Afternoon Report / ASX shakes early weakness (EML, AAC, SYD)

By Market Matters 20 May 20

ASX shakes early weakness (EML, AAC, SYD)

Market Matters Afternoon Report 20th May 2020

WHAT MATTERED TODAY

The index started bottom right and finished top left today – early on the ASX200 sold off following overnight markets lower, but hit an early session low down 52 points just 15 minutes in. From there nothing could stop the Aussie market from climbing the wall of worry, slowly but surely ending the session 1.3% from the low. Last night’s focus was on the economic downturn, today’s rally focused on the reopening of economies, a more glass half full approach. Banks found intraday buying, but it was tech names that performed best overall with the market happy to take on some more risk.

Overall, the ASX 200 added +13pts / +0.24% today to close at 5573 - Dow Futures are trading up 100pts/+0.41%.

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE:

Australian Agricultural (AAC) +3.26%: This integrated cattle and beef company started life back in 1824 and now runs the largest herd of Wagyu Beef in Australia. It’s a stock I’ve always looked at with an eye to buy given its exposure to a growing Asian middle class and their rising consumption of beef, however it’s always had its challenges and the technical picture has been muted.

Today they delivered an improved FY20 result and while its not a well-covered stock (only Bell Potter cover it I think), today’s result was well ahead of their expectations. AAC said they had a record year of Wagyu meat sales +19.7% plus prices were also up by 8%. They saw growth across all key regions: Asia +19%, Europe/ME +17%, NA +34%, Australia +16% and they delivered their strongest operating cash flow since FY17,  achieving positive cash flow in four out of the last five halves. This better backdrop flowed through to a increase in net assets which were up 8% to ~$913M. There pastoral properties valuation increased $63.6M, the value of livestock increased by $49.6M dropping down to an NTA per share of $1.53 per share vs $1.42 this time last year. Gearing always an important issue with a business like this and pleasingly, gearing ratio was 30% post accounting standard changes within the targeted 20-35%, although at the higher side. The stock closed today $1.11. Well worth a deeper dive in our view.

Australian Agricultural (AAC) Chart

EML Payments (EML) +12.77%: traded to a 10-week high today, now 300% higher than the low set in March. They provided a trading update talking to the impacts of COVID-19 as well as the completion of the PFS acquisition in April. With EBITDA at $27m through the first 9 months of the year, EML is on track to exceed the $35m expected by the market however a large portion of earnings comes from gift & incentive which has fallen substantially given the closure of retail stores across EMLs 1,100 programs. G&I saw a 29% fall in March into a 53% fall in April based on last year’s numbers, with uncertainty remaining around the rebound in Gross Debit Volume.

Post the acquisition, EML’s General Purpose Reloadable (GPR) business counts for more than half of revenues. This side of trade has yet to see significant impacts given the stability of the salary packaging vertical offsetting a small drop in online gaming GDV. All in all a reasonable announcement and the market enjoyed the focus on diversified earnings of the company. EML did flag insider selling of stock with the Chairman set to sell over $1m worth of shares in the coming weeks. Despite this, we do like the business, potentially one to pick up on any weakness on the back of the selling.

EML Payments (EML) Chart

Sydney Airport (SYD) +1.07%: traffic numbers for April painted a grim picture for the airport with less than 100,000 passengers making their way through the terminals, down 97.5% on April 2019. They are not yet in a position to guide to any travel rebound though the travel names did find some buying today with NSW Premier Gladys Berejiklian encouraging people to start booking domestic getaways with the state easing restrictions from June 1. We recently added SYD to the income portfolio.

Sydney Airports (SYD) Chart

BROKER MOVES:

·        Baby Bunting Cut to Neutral at Citi; PT A$3.35

·        Silver Lake Cut to Hold at Canaccord; PT A$2.25

·        Evolution Cut to Hold at Canaccord; PT A$5.85

·        Super Retail Cut to Hold at Morningstar

·        Carsales.com Cut to Hold at Morningstar

·        oOh!media Cut to Hold at Morningstar

·        Appen Cut to Neutral at Credit Suisse; PT A$30

·        AP Eagers Cut to Neutral at Credit Suisse; PT A$6.45

·        ALS Raised to Outperform at Credit Suisse; PT A$8

·        Abacus Property Raised to Outperform at Credit Suisse

·        ALS Raised to Neutral at Goldman; PT A$6.90

·        Evolution Cut to Equal-Weight at Morgan Stanley; PT A$4.70

OUR CALLS

No changes to portfolios today.

Major Movers Today

Have a great night

James, Harry & the Market Matters Team

Disclosure

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