Afternoon Report / ASX higher thanks to the Energy sector, BHP above $50, IT on the nose (BOQ, MND, ABY, AWC, DUB, SEK, ASB)

WHAT MATTERED TODAY

High value growth took it on the chin today, mirroring the performance we saw in US markets overnight where the Dow finished marginally higher while the Nasdaq fell 2.63%. The composition of the ASX being dominated by Banks and Resources was the key today and  highlights why at MM we think Australia is in a very good position to outperform from here. If you’re doubting the reflation trade, simply look at BHP which ripped up through $50 today and now has clear sky in front of it. We hold BHP in 3 MM Portfolios, the Growth, Income & International Equities and are clearly enjoying the move.  As an aside, I had a Q from a client today around the impact of bond yields on growth stocks and why rising rates (as we discussed this morning) is a negative. The easiest way to think about this is around duration. Growth stocks are by nature long duration assets i.e. they are not earning much now, but they hope to in 5-10 years’ time.  When longer dated rates rise as they are now, these longer term earnings become less valuable, and vice versa when rates are falling.

At a sector level today, Energy put on nearly 5% while IT fell more than 4% - these were the two extremes however the market was split in two distinct groups:

Winners:  Energy, Real-Estate, Materials, Industrials & Financials

Losers: Healthcare, Staples, Telco’s, Retailers and IT

Reporting tomorrow we have: (stocks we hold in yellow): APA, APX, ASG, BGA, CCX, DRR, FCL, HLS, HT1, HUM, IEL, IFL, IVC, JHC

Asian markets were higher today, while US Futures were also trading in the green leading into our close.

The ASX 200 finished up +58pts / +0.86% to close at 6839. Dow Futures are trading higher, +136pts / +0.43% 

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Bank of QLD (BOQ) +12.78%: Back online today after raising capital at $7.35 to buy ME Bank, the stock closing at $9.21. We wrote this morning that we’d be interested ~$8, that has proved optimistic!

Bank of QLD (BOQ) Chart

Monadelphous (MND) +3.97%:  This morning produced 1H21 results that beat the street plus their full year guidance for growth of 10% was inline with current market expectations. For the half, they produced revenue of $947m v $874m expected, an 8% beat which dropped down to EBITDA of $57m v $55m expected and a net profit of $31.6m versus $26.6m expected, which is an 18% beat. As touched on above, guidance for the full year was inline with current consensus expectations however it seems to MM that this is a conservative forecast given 1H21 run rate. All in all, a good upgrade from MND supporting our bullish thesis.

We are bullish MND

Monadelphous (MND) Chart

Adore Beauty (ABY) -3.68%: These guys / girls can’t seem to take a trick reporting a very solid result this morning, the first of their listed life on a day where high value growth was on the nose. For those not familiar with Adore, they are the largest pure play online retailer of beauty products in Australia having listed in October last year, and todays 1H21 result was above both January 2021 guidance for a 7% increase in revenue against Prospectus (achieved 8%) and a very strong beat at the EBITDA line (+58% on Prospectus forecast). This time last year they sold $52m worth of products for the half while this year they’ve delivered half year sales of $96.2m, i.e. big growth.  When they recently upgraded revenue forecasts the market became concerned about margins i.e. discount to grow the top line however that wasn’t the case. Impressively, particularly for those worried about the competitive landscape and level of discounting, margins expanded which drove a big beat at the EBITDA line. This highlights the significant operational leverage in the company and is the reason why we continue to like it. (operational leverage broadly means that as the top line grows, other metrics improve like margins which has a bigger impact on earnings). That said, I was very unimpressed with the company earnings call today, almost a robotic effort by the CEO – needs to get better at talking (not reading) the business and that I’m sure (hope) will come in time. 

MM remains bullish ABY

Adore Beauty (ABY) Chart

Alumina (AWC) -2.07%: Is a December year end so today was their full year result. Dividend is more a focus for AWC given it’s s straight 100% pass through from their share in the worlds largest alumina and bauxite producer, AWAC and given analysts have 4 opportunities every year (Alcoa Quarterlies) to triangulate the data the AWC numbers typically drop out within a reasonable range of expectations, hence when they miss, it’s generally a real surprise. Today that was the case, although it was only small relative to consensus and importantly the dividend was inline with most of the more influential analysts on the stock.

This is a high yielding stocks (~5%) fully franked so looks appealing however it’s failed to embrace reflation trade, which is a negative in MM’s eyes. This is probably because the tailwinds of rising Alumina and aluminium prices are being offset by 1. Higher energy costs putting costs in the refining process and 2. A higher AUD.

We’re more neutral AWC after today’s result

Alumina (AWC) Chart

Dubber (DUB) +7.46%: Local communication software company Dubber continues to make waves in the industry, today announcing a deal with big swinging US telco AT&T. Dubber is a cloud software company that allows users to record calls, as well as providing transcripts and AI analysis of communications. It's in the midst of monetizing its offering, signing a number of deals over recent months. Today, AT&T is implementing call recording and voice intelligence software through its IP Toll Free, Hosted Voice Services & Webex Calling services with users. Through the upgrade, customers can have calls recorded and saved to the cloud, as well as have a range of data around sentiment analytics and conversation content at their fingertips. Dubber’s offering is best-in-class at the moment.

Dubber (DUB) Chart

Seek (SEK) -7.09%: first half results were broadly in line with 1H20, about where the market was expecting – very little growth baked in for the full year in Seek. The result played second fiddle to broader changes at the company with ex-CBA boss Ian Narev set to take the reins on 1 July this year, with current CEO and co-founder Andrew Bassat moving to Executive Chairman and heading up the investment segment after a restructure, splitting it from the core online employment business.

With that, the company is looking to offload some of its 61% ownership in Zhaopin with talks underway with a potential buyer. The market appears to be caught by surprise on the restructure, and a new CEO – as good as their CV might check out – always comes with the chance of a rebase to expectations. MM are not keen on SEK.

Seek (SEK) Chart

Austal (ASB) -10.93%: Shipbuilder Austal (ASB) took a beating today, shares briefly trading to 2 year lows on news the US SEC & ASIC were stepping up their investigation into accounting issues made back in 2016. As a result of the progressing investigation, Austal's US President resigned today though the company was steadfast in their defence noting an external investigation concluded revisions made at the time were appropriate. The investigation relates to costs and man hours against the Littoral Combat Ship (LCS) back in 2016 where costs were initially understated. While Austal conceded some isolated mis-allocations in relation to the adjustments, for the most part they were on the offensive. Claims relating to certain aspects that did not meet the required specifications had already been resolved with the US Navy. The market didn't appreciate ASB going after their main customer today. MM is cautiously bullish ASB.

Austal (ASB) Chart

BROKER MOVES:

·         Bank of Queensland Raised to Add at Morgans Financial Limited

·         Costa Cut to Neutral at UBS; PT A$4.60

·         AMP Reinstated Outperform at Credit Suisse; PT A$1.60

·         New Hope Raised to Neutral at Macquarie; PT A$1.30

·         Opthea Cut to Market-Weight at Wilsons; PT A$1.85

·         Integral Diagnostics Cut to Market-Weight at Wilsons; PT A$5

·         Integral Diagnostics Cut to Accumulate at Ord Minnett; PT A$5.16

·         Insurance Australia Raised to Buy at Morningstar

·         CSL Raised to Hold at Morningstar

·         Mirvac Group Raised to Buy at Morningstar

·         Stockland Raised to Hold at Morningstar

·         Lendlease Raised to Outperform at Credit Suisse; PT A$13.47

·         Reliance Worldwide Cut to Hold at Jefferies; PT A$5.10

·         Bank of Queensland Raised to Hold at Jefferies; PT A$8.40

·         Tyro Payments Raised to Buy at Goldman; PT A$3.70

·         Costa Cut to Neutral at Credit Suisse; PT A$4.70

·         Integral Diagnostics Cut to Neutral at Credit Suisse; PT A$5

·         Bingo Industries Cut to Neutral at Credit Suisse; PT A$3.15

·         oOh!media Raised to Buy at Canaccord; PT A$1.90

·         RWC AU Raised to Hold at CCZ Statton Equities Pty Ltd.

OUR CALLS

No changes today

Major Movers Today

Have a great night

James, Harry & the Market Matters Team

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