Afternoon Report / BHP just out with results – looks like a miss (IFL, COH, BKL, ALU, EHL, COL)

By Market Matters 19 February 19

BHP just out with results – looks like a miss (IFL, COH, BKL, ALU, EHL, COL)

Market Matters Afternoon Report 19th February 2019


Another hugely interesting day and we’ve just had BHP across the ticker to round things out (I have done a quick recording below after the numbers dropped). Six large caps dropped more than 6%, a couple by more than 20% while on the flipside, five stocks in the top 200 added more than 5%, the best of them up +20% - clearly opportunities are being thrown up on both sides of the ledger and we were active today in two names.

More broadly, the index was muted on open given the US was closed overnight, however left to our own devices the market showed its bullish hand ticking higher throughout the day - the market closing at its highest level since October. The RBA released minutes of their last meeting at 11.30am this morning, the meeting where they took a sword to growth expectations and dished up the notion of a rate cut – no new news out of the detail today - essentially they say that rates may go up, may go down, or may stay the same depending on data flow! The AUD sold off a bit on the news, traded down to US71.13c around our close – while it was lower, its resilience has been strong, the iron ore price around US$90 helping.

Overall today, IT stocks were strongest while the consumer staples lagged. Banks were also good, ANZ the best of them adding 2.28% while CBA lagged, but still added 0.99%. Clearly some rotation out of CBA into the others for the upcoming dividends.  

The ASX 200 closed up +17points or +0.21% to 6106. Dow Futures are currently trading flat

ASX 200 Chart


ASX 200 Chart




Reporting today; A lot across the ticker today and some interesting ones. Harry covers Cochlear & IOOF in more detail below however this is a good lesson in market positioning. COH down by ~8% and IFL up by ~16%. COH a well owned, well-loved growth stock trading on a high valuation  that delivered good numbers and outlook, the market just fixated on a slight compositional skew and whacked the stock – pedantic but that’s what happens when priced highly, while IFL result was poor, the business has huge challenges – huge levels of uncertainty, the market hates it BUT, a slight beat to downbeat expectations + IFL has a decent short position and we see a 16% pop – Roger who sits on the insto desk behind me has called this one very well as a short, and saw nothing good in the result, however clearly it wasn’t as bad as some were positioned for.

Altium (ASX:ALU) +20.28% had a painfully strong session and I can hear the rumblings of regret circulating  RE our sale around ~$24 for a profit of 13%. The business continues to kick goals and strength today was really about margin expansion even as sales kicked higher. It’s a great business, we sold too early , enough said!

I was on the box when Blackmores (ASX:BKL) -24.85% came out this morning and straight off the bat, guidance for flat earnings HoH was a red flag for a stock on 26x. They printed 34m NPAT in 1H and said 2H would be similar, equates to $68m for the year v mkt expectations of $80m = SELL. Weak trends here are relevant for  other China facing businesses.

Emeco (ASX:EHL) -24.2% was another stock that missed today for the half…top line revenue up +31% but about a 3% miss to expectations, profit was pretty much inline, margin slightly soft and while I haven’t looked into this a lot today, a 24% decline seems excessive – more work needed here. Here’s what the company said in terms of outlook We expect strong market conditions to continue into 2H19, particularly in the Eastern Region, with increased bidding activity in the Western Region for new projects expected to come online during 2019. In order to meet strong ongoing demand and drive continued growth, Emeco has committed to investing in a significant package of core assets. We currently have very high utilisation in these asset classes and already have rental agreements in place for a majority of these assets. This disciplined asset purchase is expected to achieve high-teens returns through its life. Delivery and preparation will occur throughout 2H19, with earnings contributions expected in FY20.”was DPS growth of +1.7% - including the payout of capital profits.”

Coles (ASX:COL) -4.05% is a stock we have no real interest in. It’s expensive for very little earnings growth, has a big capex requirement to build out better distribution centres, is facing more competition and recent momentum in sales relative to comps has come from making little mini things so kids bug you to shop there. We could buy for the dividend in September, however based on 80-90% guided payout they’ll deliver something like 4.5% fully franked – I’d rather buy a hybrid.

We hit the vortex of reporting tomorrow…

IOOF Holdings (ASX: IFL) +16.42%; One of the dogs of 2018, IOOF today reported their half year numbers to the market helping the stock over 10% higher on the session to offset some of last year’s pain. The wealth management conglomerate saw underlying profit climb 6% to $100.1m while funds under management, administration & advice (FUMA) rose 15% to $137.8b. The result wasn’t better than the market, but the negativity surrounding IFL has certainly helped an average result look much better. Statutory NPAT at $135.4 is just shy of triple that of the FY18 but a number of one-off additions has added to the growth. This includes the sale of the corporate trust business ($34m), legal cost recovery ($25m) and the release of $28m of impairments relating to the Perennial business it no longer needs to account for. Adding these back gives growth of closer to 4% for the year – a more reasonable figure.

The FUMA growth is also a bit of an anomaly, with the 15% growth driven by IOOF’s purchase of the ANZ dealer group business. Without this transaction FUMA would have fallen around 4%.

The road ahead for IFL is still rocky. There is still the ANZ super business which is due to be taken over by IFL in June, but faces a vote from the current custodians to determine if the transfer of ownership is in the members best interests – tough to determine when a number of the company’s previous executives are facing criminal charges for their handling of the business. A low quality result to us in a business that has a lot of work ahead of it to both be and stay compliant, but also integrate the ANZ acquisitions. Not one for us here.

IOOF Holdings (ASX: IFL) Chart

Cochlear (ASX:COH) -8.14%; In a similar vain to the result from CSL (ASX: CSL) last week, Cochlear has shown significant growth for the first half the year to meet consensus numbers, but fell short on guidance for the year which has led to the stock trading lower this morning. Profit for the half was up 16% to $128.6m, just edging out the consensus at $127m, while revenue landed just shy at $711.9m vs $713.5m from the analysts. For the full year, Cochlear maintained guidance of $265m-$275m profit being 8-12% growth on FY18. The market has run ahead of these numbers, with consensus sitting at the top end of the range at $272m.

Part of the issue with guidance wasn’t just the numbers given. One key consideration from the company is “a lower rate of cochlear implant growth across the developed markets for FY19.” Although the company clearly has a large untapped market, competitors are encroaching in on the space and the low hanging fruit seems to be have taken. The half year was also supported by a lower R&D expense that seemed to prop up profits, lowering the quality of the result. A growth company that is growing, but markets get a bit too excited some times. It would look better value around the 5-year average PE of around 31.5x which would price COH at around $162.

Cochlear (ASX: COH) Chart


Broker Moves;

·         iSelect Downgraded to Hold at Bell Potter; Price Target A$0.86

·         Fortescue Downgraded to Hold at Bell Potter; PT A$6.33

·         Steel & Tube Upgraded to Neutral at Forsyth Barr; PT NZ$1.30

·         Ansell Upgraded to Hold at Taylor Collison

·         Ansell Downgraded to Hold at Morningstar

·         GDI Property Downgraded to Hold at Moelis & Company; PT A$1.44

·         GWA Group Downgraded to Neutral at Citi; PT A$3.26

·         GWA Group Downgraded to Sell at Morningstar

·         GWA Group Downgraded to Neutral at Credit Suisse; PT A$3.65

·         Property for Industry Cut to Underperform at First NZ Capital

·         Telstra Downgraded to Neutral at New Street Research; PT A$3.30

·         Magellan Financial Downgraded to Sell at Morningstar

·         SmartGroup Downgraded to Neutral at Credit Suisse; PT A$9.50

·         Helloworld Downgraded to Neutral at JPMorgan; PT A$6

·         Helloworld Downgraded to Hold at Morgans Financial; PT A$5.85

·         nib Downgraded to Hold at Morgans Financial; PT A$6.18

·         nib Cut to Underperform at Credit Suisse; Price Target A$4.90

·         Bank of Queensland Cut to Sell at Shaw and Partners; PT A$9

·         Saracen Mineral Raised to Hold at Argonaut Securities; PT A$2.45


We added two stocks to the MM Platinum Portfolio today, NIB Holdings (NHF) early on and Bingo (ASX:BIN) late in the day. Here’s a recap of why we bought into Bingo…

Yesterday BIN came out with a large profit downgrade and the stock fell by ~50%, it now trades at ~$1.20, down from a high in October 18 of ~$3.20. They are embroiled in a takeover deal for Dial-a-Dump Industries which is under ACCC scrutiny, a decision from the ACCC due out on the 28th February. Despite the negativity in the stock now, there could be some significant upside from here under the various scenarios that could play out, however we stress, we view this as a high risk position in our portfolio. .

1.    The deal doesn’t happen

If the ACCC veto the deal, BIN could potentially launch a large share buy-back, something around ~$350m. If that were to happen, we estimate that would be earnings accretive by at least ~50%. BIN now trades on just 13.8x forecasted earnings meaning its priced for no growth. A share buy-back changes that in the short term at least. This would be supportive of the stock.  

2.    The deal happens

They benefit from a larger footprint, a better logistics network and more opportunity to optimise landfill which would support better earnings / margins in the future.

While these scenarios seem positive, risks lie around the continued decline in construction activity – it was a fairly quick / savage reduction that led to this recent downgrade, while I also have some concerns that management have too much on their plate (clearly). The CEO is 33 without a track record and now has a big task to reposition the business to grow strongly from here. That said, it operates in an attractive sector (infrastructure, recycling, landfills, waste volumes) and in either scenario the risk / reward equation looks attractive.    

While we’re taking a 2% position today around $1.20 we would be comfortable adding to the position (once) on another spike lower. This is a play on a share buy-back or an earnings recovery in FY20 and beyond.  

Have a great night

James / Harry & the Market Matters Team


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