Afternoon Report / ASX still manages 7th week of gains as stocks end day down, A2M, QBE & MSB all slump (A2M, QBE)

WHAT MATTERED TODAY

The market pulled back today by around 1% as the growing cluster of COVID-19 cases in the Northern Beaches of Sydney topped 27, with 10 new cases announced at 11am. On one hand, 10 new cases since 8pm last night is probably a win given the volume of tests however it also shows how quickly it spreads – speed in tracing is clearly of the essence. I’m working from home today given the stay-at-home recommendation and when I went out to get some lunch, it was a ghost town. Clearly everyone in the area taking this very seriously, wanting to get on top of it pre-Christmas.

Stocks opened lower today despite US markets trading at all-time highs, the selling ticked up throughout the session and despite a brief attempt at rallying before lunch, we rolled over and closed on the session lows. As to be expected, defensive utilities did best however the material stocks also closed marginally higher which highlights the underlying strength in that area of the market. On the flipside, IT & Property felt most pain, Afterpay (APT) down 7.5% however there was a few pockets of strength, namely Megaport (MP1) +5.12% & Wisetech (WTC) +4.11%.  

A2 Milk (A2M) came back online with a profit downgrade and dropped sharply, ditto for QBE Insurance (QBE) who booked yet another huge loss while Mesoblast (MSB) took the gong down -36% on the day.  All in all, a weak session, we haven’t had one like it for a while however it wasn’t enough to stop the ASX from finishing higher for its seventh consecutive week.

Asian markets all traded lower, although not by the magnitude we did and US Futures were lower at our close.

The ASX 200 finished down -81pts / 1.20% to close at 6675. Dow Futures are trading down -84pts / -0.28%

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE

A2 Milk (A2M) -23.64%: Back online today with a profit downgrade thanks to weakness in demand from Daigous. The milk marketing company now saying that revenue for FY21 will be in the range of $1.4b-1.55b versus the $1.8b expected by the market while margins have also come under some pressure. A2 targets EBITDA margins of 30%+ however they’re sitting at 27% for the 1H while they expect them to end the year between 26-29%. Today’s downgrade implies a 16% miss at the top line to the midpoint of guidance however weaker margins will see bigger earnings hit. We wrote the following about A2M recently…This is one China facing stock that doesn’t excite as growth slows. When a business moves from a period of strong growth to lower growth amid greater competition (this happens as industries mature), then share prices generally struggle for a period, hence we have no interest in A2M over the foreseeable future.MM is bearish A2M short-term targeting fresh 2020 lows.

The stock is now starting to look interesting again.

A2 Milk (A2M) Chart

QBE Insurance (QBE) -12.46%: took a hit today as it faces a cash loss blow out for 2020 of $US780m as COVID claims and costs bite. The market was hopeful of a recovery in earnings into the second half, after a $US666m loss in the first half. Challenges still face the insurance group which is hoping to boost premiums in 2021, though premiums tend to follow claims. An all too familiar story for QBE unfortunately and a reason why we give the stocks a wide berth.  

QBE Insurance (QBE) Chart

Sectors this week – the engrained trend of IT up, Energy down played out this week

Source: Bloomberg

Stocks this week

Source: Bloomberg

BROKER MOVES

  • Bank of Queensland Cut to Hold at Morgans Financial Limited
  • Service Stream Cut to Neutral at Macquarie; PT A$2.01
  • Zip Co. Cut to Sector Perform at RBC; PT A$6
  • Scentre Group Raised to Buy at Jefferies; PT A$3.20
  • Nickel Mines Rated New Outperform at Credit Suisse; PT A$1.35
  • Adbri Cut to Underperform at Jefferies; PT A$3
  • Service Stream Cut to Sell at Bell Potter; PT A$1.85
  • Peninsula Energy Reinstated Speculative Buy at Canaccord

OUR CALLS

No changes today

Major Movers Today

Have a great night

James, Harry & the Market Matters Team

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