Afternoon Report / Ah Telstra – hit on another earnings downgrade! (TLS, HSO, STO)

By Market Matters 14 May 18

Ah Telstra – hit on another earnings downgrade! (TLS, HSO, STO)

Market Matters Afternoon Report 14th May 2018

WHAT MATTERED TODAY

The market finished just shy of a 10-year high again today– closing half a point below the 6135.8 mark set on January 9 this year, prior to that it was January 2008! To go along with the gains, we also saw ~11points come out of the index between dividends from ANZ & MQG, both companies held much of the dividend today. CBA saw the back of their CFO Rob Jesudason who is heading to a blockchain/crypto firm in Hong Kong – now the 6th  executive role they will have to fill following the arrival of new CEO Matt Comyn in March, CBA performed in line with market today, up +0.38% to close at $70.80.

TLS gave commentary around their FY18 result, pointing to EBITDA coming in at the lower end of guidance – more on this later. We also discuss the new Healthscope bid.

The S&P/ASX 200 index rose 0.3 percent to close at 6,135.30, the highest since Jan. 9.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves;  Citi put out a note today on Santos taking into consideration the rise in Oil price in Aussie dollar terms, saying that Harbour Energy would now need to pay $A7 a share to compensate for the higher prevailing prices. STO is still trading at a discount to the bid price of $6.50, closing today at $6.25.   

Santos (STO) Chart

ELSEWHERE…

·         Alumina Upgraded to Hold at Morningstar

·         IOOF Holdings Upgraded to Buy at Morningstar

·         REA Group Downgraded to Sell at Morningstar

·         Western Areas Upgraded to Sector Perform at RBC

·         GrainCorp Upgraded to Outperform at Credit Suisse; PT A$8.80

·         Super Retail Upgraded to Buy at Goldman; PT A$9.45

Telstra (TLS) $3.04 /-5.00%; Off sharply today following the update to their FY18 outlook to investors this morning, indicating that earnings will come in near the lower end of guidance at $10.1b, around 2% below consensus numbers. Although a better outlook was shown for Net Income, investors also got their first taste of declining margins in the mobile business showing average return per unit (ARPU) falling 3.6% in the quarter alone. While user numbers increased, any benefit was offset by the decline in ARPU which is concerning considering the rise in lower cost options in the market. The CFO, Warwick Bray, noted revenue is in decline “because of the more generous plans in the market” – something to consider if your mobile plan is up for renewal! They are cutting costs and this is dropping down into a higher than expected free cash flow forecasted in the future + they confirmed their dividend of 22cps was safe for now, the market seemed to hang it’s hat on the negative trends underpinning the result.

Telstra (TLS) Chart

Healthscope (HSO) $2.58 / +4.45%; Up today after confirming a second party had now come to the table with their own takeover proposal. A fuse was lit under HSO in April following a $4.11bil offer from a group of institutions the private equity firm BGH had pulled together, and now Brookfield Asset Management has offered $4.35bil or $2.50/share, just shy of 6% better than the original. Brookfield is a large Canadian based global asset manager that already has a significant footprint in the Australia’s hospital industry, owing the leading constructor in Multiplex, and a facilities management business in Brookfield GIS that services 11 hospitals. HSO climbed well above both offers today in anticipation of a bidding war to come between the two parties – and any other bidders that may yet come to the table. Brookfield’s bid is subject to a “level playing field condition” which prevents any new bidder gaining due diligence without presenting a higher bid, and without agreeing to vote in favour of any offer that is unanimously accepted by the Healthscope board – a bit of a mouthful but really just aimed a de-railing some of the BGH bid’s exclusivity clauses.

The Healthscope board has much to consider, and will probably look to bide their time given that a third player in NorthWest Healthcare REIT is likely to enter the fold. Another Canadian player, NorthWest has a large global hospital real estate position, and took up 10% of Healthscope shares through a derivative deal about a week ago signalling that they would like to add Healthscope’s  real estate portfolio to their books.

Healthscope (HSO) Chart

OUR CALLS

No changes to the MM Portfolios today

Have a great night

Harry & the Market Matters Team

Disclosure

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