ASX Weekly Wrap 17/10 - 21/10

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.

Another fairly bland week for the Aussie markets as there were large amounts of economic and company news to digest, but in the end little movement in the index. The XJO ended up with a high of 5,457.90 yesterday and a low of 5,386.10 on Tuesday. We finished the week -3.70 points down or -0.07%. Thus as you can see it was all a bit underwhelming in the end.

The week started off with UK and US CPI figures. The UK came in well above forecast at +1.0% for the quarter vs the +0.8% forecast. The US came in slightly below at +0.3% vs +0.4% expected. US Bonds rallied on the back of this sending yields lower. The 10yr US Treasuries sit at a yield of 1.75% and still in that breakout zone as we speak. Rhetoric still remains the same as the global trend seems to be shifting towards stronger inflation and thus higher rates. It still seems as if the Fed will lift rates in December.

The most important drop of data this week were the Chinese GDP figures. These came in dead on forecast at +6.7% for the September quarter and signaled what I have been saying for a little while that the slowdown has finished and an acceleration may be just around the corner. This is the third quarter in a row of +6.7% year on year growth.

The GDP figures also came with two other sets of data. The first being retail sales which rose +10.7% vs forecast of +10.6% and finally Industrial Production which rose +6.1% vs forecasts of +6.4%. Despite the miss on Industrial production these were seen as a very healthy set of numbers and obviously a strong and healthy Chinese economy is very positive for Australia. There were some articles during the week that signaled that 2017 was going to be the year of the major Chinese slowdown/correction mainly due to the looming debt bubble, which I have mentioned before. Whether this occurs or not we will have to wait and see, but I do know, no major crash or event has ever been foreseen by main stream media so I will take it with a pinch of salt at this stage.

Focusing on individual stock data now Crown (CWN), the casino operator, had a rough week after it was announced that 18 employees had been detained in China following a series of raids. It all surrounds the way Crown markets and advertises itself in China. It’s illegal to advertise gambling in China but not illegal to advertise tourism. Thus Casinos walk a fine line when advertising over there. The stock ended up tumbling almost 14% on Monday on the back of this and still remains significantly down today.

CGF and Brambles (BXB) both released their quarterly earnings during the week and they were poles apart. CGF had another excellent set of numbers. They sold $1.03billion worth of annuities during the September quarter which is +46% on the same time last year. These were a very strong set of numbers, which followed on from their strong fourth quarter in 15/16. It is now expected that +20% in sales growth could be very conservative and upgrades could be on the way for the stock. CGF is a stock I have liked in the past and bought around the $7 mark, however around this $10.50 mark it does seem slightly on the expensive side trading at 17x current earnings. Will look to enter again if it is to pull back.

Brambles (BXB) also released their quarterly update this week. It was quite underwhelming in comparison to CGF’s update as sales only rose 5% for the September quarter, compared to last year. Now on the face of it +5% sounds like a solid number but when the stock is trading 33x current earnings you expect more. The stock has been slowly sold down over the last few months from its mid-$13 price range to now sit sub $12. I have been selling BXB and switching into AGL on the back of better and more stable earnings growth. I am not looking to enter BXB here.

In probably the biggest news of the week Tabcorp (TAH) announced it was to takeover fellow gambling company Tatts group (TTS). The merged company was to make a combined group worth roughly $11billion. The structure of the takeover is as follows. For every TTS share held, TTS owners will receive 0.8 TAH shares + $0.425 in cash giving TTS an implied value of around $4.34 a share. This was well up on TTS previous close of $3.60 and hence the stock climbed to $4.21 (+21%) on the back of it. The TTS board is in agreement with the takeover as both companies worked closely together to structure the merger. The takeover is said to be EPS accretive immediately for TAH and it has said the reason behind this is to help fend off competition from international entrants into the gambling sector here in Australia. They also announced a $500mill share buy-back once the merger is completed. Obviously barring any regulatory objections the merger looks set to go ahead.

In just a quick comment BHP, RIO, FMG, WPL & STO all released their quarterly productions numbers this week. BHP were a little light on but mainly in Copper due to power outages suffered at its Olympic Dam mine here in SA. RIO also were a little sluggish with iron ore numbers but explained that the port and rail were impacted by maintenance and a lower grade obtained by its largest copper mine impacted those numbers. FMG was the star of the show, well at least the miners, as it has another solid production report. It shipped 43.8mill tonnes of Iron ore +1% on quarter and +5% on year. It also got costs down to $US13.51 per wet metric ton from the $US14.31 the previous quarter. As per the chart below FMG looks poised for a big movement either way. My thoughts are it will break upwards based on continued strong production, reduced costs and a stable Iron ore price. This should lead to earnings upgrades. The stock has hit that $5.10 - $5.30 range 4 times now and pulled back. A break of the 5.30 could see an explosive move on the stock. However due to those multiple rejections it could also break down the other way and we could see $4.50 or even $4 on it as well. Whatever the case I will not enter until it breaks either way.

Both WPL & STO has solid quarterly reports as well. Both hit upper end of production, sales and revenue guidance as they benefit from a higher oil and Natural Gas prices last quarter. STO also benefitted from increased LNG production from its newly opened project on the eastern seaboard of Australia. I’m not keen on either of these at current prices. There is better value to be had in the smaller energy companies.

An Important week technically for the XJO next week. After our recent surge to 5,500 we have pulled back close to that 5,400. It is imperative we bounce off this level (red line) and then break out of this mini downward trend (Black line) we have been encapsulated in since August. This will dictate where we go for the rest of the year and it’s likely to play out next week. I still feel there is enough momentum in the market to break upwards. I am still backing us hitting 5,700 before the end of the calendar year.

Not as much of a data dump next week as it was this week, however some very important data points released. Domestically we have the all-important CPI figures out on Wednesday. These will decide if the RBA really has finished cutting or not. My bet is on a beat on forecast. We also have our PPI figures out on Friday. In the US there is a myriad of housing figures out but more importantly third quarter GDP figures are out on Friday night. It is expected that these will be a bit soft. On an individual stock level the banks start reporting with Nab kicking it off next Thursday. Then on Friday Macquarie will round out the week with their results. I will go through these both in detail in next week’s wrap as the banks will likely decide which way our market breaks for the rest of the year.

In some personal news I have decided to move office. I no longer hold an office in the Adelaide CBD, but will be working 100% from my home office (new details below). The decision to do this was not made lightly but in the end makes a lot more sense from a business perspective, financial and my home life. Hence my weekend will be spent completing the move. I have the important gear set up such as my PC, printer etc. but still have boxes of files that need to be filed away correctly. I won’t give you my tip for the Cox plate as clearly I make a better stock picker than horse tipper per my results last weekend. Hope you all have an enjoyable and safe weekend and I will speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

PO Box 6014

BURTON SA 5110

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.