Wealth Managed – 21 November 2016

By David Lane - November 21, 2016

Financial markets have become relatively subdued following the severe volatility earlier in the month. Last week saw more stable equities markets, with the ASX200 marginally weaker last week, and most developed markets rising slightly.

Underlying the index movement, however, were some notable movements of individual companies as the market continued to react to the tone of company announcements at the AGMs.  The shares of companies that have not delivered on previous company guidance have been dealt with severely by the market.  iSentia – a previous market darling - was punished after missing forecasts.  iSentia fell 20.5% over the week.

Conversely, companies where management have achieved profit guidance have largely been rewarded.  Costa Group announced that it had not only met, but had beaten, its profit forecasts in the prospectus in its first year as a public company.  The company has implemented international expansion plans utilising funds from the listing, and the shares rose 9.49% over the week.

A company that has finally received some market ‘love’ – after being unloved for many years – is Myer.  The retailer achieved sales in-line with forecasts, and has begun delivering on its “sharper and more focused offer to serve a more valuable customer driving productivity and growth.”  The shares have rebounded almost 10% over the last week, and are over 20% higher than their low on Thursday.

The election of Donald Trump has provided some life for industrial metals, with the prices of these commodities strengthening over recent weeks.  Copper, in particular, has been stronger as market participants seem to be readying themselves for a ‘new world’ of growth and expansion under Trump.  Given its excellent electrical conductivity, copper is widely used as an industrial metal in applications such as electrical wiring, roofing, plumbing and motors.  For this reason it is often viewed as an indicator of economic health.

The copper price has experienced the biggest short term surge in 7 years, commencing before the election of Donald Trump and reaching an 18 month high last week. However, according to a FocusEconomics survey of 22 investment banks, not a single analyst sees copper averaging the final quarter of 2016 above the current spot price.

The question remains whether optimism in equity and copper markets will be validated by economic strength in the medium term.

News in Review

  • Employment in Australia decreased in October 2016 by 1,000 to 11,946,600 persons. This slight fall in employment reflected an increase in part-time employment of 8,400 persons being more than offset by a decrease in full-time employment of 9,500 persons. The unemployment rate remained steady at 5.6% while the participation rate decreased by 0.1% to 64.5%. The participation has decreased by 0.6% over the past year.
  • The US Consumer Price Index (CPI) increased 0.4% in October. Over the last 12 months, the index rose 1.6% before seasonal adjustment.
  • Sales at US retailers rose more than forecast during October after an even stronger September than initially estimated, showing consumers continue to pump up the economy. A 0.8% rise in October followed an upwardly revised 1% jump in the prior month, marking the biggest back-to-back increase since 2014.
  • US housing numbers came in extremely strong at 1.32 million starts, an increase of 25%, the first commentary around this number was it could be an outlier and subject to some form of correction.
  • US Federal Reserve Chair Janet Yellen commented there is not that much space for Donald Trump and his stimulus. Such are the dynamics of central bank and government.
  • GDP rose by 0.3% in the Euro Area and by 0.4% in the EU28 during the third quarter of 2016, compared with the previous quarter. In the second quarter of 2016, GDP also grew by 0.3% and 0.4% respectively.
  • The UK CPI rose by 0.9% in the year to October 2016, compared with a 1.0% rise in the year to September. Although the rate was slightly lower than in September 2016, it remained higher than the rates otherwise seen since late 2014.
  • Broad measures of Chinese economic activity expanded less than forecast in October:
    • Industrial production, an indicator of factory output, rose at an annualised 6.1% in October from a year earlier. Industrial production rose by a similar amount the previous month.
    • Retail sales, which track private and government spending, rose 10% year-on-year, down from September’s 10.7% gain.
    • A separate gauge of annual fixed-asset investment, a proxy for long-term spending, increased 8.3% in the January-October period. Urban investment rose 8.2% in the year to September.

Company News

  • Boral (BLD) announced that it has entered a binding agreement to acquire Headwaters for US$24.25 per share in cash representing an aggregate enterprise value of US$2.6bn. The Acquisition is subject to customary closing conditions and is expected to complete in mid CY2017. The Acquisition is expected to be partially funded via a fully underwritten A$450m institutional placement and a fully underwritten A$1.6bn, 1 for 2.22 pro rata accelerated renounceable entitlement offer with retail entitlements trading. The entitlement price is $4.80, a 22% discount to Friday’s closing price of $6.15.  The balance of the acquisition will be funded through a combination of US$0.8bn of debt from a committed bridge acquisition facility and existing cash.  Boral aims to maintain its prudent capital structure with a target pro forma net debt to EBITDA ratio of 2.5x following transaction close.
  • Insurance Australia Group (IAG) announced an offer of Capital Notes to raise $300m with the ability to raise more or less. The Capital Notes are scheduled to pay quarterly, floating rate, discretionary distributions which are expected to be fully franked. The Capital Notes have an Optional Exchange Date on 15 June 2023 and, subject to certain conditions, will Mandatorily Convert into the Company's ordinary shares on 16 June 2025. The Capital Notes have an Issue Price of $100 and will qualify as Additional Tier 1 Capital. The Offer is part of the Company's capital management strategy and the proceeds will be used for general corporate purposes and to refinance some of the existing convertible preference shares issued by the Company in May 2012.
  • Big W chief executive Sally Macdonald has tendered her resignation just 10 months after being appointed to the top job at the Woolworths (WOW) owned discount department store chain. It comes after her predecessor Alistair McGeorge stepped down for “health reasons” in August last year after just 14 months in the position, with a staff complaint about his behaviour tarnishing his exit. Ms Macdonald, the former chief executive of fashion group Oroton, claimed the lead Big W role in January and quickly made her mark on the company, with a major shake-up of sourcing that led to significant job cuts among its buyers.
  • Telstra (TLS) has reiterated its FY17 guidance of "mid to high-single digit revenue growth; mid-single digit EBITDA growth; capex to sales of ~18%; and free cashflow of A$3.5-4.0bn". They noted while competition is still heavy they have seen strong growth in mobile and fixed subscribers.
  • Oz Minerals Ltd (OZL) said it will dig up more ore than expected from an underground mine at its Prominent Hill copper-gold operation in South Australia state each year, with mining now due to continue there through 2028.
  • Senior Rio Tinto (RIO) executive Alan Davies has declared war on the company over his sacking from his $3.5 million-a-year job, in the latest instalment of the mining giant’s festering Simandou iron ore corruption scandal in Guinea. The dumped London-based chief executive of its energy and minerals unit, a Rio man for close to 20 years and a former Brisbane accountant and lawyer, is seething that the company has made “no effort to abide by due process’’ in sacking him after suspending him from duties last week.
  • Donald Trump’s plan to make American infrastructure great again is benefiting at least one Mexican company. Grupo Mexico SAB (market cap of US$18b) was the only company that rose in Mexico’s IPC stock index since the Nov. 8 U.S. election through Wednesday, as Trump’s US$550 billion infrastructure pledge helps fuel the biggest surge in copper prices in seven years.

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