de-merger of Coles with a little bit of debt, the next major decision for new WES CEO Rob Scott is how to gear his balance sheet, and that uncertainty should attract a discount in its rating. Perhaps more relevant in the medium term is just how any local housing slowdown impacts the Bunnings earnings juggernaut.
Bank Results mixed … hard to find the positives.
ANZ (ANZ) and National Australia Bank (NAB) have reported earnings this week.
ANZ saw revenue pressures across the board, but the underlying results were prettied up by the continuation of a benign environment for credit quality. Unfortunately, we seem closer to the end of this rosy credit cycle than the start, with the bank reporting rising past-due rates and falling collective provisions, meaning that in the years ahead we are more likely than not to see bad and doubtful debt provisions rising, removing that support for bank earnings.
Interestingly on this subject, Genworth (GMA), one of Australia’s largest mortgage insurers, announced in their results this week that so-called ‘cure-rates’ had softened during the first quarter. A ‘cure-rate’ is the measure of how many underperforming loans are being ‘repaired’ by borrowers after having gone into bad.
This is most definitely something to watch, and was one of the interesting flags of worsening mortgage credit quality in the US ahead of 2008-2009. For the record, by no means do I think Australia’s housing will end up collapsing in the manner it did in the US in 2008-2009, but I also think people ignoring this issue will end up the poorer in 12mths time.
NAB figures were largely in line with analyst expectations, but the bank announced that it too would be following its peer group in exiting funds management via the de-merger or sale of MLC.
On NAB, though the bank announced the planned payout of 99c in dividends this half as expected, I have to say, I fully expect NAB to lower its dividend by as much as 10% in the coming 12 months due to the impact of declining profitability from competitive conditions and asset sales on its already stretched payout ratio.
I think the DPS will fall from $1.98 or so to perhaps $1.70 – $1.80 in 2019, and the perfect time to flag this will be at the full-year results in early November.
Our preferred bank continues to be Macquarie Bank (MQG), and we were delighted to see today’s results come in 3-5% ahead of analyst expectations, and even more importantly to see a positive surprise on the second half dividend (10% ahead).
Divisionally the beat was less impressive since it came from the securities and commodities businesses, divisions of the bank the market rates less highly. More predictable earnings streams from Macquarie Asset Management and the Corporate and Asset Finance businesses were both a shade lighter than anticipated, but again, a beat is a beat, and when backed with strong dividends and the outlook for a similar year in 2019 we are not going to quibble.
We have mentioned the stock is looking more fully valued here, and we maintain that view. A push above $110 would likely see the stock looking even fuller, and perhaps buyers should hold out for pullbacks into the mid $90’s.
On Commonwealth Bank (CBA) too this week, APRA handed down their findings into CBA’s complacent (at best) cultural and compliance controls. Beyond the various remedies announced, APRA also lamped CBA with an additional operational risk capital requirement of $1bn, which reduces the bank’s available capital for lending, and lowers its Tier 1 capital ratio by 0.30% which is not immaterial.
Like the other major’s, I would expect CBA to bottom still a further 10% or more under where we are now.
Tidbits from the week gone and for the week ahead
Our recent recommendation to BUY Vocus (VOC) is working well with the shares now +15% higher in a matter of weeks. For those looking for small-cap opportunity, this share is a standout, although I would direct would-be investors to settle their BUY limits in the $2.30’s, marginally above the levels we recommended them.
AMCOR (AMC) on the other hand remains $1 lower than where we bought them last year, hobbled by rising input costs and slow US beverage volumes. That being said, the falling AUD will likely prove a neat support for the group given over 80% of group sales are made offshore.
Any further falls to near $13 and we would be keen to BUY more for our discretionary portfolios.
On the economic front, the early April data from China, the U.S and Australia has all been fine. US and Chinese and Australian manufacturing remains solid, Australian service sector activity continues to grow, albeit at a moderately lower pace than March and in a domestic sense, next week’s Federal Budget is likely to bring with it additional cheer on infrastructure spending.
Enjoy the week.
Friday 10am values
|S&P / ASX 200||6098||+198||+3.2%|
|Property Trust Index||1384||+56||+4.2%|
Thursday Closing Values
|U.S. S&P 500||2630||-37||-1.4%|
Key Dates: Australian Companies
|Mon 7th May||Results – Westpac (WBC)
|Tue 8th May||Trading Statement – Commonwealth Bank (CBA)
Div Pay Date – MCP Master Income Trust (MXT)
|Wed 9th May||Div Ex-Date – RESMED (RMD)
|Thu 10th May||Results – BT Investment Management (BTT)|
|Fri 11th May||AGM – Oil Search (OSH)|
4th May 2018, 1030am
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.