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Shares bounced off a morning low to close stronger as Telstra hit a 12-year high.
Investors warmed to the latest confirmation by the Reserve Bank that interest rates are firmly on hold, while shrugging off concerns about declining consumer confidence and a slump in the iron ore price.
The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each gained 11.4 points, or 0.2 per cent, on Tuesday to 5420.4 and 5401.7 respectively as shares recovered from a 0.5 per cent drop in the morning session despite positive leads from the United States.
Strength in Asian markets, such as Japan, Hong Kong and India, helped buoy the local bourse in afternoon trade. At the Australian close, the Bangkok stock exchange was trading 0.9 per cent lower after the army imposed martial law in Thailand.
Telstra led the bourse into the black, lifting 0.8 per cent to a 12-year high of $5.30, as US research house Sanford C. Bernstein & Co reiterated its "perform" rating on Australia's largest telecommunications company.
Treasury Wine Estates, the owner of Penfolds and Lindemans wines, also helped lift the index as it posted the biggest percentage gain among the ASX 200, up 17.9 per cent to $4.80 after rejecting a $4.70 a share takeover offer from private equity firm Kohlberg Kravis Roberts, fuelling speculation of a higher bid.
The market remained buoyant despite a private survey showing consumer confidence fell to its worst level since the wake of the global financial crisis in 2008 after the release of the federal budget last week.
Barclays economist Kieran Davies said he was hopeful the drop in confidence will prove temporary as it is offset by an ongoing improvement in employment but presented a downside risk to consumer spending.
Turning to the hits and misses on the ASX today, and no surprise to see private equity target Treasury Wine Estates at the top of the pops with a 17.9 per cent gain.
Pacific Brands jumped 4.7 per cent for reasons unknown, while DUET gained 4 per cent as Spark Infrastructure gained a cornerstone stake.
Acrux was the worst of the top 200.
Best and worst performing stocks in the ASX 200 today.
A financially damaging airline capacity war on Australia-south-east Asia routes is showing signs of abating, with AirAsia X forecasting an improvement in fares and earnings in the second half of the year as seat numbers stabilise.
Qantas and Singapore Airlines - and their respective budget subsidiaries Jetstar and Scoot - have all cut or announced plans to slash capacity between Australia and Singapore in recent months after having been forced to slash prices to fill seats.
Meanwhile, AirAsia X and Malaysia Airlines, which compete on the Australia-Kuala Lumpur routes, are showing signs of bedding down double-digit capacity increases over the last year rather than unveiling further growth.
AirAsia X today reported its Australian unit, which flies from its Kuala Lumpur hub to Sydney, Melbourne, Perth, Adelaide and the Gold Coast, had swung to a 52.6 million ringgit ($17.6 million) loss in the first quarter despite reporting a 24 per cent rise in revenues as a result of capacity additions. A year ago, it had reported a 20.4 million ringgit profit from its Australian operations in the same period.
After a less than inspiring start, shares managed to rally into the afternoon to post modest gains after miners bounced back from steep losses yesterday.
The ASX 200 closed 11 points, or 0.2 per cent, higher to 5420.4, while the All Ords climbed by a similar amount to 5401.7.
Telstra closed 0.8 per cent higher to $5.30, and traded as high as $5.34 to reach its highest price in over 12 years.
Treasury Wine Estates surged 18 per cent after the winemaker revealed its board had rejected a $3.1 billion offer from private equity behemoth KKR.
Fortescue recovered 3.9 per cent, despite the iron ore price dropping below $US100/tonne and with futures trading suggesting further falls when the spot price is printed tonight. BHP eked out a slight gain and Rio a slight loss, but junior iron ore miners did well.
Banks also rose, aside from Westpac after it revealed a rogue currency trader had cost the bank around $1 million.
Woolies gained 0.5 per cent.
CSL lost 0.7 per cent and Woodside and Santos fell 0.5 per cent and 0.6 per cent, respectively.
After doling out a "first strike" to troubled driller Boart Longyear on Monday, it was ComOps turn today.
At its annual general meeting, around 45 per cent of the votes cast opposed the remuneration report, which was way more than the 25 per cent needed for a "strike".
The US sharemarket is very subdued. So subdued that analysts are starting to worry.
It’s got to the point, say the number crunchers at Societe Generale, that a mere two days of selling is enough for commentators to jump up and down and call it a significant sell-off.
And little wonder.
On average, since 1969 there have been 27 days a year where the S&P 500 is down 1 per cent or more; yet the key US index has only had 16 such days over the past 12 months, calculate the SG analysts.
What’s more, it’s been 468 days since a market correction of 10 per cent or more – the fourth longest period on record.
And as the chart below shows, the maximum peak-to-trough loss over the past year has only been 5 per cent, against a typical annual drawdown of 15 per cent.
“The point of all these figures is to illustrate a potentially risky build up of investor complacency,” writes the team at the French investment bank. “The longer equities (and other risk assets) go without a typical period of losses, then the more these assets may be seen as one-way upward plays.”
It’s these kind of smooth waters that can entice in “new investors who may not have the capacity to absorb normal equity volatility and losses,” they say.
“Downplaying risk serves no one in the long term and we think policy makers should be more vocal about the potential downside.”
Volatility in the US sharemarket is worringly low, reckon analysts, with the annual peak-to-trough at only 5 per cent against a 15 per cent average. Source: SG.
Has the recent slump in the shares of iron ore miners turned them into bargain buys? Judging by analyst calls it would seem so, with the majority of professional stock watchers surprisingly bullish for the sector.
Shares in Fortescue have fallen 25 per cent this year but 18 brokers recommend buying the stock while just one, Goldman Sachs, think clients should sell it, according to Bloomberg. Credit Suisse is the most bullish with a price target of $7.50 compared to today’s level of $4.57, while Goldman’s target is $4.20.
It’s a similar takeout with other stocks. Rio Tinto has 15 brokers calling the stock a buy, while just five have a ‘hold’ rating and no broker thinks it’s an outright sell.
Atlas Iron has dropped 36 per cent since trading began in January but now is not the time to sell. Only one broker suggests reducing exposure to the stock while 13 believe it’s a buy and eight have a recommendation of hold.
Arrium has halved in value this year but only one analyst, CIMB, has a sell recommendation on the stock with four others calling it a buy. The stock is changing hands at 92 cents but even when brokers such as JPMorgan have a neutral rating the target price for the stock is $1.40.
Telstra is continuing it march higher, trading up 1.3 per cent today to 12-year highs.
The stock fetches $5.33 - the last time it reached these heights was March 2002.
Speculation has been building on how the giant telco will put to work its enormous cash pile - recently boosted by asset sales - with chatter around potential acquisitions, and investors appear to be happy to back management's ability to add value.
Telstra's share price since 1998.
The corporate watchdog has banned a former Westpac and Nomura trader who is alleged to have filed fictitious foreign exchange trades to conceal losses.
Jeremy Kaviraj Nambiar of St Ives, NSW, was named by ASIC having received an eight-year ban from the financial services industry. He may appeal to the Administrative Appeals Tribunal to have the decision overturned.
Nambiar allegedly created more than 100 fictitious trading entries designed to appear to be profitable and some hid more than $1 million in losses in the Australian dollar-US dollar spot market, ASIC said.
The regulator said $17.6 million was written off Westpac’s income statement for accounts dating back to March 2011.
“Mr Nambiar did not personally benefit from the trades. The trades were internal to Westpac and no customers were affected,” ASIC said.
Chinese iron ore futures fell for a third straight day to a fresh low and spot prices dropped to a 2-1/2 year trough on weak buying from steel mills in top consumer China.
Spot prices have fallen 25 per cent this year to below $US100 a tonne due to rising supply and weak Chinese demand growth for steel. A cooling of economic growth and the property sector is expected to further weigh down steel and iron ore prices.
Iron ore futures on the Dalian Commodity Exchange touched a low of 695 yuan ($US110) a tonne, the lowest since the contract was launched in October last year. It fell 1.3 per cent to 699 yuan by midday break.
"The tepid steel market and rising iron ore supplies from overseas put the raw material under huge pressure, and there is risk that some traders may rush to sell at low prices to liquidate some stocks," said an iron ore trader in Shanghai.
On the Shanghai Futures Exchange, the most active rebar futures for October delivery fell for a fifth consecutive session to 3,075 yuan by the midday break, down 0.3 per cent. It touched a low of 3,065 yuan, not far from the record low hit last Friday.
"Prices could test the lower end of the next trading range $US95-100 a tonne, but should improve as steel stocks reach the low point for the year in the next month or two," ANZ said in a research note.
Spot iron ore for immediate delivery to China dropped 2.1 per cent to $US98.50 a tonne on Monday, its lowest since September 2012.
The Reserve Bank has never been shy about its preference for a lower Australian dollar. And Guy Debelle, assistant governor for financial markets, has taken this theme and run with it at a speech in Adelaide today.
Debelle hypothesises that capital flow trends could lead to a lower Australian dollar because direct investment inflows into the resources sector from offshore will decline. That's but one reason in a complex web of factors that compose Australia's complete capital position, including the funding activities of banks and investments in Australian government debt.
"The net implication of these developments is that one might expect to see reduced capital inflows in the period ahead, with the possibility of a consequent further decline in the Australian dollar," says Debelle. "That said, the ability of economists to forecast exchange rate movements is notoriously poor."
The dollar has slipped below US93 cents for the first time in two weeks as investors digest the fall in the iron ore price and the sustainability of Australia's triple-A credit rating.
Foreign investment in Australia. Source: RBA
Chinese iron ore traders are dumping stocks ahead of a June deadline to repay bank loans, according to one industry player who said demand remained weak for the key steel making commodity.
Ji Minlei, a trader who operates from the port of Rizhao, told AFR china correspondent Angus Grigg that pressure from banks partly explained why the iron ore price had dipped below $US100 a tonne for the first time since September 2012.
“Some traders have been caught in the liquidity crunch and have been forced to sell,” he said.
Ji said banks had been increasingly tightening credit this year and were now demanding deposits of up to 30 per cent to finance cargos, double the previous level.
“The biggest risk to the price now is that banks further tighten credit,” he said.
China’s state-owned banks have reined in credit this year, fearing a spike in bad loans. There are also unconfirmed suggestions that banks have cracked down on property developers and others using iron ore as collateral to obtain bank financing.
Ji said traders were usually required to repay loans in June and December each year. He said many had been forced to sell iron ore stock in the lead up to this deadline, even though they would be taking significant losses.
Superannuation funds are on track to deliver returns of more than 10 per cent for the second financial year in a row, as retirement savings are propelled higher by a global surge in shares.
Six weeks from the end of the financial year, new figures show the typical managed super fund bounced back in April, positioning funds for another year of strong growth.
Research house SuperRatings said the median balanced fund returned 0.7 per cent in the month, taking returns over the first 10 months of the year ending June 30 to 11.1 per cent.
Some of these gains have been eroded in May, but analysts believe double-digit returns are likely for the current financial year, after a bumper 14.7 per cent increase in the year ended June 2013.
It is almost certain to be the fifth consecutive financial year of higher returns from the typical managed fund.
Separate figures also published by Chant West highlighted strong performance of ‘‘growth’’ funds, which are 60 to 80 per cent invested in riskier assets such as local and international shares.
The typical growth fund gained 0.8 per cent in April, taking returns over the financial year so far to 11.4 per cent.
Who will uncork Treasury Wine Estate's potential, Malcolm Maiden asks:
Treasury Wine Estates' revelation that it has studied and rejected a $3 billion takeover approach from US private equity group Kohlberg Kravis Roberts raises the usual question: will the target company have the time to prove that it can deliver gains that new owner would collect if control passed?
Private equity funds are bottom-fishers. They find companies that are weak and marked down by investors, privatise them, repair them and then ''flip'' them, either into a sharemarket float or a trade sale.
Treasury Wine Estates' new chief executive, Michael Clarke walked in the door at the end of March, and for the rejection of KKR's approach to make sense, he has to deliver similar improvements to those that KKR would achieve if it took the company private.
The Australian wine group argues that he can, and in a separate announcement it detailed his plan. It includes a 50 per cent increase in the group's marketing spend in the year to June 2015, and a crackdown on costs that it says will involve job cuts across the group, office space rationalisation, new IT contracts and a reduction in discretionary spending.
There's another sleeper. Treasury has been building up its stocks of super-high quality vintage wine, and they are coming onto the market over the next two years. That will deliver an earnings lift regardless of what else the new CEO does.
Treasury is arguing that at $4.70 a share, KKR offered a price that failed to value the gains that are coming, and it is correct. A takeover premium of 30 per cent is standard in this market, and KKR's indicative scheme of arrangement acquisition price is 5.5 per cent above Treasury's share price on Monday, before the approach was revealed.
Still, Treasury is now officially a takeover target.
Regional bourses are mostly higher, but investors are complaining about a lack of impetus for further buying:
- Japan (Nikkei): +0.9%
- Hong Kong: +0.6%
- Shanghai: +0.1%
- Taiwan: +0.1%
- Korea: -0.4%
- ASX200: +0.1%
- Singapore: flat
- New Zealand: -0.6%
‘‘The market lacks catalysts,’’ says Daiwa Securities chief strategist Junya Naruse. The situation in Thailand, where the army imposed martial law today, ‘‘doesn’t impose much of a geopolitical risk, but it still weighs on the market when it doesn’t have other catalysts.’’
The competition watchdog has begun monitoring companies in preparation for the repeal of the carbon tax.
The ACCC said it was monitoring prices in the sector and would take action against any businesses that attempted to exploit consumers by inflating costs due to a repeal. It said it would also take action against any business that made false or misleading representations about the effect of a carbon tax repeal on the price of goods or services.
“The ACCC is gathering information that will provide a benchmark to allow the ACCC to compare prices charged to consumers both before and after the carbon tax is removed,” ACCC acting chairman Michael Schaper said.
The government is hoping to repeal the carbon and mining tax in a Senate sitting in July.
Investors say they would not mourn Australia's triple-A credit rating if the economy were stripped of its prestigious badge by ratings agencies because top ratings have become less relevant to bond fund managers since the financial crisis.
Australia is one of only 12 countries which boast triple-A status under the Standard & Poor's methodology.
Sovereign analyst Craig Michaels told Fairfax Media there was "at most" a one-in-three chance of Australia being downgraded to double-A, and S&P is counting on the Abbott government to win Senate approval for at least some of the $37 billion in planned savings to address the budget deficit position. Labor has signalled its opposition to almost half of that.
Investors suggested that if Australia were unable to hold onto triple-A, the damage would be more of a reputational blow than an economic one.
Vimal Gor, head of fixed interest at BT Investment Management, said by virtue of the shrinking pool of triple-A sovereigns, Australia now represented about 15 per cent of global triple-A issuance from less than 1 per cent before the crisis.
"I don't know whether anyone really pays attention to sovereign credit ratings anymore. There's no question that Australia's debt metrics are among the best in the world... and if we were to lose the triple-A rating I don't think it would be significant for our bond or equity markets," he said.
"Ten years ago I think it would have had a much greater significance. The issue is the GFC questioned the whole way people use credit ratings because a lot of the issues that blew up were triple-A rated."
Pimco’s former chief executive, Mohamed El-Erian, has cautioned investors about the present low-interest rate environment and possible sell-offs in some assets.
El-Erian, who left the world’s biggest bond fund in March this year, wrote in a comment piece for the Financial Times that “sudden drops in interest rates raise concerns about the health of the global economy, leading to fundamentally-driven sell-offs in equities and other risky assets – a worry that is amplified by the extent to which the earlier equity rally had decoupled prices from more economic sluggish conditions.”
His comments come after last week’s rally in the bond market which saw bond yields - which move in the opposite direction to price - fall to their lowest point this year. The yield on US 10-year government bonds touched its lowest point since October, while the yield on 10 year Australian government bonds also struck a nine month low last Tuesday.
El-Erian who was a key investment strategist at Pimco, along with the company’s founder Bill Gross, before the two men had a falling out, blamed the fall in bond yields on several factors, including the view that interest rates would stay lower for longer and the risk of deflation, investors readjusting their portfolios, tapering by the US Federal Reserve, and failure of American and European growth to “lift off”.
He said it would be difficult to combat these forces in the weeks ahead given potential volatility stemming from “the combination of stretched valuations, geopolitical risks from Ukraine, and the challenges China faces in negotiating a soft landing for its economy while reorienting its growth model,” he wrote in the Financial Times.
Mohamed El-Erian, now ex-Pimco warns about sudden drops in interest rates. Photo: Virginia Star
Mortgage insurer Genworth is off to a strong start on its ASX debut, with shares up 11.3 per cent, or 30 cents, at $2.95, the biggest initial public offering for the year to date.
US financial services giant Genworth Financial raised $583 million by selling 34 per cent of its Australian business, joining a rush of companies to capitalise on the buoyant equity market.
The jump in its share price gives Genworth a market capitalisation of $1.92 billion. The company has a 45 per cent share of the lenders’ mortgage insurance market in Australia
The dollar has slipped about two-tenths of a cent in the wake of the RBA's latest minutes and is threatening to drop through 93 US cents for the first time in two weeks.
The currency is currently fetching 93.03 US cents, after having dropped nearly half a cent overnight on another drop in the iron ore price and after an S&P analyst said there's a one-in-three chance Australia could lose its AAA rating.
In the minutes of its board’s May monetary policy meeting, the central bank signalled interest rates would be kept low for the indefinite future.
Ongoing weakness in the labour market is giving the RBA no reason to raise interest rates, and plenty of reason not to.
Recent macroeconomic data in Australia has been pretty good - jobless rate hovering below 6 per cent, GDP growth picking up, inflation low - so why is the mood among consumers so bad, Deutsche Bank chief economist Adam Boyton asks.
Boyton reckons one reason is that economists look at the wrong data instead of focusing on changes in living standards.
Deutsche put together a chart plotting annual change in nominal GDP per person, deflated using the consumer price index, to calculate the change in how much every consumer can buy year for year.
‘‘This gives us a guide to whether the economy is able to produce higher living standards (positive growth in the chart) or not (negative growth),’’ Boyton says.
The result is the economy has been unable to deliver higher living standards for the past two years, and a rise of just 2.6 per cent over the past five years.
‘‘This is quite unusual,’’ Boyton says, adding that the last time there were back-to-back declines in living standards was during the recessions of the early 1980s and 1990s.
GDP per person, adjusted for inflation, has shrunk over the past two years. Source: Deutsche Bank.
As noted earlier, beleaguered wine giant Treasury Wine Estates has rejected a bid from private equity firm Kohlberg Kravis Roberts, claiming the $4.70-a-share bid does not properly value the company.
The bid would have valued the business at $3.05 billion. In early trade, shares in Treasury have shot up 18.9 per cent to be trading at $4.83.
In a statement to the ASX this morning, TWE said the offer was a "preliminary, indicative" bid that would have been executed by a scheme of arrangement.
The company said in a statement that it was determined to pursue the strategic plan of of its new chief executive Michael Clarke,
However, the company also told investors this morning that trading conditions were "difficult, underpinned by intense competitor activity and a challenging retail environment".
"TWE is now in the midst of its most crucial trading period, with the 2014 Penfolds luxury and icon wine collection released earlier this month," Mr Clarke said in a statement.
TWE said that KKR had requested that the proposal – first received by TWE on April 16 – be kept confidential.
But TWE says that it learned on Monday night that KKR had spoken to "one or more of TWE's shareholders" there was a risk the confidentiality of the bid had been lost.
Penfolds' earnings potential in the next two years is vast. Photo: Tamara Dean
Media monitoring business iSentia will have a market capitalisation of $408 million when it lists on the ASX next month.
The company’s prospectus shows owner Quadrant Private Equity will retain 25 per cent of the company, while new investors will control around 70 per cent of the stock.
Shares will be issued at $2.04, which reflects a multiple of 11 times forecast EBITDA on an enterprise value basis.
The Australian Financial Review’s Street Talk reported that iSentia attracted strong support from institutional investors in a bookbuild earlier this month. It will raise $283.5 million.
iSentia tracks editorial content across social media, broadcast, print and online. Its clients are mostly big companies, governments and, to a lesser extent, ad agencies seeking to stay abreast of how they are being talked about, industry issues and comments on their peers. The company also operates in Asia after a series of acquisitions over the past decade.
iSentia’s EBITDA is expected to grow by 32 per cent to $30.2 million in fiscal 2014 on a pro forma basis.
Clothing and accessories retailer Country Road will spend $53 million building a distribution centre in Melbourne to support its growing business, which is set for another boost when its South African parent, Woolworths, takes control of David Jones.
Country Road, which acquired the Witchery and Mimco brands in 2012, has unveiled plans for a 22,000 sq metre purpose-built warehouse and logistics centre to support online and bricks and mortar sales across all brands.
The large capital investment follows a strategic review of the warehousing, logistics, replenishment and fulfilment processes required to support the current and future needs of Country Road’s Asia-Pacific omni-channel network.
Chief executive Iain Nairn said the project was expected to cost $53 million and deliver an internal rate of return well above the group’s cost of capital, with an expected post-tax payback period of less than 10 years.
Bradken copped a fair whack yesterday after posting a profit warning and axing another 500 jobs, but Deutsche doesn’t see a turnaround in the heavy engineering company’s fortunes anytime soon.
Bradken’s latest downgrade shows the rate of decline is subsiding, with second-half guidance in line with first half, but the likelihood of a near term recovery is low, Deutsche notes.
‘‘The restructure of the manufacturing facilities is a necessary move, delivering savings to offset weaker earnings, although it signals a persistent and deep downturn,’’ the bank’s analysts write. ‘‘The outlook remains highly unpredictable and subject to continuing pressure in the mining supply chain, while Bradken’s level of gearing is higher than we like.’’
Despite the share price trading at a 21 per cent discount to Deutsche’s already reduced price target of $4.60, the analysts say risks of further downgrades are high, but maintain their ‘hold’ recommendation for the stock.
Shares are down 2.6 per cent at $3.525, after plunging 7.65 per cent yesterday.
Rural services group Ruralco Holdings said it swung to a first-half profit of $5.1 million from a $500,000 loss in the year-earlier period. Stronger livestock trading volumes and better sales in the rural supplies business contributed to the improved result.
Managing director John Maher said the result was pleasing given the hot and dry seasonal conditions that buffeted the agribusiness sector in the first four months of the half year ended March 31.
“It is pleasing to see our strategy of diversifying and extending the revenue base to provide some protection against volatility in seasonal conditions and commodity prices working to our advantage,” Mr Maher said in a statement.
In February, Ruralco launched a capital raising to fund its acquisition of water services business Total Eden for $57.4 million .
The move underscores Mr Maher’s drive to diversify the company’s revenue stream to offset the impact of seasonal swings.
First-half revenue increased 14 per cent on the year-ago period to $544.6 million, while gross profit rose 14 per cent to $115.5 million. Underlying earnings before interest and tax was up 34 per cent to $22 million.
The profit result was broadly in line with guidance given last month for net profit in the range of $4.5 million to $5 million.
Ruralco declared a fully-franked interim dividend of 8¢ per share, down from 10¢ a share last year.
Ruralco shares were up 1.4 per cent to $3.65 in early trade on Tuesday.
Beleaguered wine giant Treasury Wine Estates has rejected a bid from private equity firm Kohlberg Kravis Roberts, claiming the $4.70-a-share bid does not properly value the company.
In a statement to the ASX this morning, TWE said the offer was a “preliminary, indicative” bid that would have been executed by a scheme of arrangement.
The company said the KKR had requested that the proposal – first received by TWE on April 16 – be kept confidential.
But TWE says that it learned on Monday night that KKR had spoken to “one or more of TWE’s shareholders” there was a risk the confidentiality of the bid had been lost.
Trading in TWE shares is halted at $4.07, with a resumption due 11:20 AEST.
Last week the company was forced to deny it had received an offer for its US assets from drinks giant Pernod Ricard.
Shares in energy infrastructure owner DUET Group has gained strongly early, up 3.6 per cent to $2.33.
The catalyst is an announcement by Spark Infrastructure that it has taken a 14.1 per cent stake in DUET at an average price of $2.16 per security and is raising $200 million from equity markets.
There are also reports that Spark plans to raise its stake in DUET to 14.95 per cent. The company's shares are in a trading halt.
JPMorgan is warning there is little upside on offer from Woodside Petroleum and argues Thursday’s investor day may alleviate concerns about whether an expensive acquisition is imminent to fix the energy group’s declining production profile.
In a note to clients, the broker says any further valuation increases on the stock will depend upon growth projects like the Western Australia Browse Project and the Israel-based Leviathan development.
According to JPMorgan, Woodside’s strong recent share price run has eliminated the discount to fair value of the producing asset base.
The analysts say management will now have to convince investors it can “reinvest current cash flow for NPV (net present value) positive”.
Given the challenges facing Woodside, JPMorgan argues the upcoming investor day may prove a barometer for the group’s future direction.
“Chief executive Peter Coleman is a polished presenter, and we think at this investor day he will be short on bold promises and long on pragmatism. The path to production growth is challenging and we think Woodside management will not attempt to convince investors otherwise.”
The analysts say “strong showing may alleviate concerns that an expensive acquisition to fix a declining production profile is imminent. Conversely, a poor showing may leave investors with more questions and heighten concerns over reinvestment risk.”
Despite that rather bleak outlook, JPMorgan is overweight Woodside and has a price target of $41.11 on the stock.
Shares have opened broadly flat, after the overnight moves in the iron ore price outweighed a reasonable lead from Wall Street.
The ASX 200 is down 5 points to 5404.4 - and dipped briefly below 5400 early - while the All Ords is 4 points lower at 5386.3.
Metals and mining stocks are weighing on the market, down 0.2 per cent as a group, while the energy sector is also extending yesterday's losses, down 0.6 per cent.
BHP is 0.4 per cent down, while Rio is 0.7 per cent lower. Fortescue, however, has recovered 0.3 per cent.
Banks are once again failing to pull their weight, with Westpac (-0.4 per cent) and NAB (-0.3 per cent) the biggest drags from that sector.
Telstra is doing its best, adding 0.4 per cent, and QBE has jumped 1.3 per cent.
There are a few reasons why iron ore’s fall below $US100 per tonne is not as bad for Aussie miners as the last time the price hit double figures in 2012, mining reporter Peter Ker says:
1. Currency: When the iron ore price bottomed at $US86.70 in early September 2012, the Australian dollar was fetching $US1.019, amid a year where the currency generally hovered above $US1.05. Today the local currency is worth $US0.933, meaning the cost of doing business is now about 7 per cent cheaper for Australian iron ore miners, whose costs are generally in Australian currency, but whose products are sold into US currency. That means an iron ore price of $US100 per tonne is less painful than it was in 2012.
2. Expansion: Operating on slim margins is much easier if you are selling more products, and that’s exactly what Australia’s iron ore miners are doing. In between a debt crisis and a near-death experience in the September quarter of 2012, Fortescue still managed to export 16.1 million tonnes of iron ore.
For the current quarter, Fortescue plans to export 41.6 million tonnes, having spent the past two years rapidly expanded its operations. The same is true for Fortescue’s rivals.
3. Cost Structure: All the miners, from BHP and Rio down to Gindalbie have cut jobs, while others like Fortescue have aggressively targeted their debt during the past couple of years reprieve. The new era of frugality and the focus on low-cost expansions means the miners are watching and analysing every cent in a bid to be better prepared for these sorts of price shocks.
So will there be casualties this time around? Not if the price slump is as short-lived as the 2012 flash crash. But a sustained fall to about $US90 per tonne could cause some nervous moments for the smaller, higher cost miners.
Consumer confidence slumped further after the federal budget was handed down, according to the weekly ANZ-Roy Morgan poll.
The reading came in at 100.4 for the week ending May 18, down another 3.2 per cent. Confidence began weakening noticeably four weeks ago when some significant policies were leaked ahead of the budget’s release and is down a sharp 14 per cent since then; the steepest decline over a four-week period since the series became weekly in October 2008, ANZ says:
- Respondents’ perceptions of ‘financial situation compared to a year ago’, which is most correlated with households’ spending growth, suggests consumer spending could soften in the near term.
- At this stage, ANZ’s bottom line for the household consumption outlook remains that consumer spending will improve this year, although the Budget – due to both the direct and indirect impacts – may weigh on the speed of that recovery.
- Interestingly, all other subindices fell last week except for perceptions of ‘economic conditions in the next five years’ which rose modestly (+1.0%).
Tomorrow, Westpac releases its consumer confidence index for May, which will give further indication of how badly confidence has been hit by the budget measures.
Consumer confidence has taken some knocks in recent months, but the budget takes the cake. Source: ANZ, Roy Morgan
Telstra's move to spend tens of millions of dollars on a national Wi-Fi rollout is expected to trigger a rush of investment in the area among rival telecommunications companies, analysts say.
Telstra chief executive David Thodey will announce the plan today in Sydney.
Fairfax Media believes the network will be rolled out around the country as a public network that will allow customers to better use their broadband services.
Telstra's Wi-Fi network will most likely use the company's extensive infrastructure network, which connects to almost every home and business in Australia.
Wi-Fi networks are wireless connections that typically use copper and fibre broadband to carry internet traffic to and from telephone exchanges, which in turn means they can handle higher speeds and larger internet loads than can 3G and 4G networks.
CIMB analyst Ian Martin said many Australian telcos - including Telstra as recently as 2012 - had installed hot spots in dense city areas with limited success.
iiNet launched a plan for such a network in January, though chief executive David Buckingham said at the time it was more of a marketing service. AAPT also announced plans to provide Wi-Fi services in several locations but the trial was never extended beyond the Bondi Beach area due to a lack of funding.
Telstra could trigger a rush of Wi-Fi investment. Photo: Peter Braig
Bank of America-Merrill Lynch has called IOOF’s proposed $670 million acquisition of SFG Australia attractive but has maintained its “underperform” recommendation on the stock.
“While we see the logic for this proposed acquisition, we require more comfort on industry structure (e.g., margin trends, competitive threats) and details to show that IOOF can manage the multi-faceted complexities of its various acquisitions before becoming more positive,” analysts told clients.
The broker thinks the acquisition adds further complexity to the business on top of margin compression concerns and IOOF lacking balance sheet capacity and distribution diversity of its larger peers. Plus the available pool of further potential targets looks slim, said BoAML.
Back to corporate news, the much-anticipated IPO of Spotless Group was launched this morning by joint lead managers Citigroup, Deutsche Bank and UBS.
Shares in the institutional bookbuild are being offered between $1.60 and $1.85 per share, spilling around $1 billion into the coffers of the catering services firm.
The indicative enterprise value to pro forma FY15 forecast EBITDA is 7.9 times to 8.5 times. The pricing values the company at around $1.75 billion to $1.93 billion.
Australia's most important guessing game this week is not how far Tony Abbott's approval rating could fall or how much grief he will get from various state premiers but how low the price of iron ore could move, Elizabeth Knight writes:
These issues are not unrelated given that Australia's treasury coffers are fed by the corporate taxes derived from profits in part made by iron ore producers such as BHP Billiton, Rio Tinto and Fortescue and the companies that service this massive part of the economy.
In 2012 then treasurer Wayne Swan was forced to abandon his ambition for a surplus with iron ore prices falling to $US80 levels.
The iron ore price moving below $US100 is important not just from a financial perspective but from a psychological stand point. Once the price moves through this psychological barrier it can tend to fall at a faster rate and heighten the market's concern about where it will land.
It is this uncertainty that is playing havoc with the prices of iron ore producers this week as investors steer clear of the stocks and adopt a wait-and-see position. Given the size of the companies involved, this behaviour is pushing down the broader sharemarket.
Everyone has a different view on the iron ore basement price but for the most part it's educated guesswork.
Most of the medium to longer-range estimates see the iron ore price moving down over time as Chinese demand starts to level off. Treasury is forecasting that iron ore prices will drop to $US95 by the end of 2014. By the end of 2015 it expects the price to fall to $US90 and by June, 2016, to $US87.11.
At a price of $US80, BHP and Rio are still making good returns but Fortescue's ability to generate handsome cash flows to pay down significant debt is inhibited given its break-even cash price is closer to $US70.
Illustration: John Spooner.
Ratings agency Standard & Poor’s is warning Australia’s prized AAA credit rating could be reviewed unless substantial cuts are made to the budget in coming years.
In an unusually forthright warning, a lead sovereign analyst for S&P, Craig Michaels, told the AFR he was counting on the Abbott government to win Senate approval for at least “some” of its $37 billion in planned savings against opposition from Labor, which has pledged to veto about $18 billion in cuts and tax rises.
“We’re looking to see the government improve budget performance over the next few years,” Mr Michaels said in an interview.
If it looked as though “sizeable budget deficits were considered acceptable at the political and the community level then we might reassess, certainly, government commitment and also potentially the trajectory for public sector debt,” he said.
Credit analyst Martin Whetton at Nomura said the S&P comments suggest any back-down by the government on budget repair would be frowned upon by ratings agency.
“If the government chooses to substantially water down its proposals because of the political cost, that is the sort of thing that would concern rating agencies looking at Australia over the longer term,” he said.
Bank of America Merrill Lynch Australia chief economist Saul Eslake said it would be “unhelpful” if the government’s budget measures were blocked.
“I’ve always said just because Canada has debt-to-GDP of 39 per cent doesn’t mean we could run ours up to the same level and keep our rating,” he said.
“Our banks have lots of liabilities which ratings agencies now recognise could become government liabilities in the wrong circumstances.”
Mr Michaels said the rating was “not on a knife edge” and the government still has “a bit” of wriggle room over the pace of budget repair. But he warned major setbacks would force a rethink by the agency, one of three that rates Australia with the highest possible rating.
Credit Suisse has admitted guilt to one criminal charge of aiding Americans avoid taxes, the first time the US has extracted a guilty plea from a major bank in two decades.
The Swiss bank was hit with $US2.6 billion in fines in the years-long probe into banks making a business out of helping their clients evade US taxes.
‘‘This case shows that no financial institution, no matter its size or global reach, is above the law,’’ US Attorney General Eric Holder said.
‘‘When a bank engages in misconduct that is this brazen, it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as has happened here.’’
The single felony charge filed in the federal district court in Alexandria, Virginia said Credit Suisse ‘‘did unlawfully, voluntarily, intentionally, and knowingly conspire’’ to help US citizens prepare and file false income tax returns.
Credit Suisse, Photo: FABRICE COFFRINI
Thailand's army has declared martial law after six months of anti-government protests and political crisis, Associated Press said, citing an army statement issued in Bangkok.
The army's declaration of martial law is designed to restore peace and order and does not constitute a coup, Agence France-Presse said, quoting an announcement on military-run television.
Iron ore may have extended its recent slump, dropping below $US100 overnight, but other metals had a good session.
Copper hit an 11-week high on dwindling global stocks and as investors bought to cover their bets that prices would fall, though gains were still limited by concerns about slower growth in top consumer China.
Nickel jumped nearly 5 per cent as investors re-entered the market after last week's losses, betting on prospects of supply tightening further after Indonesia's ban on ore exports.
Three-month copper on the London Metal Exchange closed up 0.95 per cent at $US6,925 a tonne, having earlier hit its highest since March 7 at $US6,954 a tonne, marking a near 10 per cent gain from around three-year lows hit in mid-March. The metal was still down 5 per cent for the year, however.
The risks of slowing demand growth in China were seen as already well priced into copper, while the newer element to consider is dwindling supplies of the metal, analysts said.
LME nickel surged 5.5 per cent to close at $US20,100 a tonne. This was short of last week's 27-month peak of $US21,625 but the year's gains are still substantial.
"Despite an 11 per cent fall over the last two trading sessions, prices are still up nearly 40 per cent so far this year and the question now facing traders is whether to jump back in on the long side," said analyst Edward Meir at INTL FCStone.
"The problem with the bullish story on nickel is that at some point, Indonesian metal will starting flowing back into the system," he said, adding that prices would likely be capped at around $US22,000.
Iron ore has slipped below $US100 a tonne as a bear market for the commodity threatens billions of dollars in Australian mining revenue.
Iron ore, measured out of the Tianjin port in China, lost a further 2.2 per cent overnight on Monday, sliding to $US98.50 per tonne, its lowest point since September 2012.
The bulk metal has slumped 6.6 per cent in May, and has pushed deeper into bear market territory, down 26.6 per cent for the year.
"It doesn't really matter what the valuations of iron ore companies are looking on some conventional metric, if iron ore prices are going down, so are the iron ore equities," Deltec chief investment officer Atul Lele said.
Global miners, such as BHP and Rio can weather a much weaker iron ore price because that have a lower cost base, while smaller miners, like Atlas Iron and Mount Gibson maintain a much smaller margin.
Rio breaks even at around $US44 per tonne, while BHP comes in at $US55 per tonne. Mount Gibson's cash costs are much higher, at $US84 per tonne and Atlas's sits at $US80 per tonne.
Larger miners also have access to higher quality grades of iron ore that they sell at a premium above the benchmark price.
BlueScope Steel's Port Kembla plant. Photo: Louie Douvis
Local stocks are poised for a rebound after a horror start to the week yesterday, although any gains may be limited after iron ore dropped below $US100/tonne overnight, while Wall St gained.
Here’s what you need2know:
- SPI futures up 20 points at 5437 at 8:15am AEST
- AUD at 93.27 US cents, 94.58 Japanese yen, 68.04 Euro cents and 55.45 British pence
- On Wall St, S&P500 +0.4%, Dow Jones +0.1%, Nasdaq +0.9%
- In Europe, Euro Stoxx 50 -0.1%, FTSE100 -0.2%, CAC +0.3%, DAX +0.3%
- Iron ore fell 2.1% to $US98.50 per metric tonne, its first time under $US100 since 2012
- Spot gold slipped 0.1% to $US1293.06 an ounce
- Brent oil dropped 0.4% to $US109.35 per barrel
What's on today:
- Australia: RBA Board Minutes for May meeting, RBA assistant governor Debelle speech, Conference Board Leading Index for March
- Asia: Japan will release its all industry activity for March
- Europe: UK will release CPI and PPI for April
Stocks to watch:
- South Africa's Woolworths will review its options on David Jones's $612m proprty portfolio to offset takeover costs, reports the AFR
- DuluxGroup is rated a new underperform at BBY; price target $5.78
- Genworth is scheduled to start trading
- Newcrest Mining is cut to neutral vs overweight at JPMorgan
- RBC Capital Markets initiated coverage on Incitec Pivot with a “sector perform” and a $2.90 a share price target, while Orica is a new underperfom
- Credit Suisse has assumed coverage of UGL at “neutral” and reckons the engineering contractor will proceed with a sale rather than a demerger of the DTZ property services business. The broker has a $8.10 price target on the stock
- Regis Resources is raised to overweight from neutral at JP Mortgan; PT $2.70
- SFG cut to neutral vs buy at Goldies