Afternoon Report / Banks find their mojo, Eclipx and McMillan join forces (APT, ECX, MMS, REA, XRO)

By Market Matters 08 November 18

Banks find their mojo, Eclipx and McMillan join forces (APT, ECX, MMS, REA, XRO)

Market Matters Afternoon Report 8th November 2018


Another decent session for Australian stocks with the market now trading up  ~300pts from the panic lows on the 26th October today hitting our ~5925 target region. From here a period of consolidation wouldn’t surprise as the midterms are digested, although the US Federal Reserve meet tonight to decide on interest rates. No change is expected (13% probably of a hike) although the decision in December is clearly a live one with the market pricing a 78.2% chance for an increase before Santa comes.

Locally, it was the IT stocks that came back into favour today, the likes of Appen (APX) which was up +9.4% to close at $11.87, AfterPay added (APT) 11.07% to $14.45 while Xero (XRO) added +1.82% after releasing a first half update – more on these below. Elsewhere, NAB traded –ex dividend today for  99cps fully franked which is worth ~$1.41, the stock closed down 94cps  while the rest of the banking sector was upbeat with ANZ up +2.27%, CBA up 1.83% and  WBC up 1.84%. Roll the drum… even the AFR published a more positive report on property, the first in a while.

Overall, ASX 200 closed up +31pts or 0.53% at 5828. Dow Futures are currently down -21points or -0.08%  

ASX 200 Chart

ASX 200 Chart



Broker Moves; Western Areas (WSA) upgraded by Bells while Dominoes (DMP) remains on the nose, the stock down around 10% today.  


·         Domino’s Pizza Enterprises Cut to Reduce at Morgans Financial

·         Domino’s Pizza Enterprises Cut to Neutral at UBS; PT Set to A$57

·         SkyCity Entertainment Upgraded to Neutral at UBS; PT NZ$3.95

·         Carnarvon Rated New Outperform at RBC; PT A$0.85

·         Inghams Downgraded to Sell at Morningstar

·         Western Areas Upgraded to Hold at Bell Potter; PT A$2.80

A bullish take on the Mid-Terms; There’s nothing like a bullish article from an investment bank after the market has moved however JP Morgan make some valid points in an article doing just that specifically about the Trade War. In essence, they say a split Congress is the best outcome for global markets which is contrary to the majority of analysis which insisted that a Republican victory across the boards would be the most bullish outcome. Perhaps if the red team won both houses yesterday, the market would have spiked short term, but failed longer term. The fact we’ve got blue in the lower house and red in the upper house creates a more sustainable balance.

The thinking from JP Morgan goes like this. Administration policies last year were pro-business, but this year they have been “strongly anti-business” such as the trade war, protectionism and subsidies. Therefore, a “red wave” could have been seen as an endorsement of the trade war – which as we’ve seen, has been market negative.  The note read…As the President cannot count on Congress or the Fed for more easing, he will need to do what is in his power to keep the economy rolling -- drop the damaging trade war and turn it into a winning deal. Seems very plausible to me.

Xero (XRO) $43.73 / 1.82%;  The online accounting platform was out with first half numbers today and the growth continues to be strong. They now have total subscribers of 1.579m (which is a few more than Market Matters!), which is up 32% year on year. Breaking it down by region,  ANZ 981k, up 24% y/y, UK 355k, up 40% y/y, North America 178k, up 45% y/y ex. Hubdoc, Rest of World 65k, up 38% y/y. They’re not making many $$ with 1H Ebitda A$16.8m, up 7% y/y however they lost margin which dropped from 8% to 7%. The main takeaway though besides the growth numbers was guidance that said FY19 cash outflow would reduce from a year ago and they’re  managing the business to cash-flow break even within current cash balance, excluding M&A outlays.

Xero (XRO) Chart

Eclipx (ECX) $2.67 / +16.09% & McMillan Shakespeare (MMS) $15.82 / -6.39%; The two vehicle leasing and fleet management companies entered trading halts before market this morning and have since released a merger proposal that has been backed by the boards of the two companies. The offer for ECX shareholders is 0.1414 MMS shares as well as a $0.46 cash component – representing $2.85 value as at yesterday’s close price, a solid 33% premium to the last ECX traded price. McMillan’s earnings are dominated by the salary package and novated leasing business, while Eclipx’s strength lies with the fleet management side.

The combined business will have the largest Fleet management and the largest novated leasing businesses by units in Australia & New Zealand, and is expected gain $50m of EBITDA synergies per year after the first three years. A merger of similar companies in tough times for the car leasing market. It makes sense on a few levels from scale, cost savings, customer base access and capital availability. The space does face some headwinds and we won’t be chasing the combined entity.

Eclpix (ECX) Chart

McMillan Shakespeare (MMS) Chart


Afterpay Touch (APT) $14.45 / +11.07%; The alternative payments company has ripped higher today thanks to success in the initial push into the US. In a business development announcement to the market this morning, APT noted over 300,000 customers and 900 retailers have used Afterpay’s product in the first 6 months of launching with a total of $A115m of transactions to the end of October. The move into the US now seems to be Afterpay’s priority with a clear addressable market, however competition is rife in the world’s biggest retail market place. Square (New York listed under SQ) and Affirm are just two names that will be tussling with APT in point of sale credit market, both also had the jump on Afterpay, although each product does have its differences.

Today’s announcement will give Afterpay a strong short term boost, but it will be some time before the US push can be fully assessed – although these are impressive numbers for 6 months, Afterpay could just be picking the low hanging fruit of the US credit market. Today’s spike sends the APT share price back to levels before the Senate inquiry fears spooked investors, but still languishing over 30% below all-time highs in August.

Afterpay (APT) Chart

Real Estate Australia Group (REA) $78.41 / +7.99%;the real estate media company jumped today on a trading update that showed solid revenue growth despite the falling volume and prices across the Australian market. REA pointed to a rise in the premium ad sales as sellers look for ways to differentiate themselves as the market eases, leading to a 23% increase in EBITDA to $130.9 million and a 17% improvement in revenue to $221.9 million for the three months to end September. Management did signal that this trend won’t last forever, even if house prices continue the slide and at some point a weak market will once again chew away at the company’s bottom line.

Real Estate Australia Group (REA) Monthly Chart



No changes to the portfolios today.

Have a great night

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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