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The Australian sharemarket has retreated from six-year highs, as a plunge in the iron ore price weighed on miners and several poorer-than-expected earnings results convinced investors to take a breather.
The benchmark S&P/ASX 200 slipped 10.7 points, or 0.2 per cent, to 5632.8, posting its first loss in eight sessions. The broader All Ordinaries inched 7.7 points, or 0.1 per cent, lower, to 5632.8.
Among the sectors, materials was the biggest drag, down 1.2 per cent, while financials slipped 0.2 per cent. The two global miners and all of the big four banks were down.
On Friday, iron ore plunged to a two-month low, falling 2 per cent to $US90.10 per tonne, its lowest point since June 18. Excess inventories and a glut of supply in the market have pressured the iron ore price for most of the year.
The big miners were hit, with BHP Billiton sliding 1.5 per cent to $37.25 and rival Rio Tinto losing 1.3 per cent to finish the day at $64.54. Fortescue Metals also fell, down 1.8 per cent to $4.34.
“That negative opening was reinforced by results in the earnings season, we’ve had BlueScope and UGL both delivering full-year numbers which were at the bottom end of market expectations. That has underwhelmed investors and they’ve reacted quite substantially,” Mr Sherwood said.
BlueScope Steel shares plummeted 12.8 per cent to $5.32 after the company failed to meet consensus analyst expectations for full-year profit. Australia’s biggest steelmaker reported a net loss of $82.4 million. While the result was an improvement on last year, the market had been expecting a better showing.
And here are the best and worst among the top 200 today.
Amcor packaging spin-off Orora has jumped 11.6 per cent today, proving once again that management destroy value in M&A, and then create it when they hive businesses off. That's why they get paid the big bucks!
Energy was the best performing sector today, and Buru and Caltex, the latter on earnings, are among the top names.
At the other end of the scale are big share price plunges in response to earnings updates from BlueScope Steel and Recall. A few iron ore miners are among the hardest hit, while Kathmandu falls 4.3 per cent after announcing its long-term CEO will step down later this long.
Best and worst performers in the ASX 200 today.
Japanese stocks have ended higher as investors welcomed the US dollar's rise following comments by Fed chief Janet Yellen at the Jackson Hole central bankers conference.
Here's how regional markets are doing:
- Japan (Nikkei): +0.5%
- Hong Kong: +0.4%
- Shanghai: flat
- Taiwan: +0.1%
- Korea: +0.2%
- ASX200: -0.2%
- Singapore: +0.5%
- New Zealand: +0.3%
Meanwhile, US futures are pointing to gains at the open of trade on Wall Street, with S&P futures up 0.4 per cent, potentially pushing the benchmark index above 2000 points for the first time.
An 11 point fall in the ASX 200 has put an end to a seven-day winning streak for the benchmark index, as a falling iron ore price put pressure on miners and BlueScope Steel plunged 12.8 per cent on its earnings result.
The ASX 200 fell 0.2 per cent to close at 5634.9, while the All Ords finished 8 points, or 0.1 per cent, lower at 5632.8.
The iron ore price looks likely to fall below $US90/tonne when the benchmark price is set tonight in China, according to futures trading.
BHP closed 1.5 per cent down, Rio fell 1.3 per cent and Fortescue declined 1.8 per cent. Woollies fell 0.5 per cent.
The big four banks all fell, with ANZ the worst, dropping 0.8 per cent.
Energy was the best performing sector, up 1 per cent for the day, with Origin providing the most support as it climbed 3.3 per cent. Caltex jumped 7.4 per cent on its profit announcement, while Woodside was 0.2 per cent up.
AMP gained 1.2 per cent.
Citi sees the biggest total return from European equities out to mid-2015, but favour Japanese and emerging market shares.
Citi have released their global asset allocation update, and they are keen on equities broadly, with European, Japanese and emerging market shares offering the best expected returns out to mid-2015.
They remain underweight corporate credit and government bonds. In the table below “IG credit” stands for investment grade corporate bonds, and “HY” for high yield, or junk bonds.
The investment bank believes earnings growth will be the key driver for sharemarkets from here, which is perhaps why they have an “underweight” stance on Australia, and the US – they expect less than 5 per cent from the S&P 500 index over the next 9 months or so.
Despite the top spot for the broad Stoxx 600 European index, they have a neutral stance on the region’s shares, presumably due to heightening growth risks within the region. They are neutral on the UK as well.
Within emerging markets equities, they favour China, Turkey and Taiwan.
Revenue was 2.3 per cent above the prospectus forecast at $2.62 million. Photo: Supplied
Spotless Group Holdings has capped its return to the ASX by just beating its prospectus revenue and profit forecasts.
The catering, cleaning and infrastructure group reported pro forma net profit of $106.6 million for the 12 months to June 30, beating its prospectus forecast by 3.1 per cent.
Revenue was 2.3 per cent above the prospectus forecast at $2.62 million. Statutory profit was 16.2 per cent ahead of forecast at $106.6 million.
The company has reaffirmed its prospectus forecast for statutory earnings of $134.5 million in the current financial year, ended June 2015.
Spotless directors intend to commence paying a dividend in the current financial year, and are targeting a payout ratio of between 65 per cent and 75 per cent of adjusted net profit after tax.
Spotless shares are 1.6 per cent higher at $1.91.
Chinese iron ore futures have dropped to their lowest since they were launched last year, while weaker buying interest pushed down prices for spot cargoes further on slower steel demand.
Benchmark spot iron ore is now trading close to this year's low of $US89 a tonne and a further decline would take it to its weakest since September 2012, as top, low-cost miners lift output even more in a bid to take out smaller producers.
The most-traded January iron ore contract on the Dalian Commodity Exchange is off 0.3 per cent at 644 yuan($US105) a tonne, after earlier touching 639 yuan, the lowest since the contract was launched in October.
That piles more pressure on spot prices which last week fell 3.5 per cent, the steepest decline since mid-June. Iron ore for immediate delivery to China slid 2 per cent to $US90.10 a tonne, its lowest since June 17.
"When the price drops this fast, Chinese mills tend to wait and see and buying activity could slow down. Supply is still huge and we see various offers from miners, big mills and traders," said an iron ore trader in Shanghai.
Big Chinese steel mills have been reselling excess cargoes from their long-term contracts with suppliers amid a global surplus that Goldman Sachs expects to hit 72 million tonnes this year and surge to 323 million tonnes in 2018.
A cargo of Australian Pilbara iron ore fines was sold at $US90 a tonne on the globalORE platform on Monday, according to the platform's website. That was down from Friday's $US91.50 per tonne for the sale of a similar grade at a tender, traders said.
‘‘Support at the $US90/tonne level looks reasonable, having bounced off that level in mid-June when port stocks were at record highs," ANZ said.
The long-serving chief executive of outdoor clothing retailer Kathmandu, Peter Halkett, plans to step down two months after the company releases its 2014 results.
Halkett, who has been at the helm for eight years and oversaw the retailer’s transition from a private-equity owned company to a public company in 2009, plans to leave on November 25.
Kathmandu issued a profit warning in June, flagging a 10 to 15 per cent fall in full year earnings after warm winter weather crunched sales of outdoor clothing at its winter clearance sales.
However, earlier this month the company upgraded forecasts as temperatures cooled. It now expects earnings before interest and tax in the range of $62.5 million to $65.5 million, compared with $63.4 million in 2013.
Kathmandu has appointed chief operating officer Mark Todd as acting chief executive while it searches for a permanent successor. It gave no reason for Halkett’s departure, which came as a surprise to investors.
Shares are down 4.6 per cent to $2.88.
Peter Halkett is to leave outdoor retailer Kathmandu after eight years. Photo: Kate Geraghty
Moody's has downgraded the debt ratings of Western Australian to Aa1 from Aaa, in yet another sign of the ending mining boom.
‘‘The ratings downgrade reflects the state's ongoing deficit position, the deterioration in its debt metrics, and a growing risk that this trend may not be reversed soon,’’ the ratings agency said in a note this afternoon.
‘‘The challenges related to narrowing the budget gaps include greater volatility in the state's revenue base, reflecting its increasing reliance on royalty income, expenditure pressures related to the rapid expansion in the state's economy and population, and a weak policy response to the deteriorating financial and debt position.’’
These trends have led to persistent deficit results with the general government sector's budget gaps averaging 5 per cent of revenues from the 2008-09 financial year through 2012-13, Moody's said, adding that in 2013-14, the deficit is estimated to be equal to 6.2 per cent of revenues as current expenditures continue to outpace revenues.
Moody’s changed the outlook to stable from negative.
The new bank hybrid securities, which have no fixed term and switch into shares at the worst possible times, would likely have fallen in value by more than 35 per cent during the global financial crisis, Christopher Joye writes in the AFR:
This is far removed from the popular claim they are super-safe “quasi cash” substitutes that should pay much lower returns than bank shares.
After publishing analysis that found Commonwealth Bank of Australia’s new $2.5 billion perpetual hybrid security Perls VII did not provide investors with sufficient compensation for its embedded equity risks, this columnist was inundated with feedback.
While many investors and advisers gushed, a frustrated institutional stockbroker had a different perspective. It is important to parse his arguments, because they form the bedrock of the sales pitch used to promote these securities.
“Ask yourself, with $500 billion of equity backing and [the Australian Prudential Regulation Authority] watching their every move, under what circumstances would bank hybrids ever be converted into equity?” the stockbroker wrote. “You will not be able to come up with a plausible answer.”
Actually, the CBA hybrids must legally convert into shares after 10 years if they are not called earlier by the bank, which happens. If they don’t convert because CBA’s share price is less than half its value on the date Perls VII were issued (one test), they stay perpetual. This means the bank never has to repay you a cent. A key distinction between debt and equity is a maturity date where the borrower repays what it owes. Equity instruments do not have one.
I am not the only sceptic. Morningstar’s credit analysts have published a report recommending “investors do not subscribe to Perls VII at these levels [because] the indicative pricing range is not attractive for the commensurate risks”. Morningstar suggested waiting for the return to improve by 0.5 percentage points (I proposed double that number).
On Sunday, the institutional newsletter Debt Capital Markets Review opined that Perls VII “come with all the downside of equity, but none of the upside”. The launch of these investments seemed “fitting in a week that the Reserve Bank of Australia governor told Parliament that ‘compensation for risk on financial instruments remains scant’.”
A subdued profit outlook has weighed on Bluescope Steel’s share price with the company flagging December half earnings would be in line with the second half of 2013-14 the main reason for the downturn in its share price today.
‘‘The second half has traditionally been stronger than the first half,’’ the managing director Paul O’Malley said. ‘‘Therefore signalling the first half (of 2014-15) would equal the second half is a very good outcome.’’
Even so, hurting on the near term profit outlook is the softness in the iron ore price, which hits earnings of its New Zealand iron sands export business, while domestically, even though residential construction demand is firm O'Malley said engineering, construction and mining sector "is seeing some softness".
Bluescope's shares are off a heavy 13 per cent at $5.295.
A building boom in the inner Sydney apartment market is likely to peak in 2017 leaving the city with an oversupply of units, a new report has suggested.
As a result the value of both new and old apartments close to the city will fall 5 per cent in the two years to 2018, said its author Angie Zigomanis.
"Some people who own older apartments will experience a bigger decline," he said.
The report Inner Sydney Apartments 2014 to 2021 by BIS Shrapnel estimates that 5800 apartments are currently under construction in inner Sydney. Within the next three years developers are likely to deliver a total of 11,500 new apartments to satisfy demand from local and overseas investors.
Zigomanis, senior manager at BIS Shrapnel, said the Sydney market was playing "catch up" after a decade of weak demand for new apartments.
"However, the current surge in off-the-plan demand is likely to see the market get ahead of itself again as pre-sold new apartment projects commence and progressively work their way through to completion," he said.
According to Zigomanis after the last boom Pyrmont, the city and North Sydney "copped it the hardest".
This time however, "it will be the southern corridor (eg around Green Square) that will be affected because that is where the majority of apartments are being built," he said.
A new report by BIS Shrapnel says the inner Sydney apartment market may be heading towards an oversupply.
The Tax Office is cracking down on the black economy, targeting businesses that are not declaring cash revenues, from restaurants through to home cleaners, in a bid to bring billions of dollars back into the tax net.
The Tax Office told Fairfax Media it had stepped up audits of small businesses including cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building trades, road freight and waste skip operators.
Also in the ATO's sights are cleaners, who are almost always paid in cash for working in clients' homes.
The recent results from iiNet confirm in the minds of Credit Suisse strategists Hasan Tevfik and Danien Boey that it is a stock that “should benefit from many of the dominant investment themes”.
Crucially, the internet services provider is “able to deliver robust growth in a low growth world,” they write.
The company has strong cash flow and should deliver double-digit dividend per share growth, they add, and the potential for further acquisitions could provide upside for the stock.
Even after rallying 14 per cent from its lows in July, it still trades on a estimated FY15 free-cash-flow (FCF) yield of more than 9 per cent, with “FCF margins rising into double-digit territory,” the strategists write.
“We know those companies operating on higher FCF margins are currently outperforming those on lower.”
All of that means iiNet is being added to the strategists’ model portfolio.
They make room by cutting their losses in Fortescue: “we have owned the stock since November last year and it has lost us 21 per cent (after dividends),” they ruefully note.
They continue: “Although Fortescue management have noted that credit investors like the company, it is clear equity investors do not.
“The company is cheap on our commodity price forecasts with a FCF yield of 9.4 per cent in FY15.
“But our economists forecast of further sluggish activity in China, compounded by weakness in the property market, suggests the stock price may be capped in the shorter term.”
Credit Suisse strategists fancy iiNet's growth prospects in a low growth world. Photo: Louise Kennerley
Beach Energy’s full-year profit has dropped 34 per cent despite a 51 per cent surge in revenues due to write-downs on the value of petroleum ventures in Egypt and a geothermal project in southern Australia.
Net profit for the year ended June slid to $101.8 million, some $52 million lower than the 2013 fiscal year, Beach reported on Monday.
UBS had been estimating full-year underlying net profit of $277 million, while Citigroup was estimating $276 million before Beach flagged the write-downs last Friday.
On Friday, Beach said it had written down its Egyptian exploration interests by $148.6 million, and had written off its Paralana geothermal project, which had a carrying value of $13.6 million.
Beach has already provided full-year guidance for fiscal 2015 production of 8.6 million-9.4 million barrels of oil equivalent, a 6 per cent decline from last year.
The company's shares are 0.7 per cent higher at $1.70 each.
Packaging manufacturer Orora, which was spun out of Amcor last December, reported a 44.8 per cent increase in net profit to $104.4 million in 2014 after slashing costs and gaining market share in glass bottles.
The result, which was underpinned by a 7.9 per cent increase in revenues to $3.18 billion, exceeded market consensus forecasts around $97 million.
Orora shares have popped 8.5 per cent to $1.60, easily their highest in the company's short history.
Pro forma EBIT rose 29.6 per cent to $192.1 million, beating market forecasts around $185 million, buoyed by cost savings of $27.1 million. Earnings in Australasia rose 26 per cent, fuelled by stronger volumes in glass and higher margins in fibre packaging, while earnings in North America rose 31 per cent.
Orora declared an unfranked final dividend of 3¢ a share, taking the full year pay out to 6¢, representing 70 per cent of earnings.
“We have delivered pro forma earnings growth of approximately 30 per cent by increasing sales revenue and continuing to successfully deliver on our cost reduction programs,” said managing director Nigel Garrard.
Mr Garrard forecast further earnings growth in 2015, Orora’s first full year as a stand-alone company.
Orora, formerly known as Australasian Packaging Distribution, had previously been one of the weakest performers in the Amcor portfolio, squeezed by import competition and rising costs.
However, analysts believe the $2 billion demerger has freed up the company to pursue profitable market share growth rather than growth at any cost.
The company is also benefiting from the opening of its new recycled paper mill at Botany and recent investments in efficiency and productivity. These programs have so far delivered cumulative cost reductions of $39 million, with another $54 million of cost savings expected to be realised in 2015.
Australian companies, wracked with fear, are stifling their growth by confining themselves to the domestic market, Goldman Sachs Asset Management’s head of Australian equities, Dion Hershan, says.
Hershan criticised investors, public company management teams and boards of directors for being obsessed with the fear of looking offshore for growth in a note he distributed to GSAM’s institutional clients, including industry and for profit superannuation funds.
“I happen to think companies have squandered an opportunity over the last few years; we’ve had elevated currency and open debt markets but there’s been little activity [exploring overseas expansion],” he said.
Hershan said some Australian companies with a track record in the Australian market have the ability to grow offshore but aren’t doing so because of a lack of confidence.
Food distribution companies in particular have an opportunity to pursuer growth by expanding into Asia, he said, adding that Australian retailers also have strong prospects for growth in other western developed markets.
“We are yet to see a controlled study that companies shouldn’t go offshore … there’s a risk associated with going offshore but I’d argue there’s as much of a risk in doing nothing,” Hershan says.
The costs of demerging from Brambles have curbed Recall Holdings’s inaugural full-year profit, but the information management business is confident it can accelerate future earnings growth.
For the year ended June 30, Recall reported a profit of $US42 million ($45.2 million), down 3 per cent on the previous year.
Demerged from Brambles and separately listed in December, the business had $US39 million in significant items. Barring these, Recall had a profit of $67.9 million, up 57 per cent from the previous year.
Recall will pay a dividend of 8¢ per share, unfranked, on October 23. The business will aim for a long-term dividend payout ratio of between 55 per cent and 70 per cent.
Recall is bullish about its growth prospects in the 2015 financial year; the company expects to deliver revenue growth in the high single digits.
“During our first financial year as a public company, Recall has established a platform for growth and made progress across each of our three strategic objectives: sustainable profitable growth, operational excellence and innovation for the future, which includes a truly differentiated digital strategy,” Recall chief executive Doug Pertz said.
Revenue surged over the year, from $US225.3 million to $US613.7. Organic revenue growth rose 3 per cent, while growth from acquisitions lifted 3.7 per cent.
Over the last 12 months, Recall fully acquired its Singapore business, CitiStorage in the US and two other small US and UK based companies.
Investors are unimpressed, selling the stock down 5.3 per cent to $4.85.
One of Australia’s top economic experts, Jeremy Lawson, says the housing market is 20 per cent to 30 per cent overvalued and has left Australia vulnerable to a big international economic shock.
Lawson is the global chief economist of Standard Life, a massive British fund manager with $460 billion in assets under management. He was previously a senior economist at the Reserve Bank of Australia and the OECD, and in 2007 advised then opposition leader Kevin Rudd.
In an interview with the AFR's Christopher Joye, Lawson criticised fiscal policy settings, suggested the RBA’s organisational culture was insular and said there was a bias towards big banks in the financial system inquiry panel and argued low interest rates are pushing house prices out-of-line with fundamentals.
As an economist focused on investing Standard Life’s capital around the world, Lawson said he can take a longer-term view than “sell-side” counterparts inside investment banks, who have to relentlessly promote new angles to clients and the media in a battle for attention.
Lawson said it is “reasonable to assume that future house prices will grow in line with real household disposable income as the commodity boom unwinds”.
“That would imply overvaluation of between 20 per cent and 30 per cent,” he said, based on a new valuation model released by the Reserve Bank in July.
House prices are 26 per cent above their peaks before the financial crisis and 11.2 per cent higher over the 12 months ended August 23, RP Data said. Prices in Sydney and Melbourne have surged over the last three months.
Lawson said valuation distortions have been fuelled by easy monetary policy and regulators’ reluctance to use so-called macro-prudential tools to slow price growth.
Vulnerable to external shocks: Australia's housing market. Photo: Louie Douvis
Patties Foods, whose brands include the famous Four'N Twenty meat pie range, has posted a return to profit growth in the second half after a tough start to the year.
The company, whose profit dived in 2013, has pledged to improve earnings this year as it expands its selling channels, invests in its core brands and battens downs costs.
Recently appointed CEO Steven Chaur said despite pressures in the market he saw growth opportunities for the business.
Patties has faced intense competition to many parts of its business in the last few years. It has a private-label business that makes foods for contracted grocery clients while also owning some of the most popular brands in the frozen foods aisle such as Patties, Four'n Twenty, Herbert Adams and Nanna's.
It has felt the pain from the supermarkets as they screw down suppliers and also devote more space to private-label brands.
Today the food manufacturer reported a full-year net profit of $16.7 million, against $4.8 million for the previous year.
But the result was down slightly against an underlying profit of $17 million for 2013.
The result was inline with earnings guidance provided to the market in February, with the second half net profit up 5.1 per cent (versus a 7.5 per cent dip in the first half) as the company swung back into positive territory.
Patties Foods shares are 3.3 per cent higher at $1.25.
Patties Foods is the company behind the famous Four'N Twenty pies brand. Photo: Erin Jonasson
A slight profit beat - $173 million in terms of its preferred replacement operating cost metric which is slightly above the recent revised forecast of $150-$170 million for the June half - but, more importantly another round of cost cutting helped to push the Caltex share price well clear of $26, to levels not seen since 2007.
The issue from here is whether it will be able to continue to push higher, and as a pointer to its prospects, in the June half Caltex managed a 5 per cent lift to volumes sold, which was underpinned by a 7.5 per cent boost to diesel volumes and an 11 per cent rise in jet fuel volumes which helped overcome an unspecified decline in unleaded petrol sales.
A cost and efficiency review will result in another 350 jobs being cut, which comes on top of the 400 jobs going with the Kurnell refinery closure - will take the cost structure down another notch, setting the scene for further profit gains over the next few years.
Shares are ahead 4 per cent at $26.59.
Result season has been “solid” but analysts tend to be downgrading rather than upgrading their earnings growth estimates for the coming financial year, which is placing more scrutiny on the high valuations being demanded for many listed companies.
With reporting season around two thirds complete, the strategy teams at UBS say the market remains on track for 13 per cent earnings growth for FY14, although that’s skewed by the resources sector and some outsized results. The “typical”, or median, number is more like 8 per cent, or 7 per cent excluding resources, reckons UBS.
“On a more cautionary note, some strong large cap share price rallies have seen the industrials ex financials P/E expand to 17.5x forward EPS,” write the UBS strategists in a new note to clients.
And it’s been “positive reactions to dividends and other capital management” which “appear to have been a key driver,” rather than strong profit numbers.
The rally has left the ASX200 at 5646, which is - worryingly - marginally above UBS’s 5625 December year-end target.
Understandably, then, they “have a somewhat cautious near term view from current levels,” adding there is “a lot seemingly resting on the superficial attractiveness of dividends versus current interest rates”.
Best large cap results so far, says UBS, are: Amcor, Arrium, Crown Limited, Echo Entertainment Group, Rio Tinto, Tabcorp Holdings, Cochlear, Woodside Petroleum and Oil Search.
The most disappointing ones have been: Transpacific Industries, James Hardie Industries, Leighton Holdings, Tatts Group, Henderson Group, Coca Cola Amatil, CFS Retail Trust and Aurizon Holdings.
The mining boom delivered Australians a once-in-a-century windfall. So how did we spend all the extra money?
New modelling published by the Reserve Bank shows the mining boom triggered a binge on new cars. Purchases of motor vehicles were 30 per cent higher than they otherwise would have been as a result of the boom.
The boom has also underpinned a glut of spending on household items such as furniture, whitegoods, TVs, cameras and computers. Purchases in durable goods were 20 per cent higher than what would have been the case if there was no boom.
There are two main factors driving these trends. First, the boom boosted our incomes. The bank's modelling shows household disposable income per person was 13 per cent higher last year than if there had been no mining boom. Second, the surge in demand for Australian minerals pushed up the exchange rate, making imported goods such as cars, TVs and computers cheaper for local consumers.
"We find that the mining boom has substantially increased Australian living standards," said the Reserve Bank research discussion paper, titled The Effect of the Mining Boom on the Australian Economy, written by economists Peter Downes, Kevin Anslow and Peter Tulip.
Investor demand for yield will keep the Australian dollar at or above current levels even after the US Federal Reserve starts tightening monetary policy, according to a contrarian view from Westpac.
Bank economist Robert Rennie says according to a fair value model based on export commodity prices, the spread between Australian and US two-year bond yields and the Chicago Board Options Exchange’s Volatility Index, or VIX, the local unit has not diverged widely from fundamentals over recent years.
He questions whether demand for Australian dollar-denominated assets will alter much once an increase in US interest rates makes the greenback more attractive.
“My sense remains that the Australian dollar will also continue to attract yield-related demand that will support it even as the US dollar inevitably starts to push higher,” he said.
His observations, in a recent note, contrast with the view of a range of commentators, including Reserve Bank governor Glenn Stevens, that the Australian dollar is considerably overvalued and due a correction.
Investment bank Nomura, in a recent note, argues the dollar is overvalued - based on spreads narrowing at the long end of the curve. Demand for long-dated Australian government bonds has compressed yield spreads with the US equivalent so much that the former is losing its appeal, it says.
Nomura says Fed moves towards tightening should gradually draw more investor interest away from Australia and compress this spread further.
“As a result of expected higher US Treasury yields, we expect to see downward pressures on the Australian dollar developing in the coming months,” it says.
“The higher US yields will make it less attractive for foreigners to invest in Australian assets. Moreover, a depreciation in the currency would also mean weaker returns or even loses on foreigners’ holdings of Australian dollar assets, which would also reduce the inflows,” Nomura says.
While the spread between US and Aussie 10-year bonds has narrowed to about 100 basis points (see chart), two-year spreads remain steadfast above 200 basis points.
Foxtel is preparing to drop the price of its premium pay television service below the $100 mark to counter cheaper competition in pay TV.
The joint venture between News Corp and Telstra is gearing up for a massive advertising campaign as it prepares to launch its broadband service, designed by former Seven West Media executive Rohan Lund.
It is understood that bundles for "triple play" Foxtel – pay TV, broadband and telephone – will be structured to cut the price of a traditional premium Foxtel subscription to below $100.
There is speculation the company may give users more options to pay for Foxtel shows on different devices.
The moves could affect average revenues per user, which are among the highest in the world for pay TV, but would boost subscriber numbers.
Foxtel, which has hired several hundred call centre staff to manage the launch of its broadband service, is under pressure to drop prices because of the increasing availability of cheaper video content – as well as pressure on household spending.
US subscription video-on-demand giant Netflix, which has more than 200,000 unofficial Australian subscribers, has tested the waters for a potential official launch in Australia.
The new bundles are set to see the price of a traditional premium Foxtel subscription fall below $100. Photo: Rob Homer
UGL will make a capital return to shareholders after completing the sale of its DTZ property arm but will not pay a final dividend despite underlying net profits rising 22 per cent to $111.7 million.
The increase in fiscal 2014 underlying net profits after tax was lower than expected, with UGL having previously told investors to expect net profits of around $120 million.
UGL has had a difficult year, abandoning its interim dividend at its half year results in February and scaling back its full-year forecast due to weakness in its engineering business. UGL’s stock has slid 7 per cent over the past year to close at $6.79 on Friday.
Statutory net profits after tax rose 66 per cent to $68.5 million due to healthy earnings from DTZ and a sharp fall in expenses but group revenues fell 4 per cent to $1.8 billion.
Operating cash flow slid to $62.1 million from $105.6 million a year earlier.
EBIT in UGL’s engineering division rose 3 per cent to $84.1 million with the help of cost cuts but revenues dropped 2 per cent to $2.26 billion.
“Earnings were impacted by reduced freight locomotive sales and resources project opportunities along with margin pressure attributable to cost saving measures implemented by mining sector clients,” the company said.
UGL plans to use the proceeds of the DTZ sale to return between $400 million and $500 million to shareholders after paying down some $567 million of net debt.
The company's shares are 2.4 per cent lower at $6.63.
Micro-blogging site Twitter has emerged as another US tech giant that has sought immunity from corporate rules in Australia that require companies to disclose their earnings.
The directors of Twitter Australia Holdings 12 months ago applied for an exemption from parts of the Corporations Act, according to documents registered with the Australian Securities and Investments Commission. This meant it did not prepare a financial report or directors' report for the last calendar year, amid continued concern over profit-shifting by international companies.
The exemption application, signed by sole Australian-based director John Pegg, argues the company does not need to file a financial report in Australia under a waiver available to foreign-owned companies that are "not part of a large group", as defined as having more than 50 employees and revenues or more than $25 million a year.
Twitter has refused to disclose its Australian revenue, staff numbers or user numbers since starting to hire staff early last year. But it is estimated to have millions of local users, and local managing director Karen Stocks has said she wants Twitter Australia "to be looked upon as the world's leading office for Twitter".
Twitter Australia Holdings' parent company is the Ireland-based Twitter International Company. The Australian Taxation Office is investigating three multinational tech companies on suspicion of shifting profits overseas. It is part of a global push by tax authorities to crack down on corporate tax-dodging by multinational companies, particularly tech giants.
The latest advertising figures from SMI Standard Media Index show social networking sites attracted $46.5 million in ads from media buyers this year. Photo: Reuters
The cheap money keeps rolling in for Australia's banks.
National Australia Bank has raised $1.65 billion in five-year bonds from domestic investors at a cost that represents a new post-GFC low for the big four banks.
NAB raised the 5.25 year bond at 82 basis points over the benchmark bank bill swap rate. ANZ Bank also paid 82 basis points above the benchmark last month, but this was over five years, rather than NAB's 5.25 year deal. Since NAB's bond has a longer duration, this pushes up what they have to pay investors.
At the start of July, CBA paid 85 basis points over the benchmark over five years - also slightly more than NAB is paying today.
Another proxy for bank funding costs - the cost of insuring against a bank default - is also at its lowest level since the global financial crisis.
Wind power producer Infigen Energy has posted a $8.9 million full-year loss, an improvement from a year earlier, despite the poor market conditions in Australia due to uncertainty over the renewable energy target legislation.
But it has warned that low renewable energy prices look set to hit performance in the 2015 financial year, and that "significant" asset writedowns would be necessary for Infigen and across the industry if prices for utility-scale renewable energy generation certificates don't improve.
Continued depressed prices would also "create significant pressure on Infigen's capacity to meet financial covenants on our borrowing facilities," it advised.
The loss for the year to June 30 was $71.1 million narrower than in fiscal 2013, when Infigen was hit by a $58.4 million write-down on its US renewable energy business.
Infigen still reported a 1 per cent increase in production to 4670 gigawatt-hours in the year, which helped drive a 6 per cent gain in revenues to $303.2 million.
Managing director Miles George said the regulatory uncertainty in Australia, where the 2020 RET legislation is under review, "had an adverse effect on the financial performance on the business, however more favourable wind conditions, good availability and careful management of operating and overhead costs resulted in a steady EBITDA outcome."
Earnings before interest, tax, depreciation and amortisation rose 7 per cent to $170 million.
Shares are largely flat at the open, with the big miners and a 11.2 per cent plunge in Bluescope Steel shares, following the release of results, the early drags.
The ASX 200 is flat at 5645.1 and the All Ords steady at 5641.4.
BHP and Fortescue are 1 per cent lower and Rio 0.7 per cent after iron ore declined further on Friday night.
Recall has slumped 5.1 per cent followings its earnings announcement.
Energy stocks are supporting the market, with Origin, AGL, Santos and Caltex all higher.
CBA is the biggest single support for the benchmark index, up 0.3 per cent.
BlueScope Steel stocks are being hammered in early trade after the company reported a sharp recovery in annual earnings but missed market forecasts for earnings and core profit.
Profit before impairments and restructuring costs rose to $112.3 million for the year to June 2014 from $105.6 million a year earlier.
Shares are down 11.1 per cent at $5.42.
M2 Group, which owns broadband companies including Dodo and iPrimus, has reported $67.1 million in net profits with annual revenue levels breaking through the billion dollar mark.
The Melbourne-based company made revenue of $1.024 billion with EBITDA rising to $160.1 million in the year ending June 30.
The result was slightly above analyst expectations with most of the market expecting net profits of $66 million. This is the first time in three years M2 hasn’t made a major acquisition during the year.
Its broadband subscriber base rose by 70,000 over the past 12 months to around 482,000 while 37,000 energy customers also came on board, showing the company has been capable of adding users without buying them.
M2 forecast revenue would rise by up to 9 per cent, which would mean financial year 2015 could see the company make $1.1 billion.
After three weeks of reporting, covering about 80 per cent of the market’s value, the overall outcome of earnings season so far is better than might have been feared at this stage, Citi says in a note:
- There has been only a modest lowering in market earnings estimates from those a month ago, with FY14 earnings growth about 1% lower, and FY15 forecast growth little changed.
- For the companies that have reported, those with FY15 earnings downgraded by Citi analysts have exceeded those with earnings upgraded by more than 2:1, but for the larger companies estimates have been more stable
- Many companies have continued to find conditions relatively slow going, but forecast earnings have held up a little better, as some have pointed to signs of improvement (AMP, ORG, AIO), or progressed further on costs (AJZ, BXB, TOL, FBU), or flagged initiatives or transactions (asset sales, acquisitions, capital raisings) that should support earnings (QBE, WPL, AMC, ANN, ORG).
- More scope and appetite for corporate transactions may be a positive trend emerging from this reporting season.
- As reporting has taken place, the market has rebounded ~4% in the past two weeks, following a similar rise in the US, but exceeding it slightly, it would seem on the back of the resilience in market earnings estimates, and perhaps the initiative being shown by some companies.
- However, against the modest downgrading of earnings, the market rise has taken the PE to ~15x forward earnings, a fuller valuation that might limit further gains in the near term, even though our end 2014 forecast for the ASX200 of 5750 would still seem achievable.
Caltex Australia reported a marginal 1 per cent climb in benchmark net profit for the June half, to $173 million, toward the upper end of its guidance in June. Gains in the marketing and distribution business were cancelled out by a loss by the refining part of the business.
Net income for the first half slid 17 per cent to $163 million, also in line with guidance, due to declines in the value of inventories.
The results were in line with the guidance Caltex gave in June, for net operating profit of $155 million-$175 million, and bottom line net income of $150 million-$170 million. Citigroup was estimating first-half net operating profit of $169 million, while UBS was estimating $171 million.
Last year, Caltex reported net operating profit of $171 million and net income of $195 million.
Caltex's net income for the first half slid 17 per cent to $163 million. Photo: Bloomberg
Australia's most lucrative export has extended its losses after plunging to a two-month low last week.
Iron ore, measured out of the Tianjin port in China, lost a further 2 per cent overnight on Friday, diving to $US90.10 a tonne, its lowest point since June 18.
The bulk metal has slumped 32.8 per cent this year, with fresh concerns about China's growth triggering the latest fall.
ANZ commodities analyst Mark Pervan attributed the metal's "sluggish" performance to a weaker-than-expected Chinese factory data, which was released last Thursday.
HSBC's Flash China Manufacturing PMI sputtered to a three-low in August, with a reading of 50.3, down from 51.7 in July.
"The main factor was the China flash PMI release, which printed well below expectations," said Mr Pervan about iron ore's slide.
"Coal markets were equally subdued as authorities continued to crack down on over-production. Three major government departments said in a joint statement that they would increase scrutiny on mines which have been producing above approved capacity levels."
Plentiful supply and tougher credit conditions in China have winded iron ore prices. Some trading firms are having difficulty securing letters of credit (LCs) from banks as China reins in lending to help spur consolidation in sectors plagued by overcapacity and prevent a surge in bad debts.
Weaker than expected Chinese factory data is behind the latest fall, say analysts.
Earnings seasons so far looks pretty good, says AMP Capital's Shane Oliver.
The profit reporting season is now about 70 per cent done and is looking good, writes AMP Capital’s Shane Oliver:
Sure it’s not been easy for non-financial industrial companies and there is still another week of results left with poorer performers often reporting late in the season. But the bottom line is that the June half earnings results are nowhere near as bad as many feared.
In fact, the profit results overall are looking pretty good:
- 55% of companies have exceeded expectations (compared to a norm of 43%), which is the best result in nine years;
- 69% of companies have seen their profits rise from a year ago (compared to a norm of 66%);
- 68% of companies have increased their dividends from a year ago (up from around 60% in the last two years); and
- 59% of companies have seen their share price outperform the market on the day they released results, which is the best result in four years.
Key themes have been continued strength for resources (notably Rio, although BHP disappointed), banks doing well (with a good result from CBA), ongoing cost control making up for still soft revenue growth and strong growth in dividends reflecting investor demand for income and corporate confidence in earnings prospects.
Australian earnings growth for 2013-14 looks to be coming in around 12%, albeit down a bit from a few weeks ago as the BHP result saw a slight downgrade for resources. Resources are still leading growth though with a 27% gain, followed by banks up 9% and the rest of the market up around 5%.
Consensus expectations for 5% earnings growth in the current financial year look a bit low to me.
Spark Infrastructure posted a 13.2 per cent increase in first half profit before interest on loan notes and tax, despite a decline in the volume of electricity carried through its networks in Victoria and South Australia.
Profit before loan note interest and tax rose to $166.1 million, while net income climbed 17.1 per cent to $89 million. Operaeting cash flows rose 4 per cent.
Spark has already provided guidance for distributions this year of 11.5¢ per security, up 4.5 per cent on 2013, and forecast growth in the 2015 distribution of 3-5 per cent. It said its declaration of an interim dividend of 5.75¢ per security was in line with that forecast.
Spark, which owns 49 per cent of the CitiPower and Powercor distribution networks in Victoria, and of the SA Power Networks business in South Australia, also holds an interest in gas pipeline owner DUET Group through derivative contracts with Deutsche Bank.
US and European shares fell on Friday, paring weekly gains, as geopolitical tensions escalated and investors weighed comments from central bank leaders for clues to monetary policy. The US dollar reached an 11-month high versus the euro while gold snapped a five-day losing streak.
The S&P 500 dropped 0.2 per cent to 1,988.4 after the previous day closing at an all-time high. The benchmark index rallied 1.7 per cent this week, the most since April, amid bets the Federal Reserve will continue stimulating the economy even as growth strengthens. The Stoxx Europe 600 Index fell 0.2 per cent, trimming its best weekly gain since February. The dollar gained against most major peers.
NATO said it saw an “alarming build-up” of Russian troops on the border, while Ukraine said the arrival of what Russia called humanitarian aid amounted to an invasion. President Barack Obama will consider airstrikes in Syria in the battle against Islamic State terrorists, deputy national security adviser Ben Rhodes said. Federal Reserve chair Janet Yellen said slack remains in the labour market while European Central Bank chief Mario Draghi said policy makers are ready to add more stimulus.
“The news out of Ukraine took a little bit more of the headlines today,” Joe Bell, senior equity analyst at Cincinnati-based Schaeffer’s Investment Research, said. “We see bad news ahead of the weekend after a week of gains, and we see that investors are reacting by taking profits off the table.”
Private health insurer NIB said its full-year net profit after tax rose 4 per cent to $69.9 million, despite a lower operating profit in its Australian residential business which was hit by high claims for medical care.
However the result was in line with consensus among analysts of net profit of $69.3 million.
Overall operating profit, which excludes net investment income, rose 4.3 per cent to $72.3 million in the year ended June 30.
The company said it would report operating income of $75 million to $82 million in the 2015 financial year.
The board declared a dividend of 5.75¢ and a special dividend of 9¢, which will be paid on October 3. The special dividend, worth $39.5 million, comes as a result of new industry capital standards.
Operating profit in the Australian resident health insurance business, which accounts for 79 per cent of the company, fell to $57 million from $59 million in the same period last year, due to high levels of medical claims.
The Newcastle-based business said revenue rose 15 per cent to $1.53 billion in the year ended June 30. This was marginally higher than the $1.50 billion expected by analysts, according to data compiled by Bloomberg.
The stock has climbed 55 per cent in the past year, compared to a 10 per cent rise in the S&P/ASX200 index.
The board declared a dividend of 5.75 cents and a special dividend of 9 cents, which will be paid on October 3. Photo: Max Mason-Hubers
And straight into the latest earnings update: lower coal and iron ore prices underpinned a continued upswing in the earnings of Bluescope, with the steelmaker lifting its underlying net profit to $112.3 million for the year to June on the back of a rise in revenue.
The year earlier underlying profit was $6.7 million.
The statutory net loss declined to $82.4 million from $107.1 million.
Driving the improvement was a 10 per cent lift in revenue to $7.98 billion for the year.
The full year underlying profit came in modestly ahead of the company's forecast that it would match its first half underlying net profit of around $50 million in the second half, signalling a full year figure of around $100 million.
The company forecast little change in underlying earnings in the first half of the new financial year, subject to market conditions.
Read more (to come).
BlueScope Steel reported a 10 per cent lift in revenue to $7.98 billion for the year. Photo: Louie Douvis
With a weak lead from Wall Street, local investors will be awaiting fresh corporate results after iron ore slumped on Friday night.
Here’s what you need2know:
• SPI futures slid 10 points, or 0.2%, to 5599
• AUD at 92.99 US cents, 96.93 Japanese yen, 70.41 Euro cents and 56.15 British pence
• On Wall St, S&P 500 -0.2%, Dow -0.2%, Nasdaq +0.1%
• In Europe, Euro Stoxx 50 -0.8%, FTSE -0.04%, CAC -0.9%, DAX -0.7%
• Iron ore tumbles 2% to $US90.10 per metric tonne
• Spot gold up 0.3% to $US1280.08 an ounce
• Brent oil down 0.3% at $US102.29 per barrel.
What’s on today:
• Australia: CBA/HIA house affordability
• US: New home sales.
• Germany: IFO Business climate survey
Stocks to watch
• Earnings today from: BlueScope Steel, UGL, Beach Energy, Caltex Australia, McMillan Shakespeare, M2 Group, NIB Holdings, Orora, Recall Holdings, Spark Infrastructure, Select Harvests, Infigen, Patties Foods
• Federation Centres cut to hold at Deutsche Bank
• SAI Global cut to hold at DB
• Shaw Stockbroking has a “buy” recommendation on Mermaid Marine, which it rates as “high risk” with a price target of $3.20 a share.
• Morningstar has a “hold” recommendation on Trade Me following the release of its full year results for the financial year ended June 30, 2014, and expects the share price to reach a fair value of $3.60.
• Macquarie Research has a positive take on Village Roadshow saying the stock will “outperform” in the next 12 months. It says VRL is an attractive investment opportunity and has a 12 month price target of $8.50.