ASX Weekly Wrap 05/09 - 09/09

Welcome to the ASX Weekly Wrap. A weekly email that will be sent out to clients, and also made available on my website, with a brief description of the events that moved the local markets during the week and also what I am watching on an individual stock level. Feel free to provide feedback and alert me to any topics that you may want covered.

Despite some very solid domestic economic news the market basically stood still this week. Whilst we had a raft of local data to digest overseas markets were fairly benign with little movement or data for us to go on. We closed the week -33.60 points or -0.63%. Our high was 5,440.20 on Wednesday and our low was 5,332.40 today. As I iterated last week it looks like we want to test that 5,300 level before our next leg up.

ANZ jobs ads started the week on a positive note +1.80% compared to -0.80% the month prior. We should see those numbers lift even more as business confidence bounces back after some predictable falls around the election. We also normally see a lot of casual positions advertised for, for the retail Christmas rush. The market reacted positively to that news and also the fact we had some catching up to do on the index as we had underperformed overseas markets. We gained back most of what we lost on Friday in the end.

On Tuesday we had the RBA meet and HOLD the cash rate at 1.50%. This was Glen Stevens last meeting as RBA Governor and Phillip Lowe will take over from here on out. You would have to say Stevens did an outstanding job as RBA Governor. He helped lead the country through some pretty tough times and whilst decisions may have been a little conservative at times his policies seemed pretty bang on.

Wednesday had the release of probably the most important news of the week, local GDP figures. We got a very solid numbers for what is normally a tough period in the second quarter. The numbers show we grew +0.5% on quarter, typically what was forecast, and +3.3% year on year. These were very positive numbers especially since exports made up a large majority of them. It also may mean unless inflation numbers fall off a cliff we are probably done in terms of rate cuts in this cycle. This impending doom and gloom we hear from ‘experts’ regarding the Australian economy seems further away than ever before. Housing construction is very solid and looks set to continue for another couple of years. Our services sector, mainly in the form of education, tourism and finance is pumping along and the resources sector seems to have stabilized. Yes there are concerns around property prices and especially the glut of apartments in Sydney and Melbourne, but overall Australia is in a very healthy place economically right now.

Finally on Thursday we had our Trade Balance released which saw our deficit smaller than expected at $2.41bill v $2.65bill forecast. This is mainly due to higher export prices from a stronger AUD. This put the final nail in the coffin for the market as we saw a heavy sell off, especially in the top end of town. There was no one reason for this and I am putting it down to several factors. First being the strength of the Australian economy will end the rate cut cycle. Secondly commodity prices have started to peel off on the back of a stronger USD as rate hikes as expected there. A raft of companies that went ex-dividend and international funds taking advantage of a higher AUD and taking some profit off the table.

On an individual stock level there wasn’t much news out as most have just reported and are taking a breather. Resources, as I said earlier, have come off a bit due to lower commodity prices and a higher USD. Oil may be the exception as Russia and Saudi Arabia talk possibility of production freezes, but I see that as very unlikely outcome. The Aged Care sector took a hammering this week as the government released a white paper that signaled cuts to subsidies to the sector and a limit as to what fees these business’ could pass on to their residents. High yielding stocks such as Property Trusts and Infrastructure stocks have also come off as investors start to prepare for higher rates in the US. All in all it was a fairly boring and timid week.

Technically the market continues to be attracted to that bottom trend line around the 5,300 level. From there we hope for it to bounce and head towards that 5,700 mark to finish off the year.

Couple of stocks I have in focus this week. One I have mentioned before in this segment but the other is new to the list.

Vocus Communications Limited (VOC) - $7.30 VOC is a company I have spoken of at length a number of times. Recent price action has seen the stock being sold off from its $9 highs to the low $7 range. I think a general round of profit taking has occurred as it has moved up from the high $5 range in the last 12 months. Also two ex-board members spooked the market when they sold down a large chunk of their holding in VOC. However the reason being is they needed to capital to start up their own venture capital fund so it’s understandable. Not much has changed fundamentally in VOC in fact value has become even better with the recent sell down. Its full year EBITDA numbers were $215mill for the financial year just gone. It is forecasted to have EBITDA numbers of $450-$500mill in the upcoming year. As you can see there is a lot of growth still to be had. Forecasted PE is 18x for 2017 and 17x for 2018. This looks value when compared to its competitor TPG who’s forecast PE are 28x and 24x respectively. VOC’s only big negative is its customer churn rate which is highest in the industry. VOC have publically stated that this is their main goal over the next 24 months to get this down to more acceptable levels. Most analysts value VOC in-between $9 - $10 per share.

Qantas Airways Limited (QAN) - $3.32 Everyone knows QAN and what they do. Not many know the value to be had in the stock. QAN just posted their biggest ever profit with an EPS of 49.4cps. This mean the stock is currently trading at a PE of 7x current earnings and 5.3x forecast 2017 earnings. These are extremely low even for QAN. To tell you the truth I am not sure why the market is discounting it so much. Maybe it’s because investors have all been burnt so badly before, however I see a lot value left in the stock. QAN has benefited from low oil prices, which look here to stay for a while, prudent cost cutting programs which are well ahead of schedule and gaining back some lost market share. It has introduced a prudent capital management scheme, reintroducing dividends and rewards shareholders with on market buy-backs. Even by a global standard QAN is the cheapest listed airline anywhere in the world. QAN has already signaled it aims to lift capacity by 4.0% this coming year. Headwinds would come from a large drop in consumer confidence, tourism or a sustained spike in the oil price. Even then QAN has much of its jet fuel prices hedged. Most analysts are valuing QAN at the $4.50 - $5 range, so it gives it much more room for growth from the low $3.

Next week we will get more of an idea if China’s economy is stabilizing as their Industrial production, fixed asset investment and retail sales numbers for August are released on Tuesday. Locally Australia has its jobs numbers out for August out on Thursday and in the US CPI figures are out on Friday night. CSL & NWS go ex-dividend on Tuesday so our market will start behind then.

After a wet few days here in Adelaide it looks as if the weekend should clear up for some decent weather. For me I love September. AFL finals start, NFL season kicks off and spring racing carnival begins. It’s a great time for a sports tragic like myself. Hope you are all keeping well and have an enjoyable and safe weekend. I will speak to you all next week. Go Crows!

- Heath Moss

heath@hlminvestments.com.au

(08)8212-9632

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.