Afternoon Report / CBA drags market into the red (CBA, RWC, LLC, REA)

By Market Matters 13 May 19

CBA drags market into the red (CBA, RWC, LLC, REA)

Market Matters Afternoon Report 13th May 2019

WHAT MATTERED TODAY

Another fairly busy session today with weakness in US Futures before our open this morning thanks to Trump’s tweets over the weekend ensuring we opened on the back foot, while a weaker  than expected quarterly update from CBA had the banks in the crosshairs + throw in a downgrade for Reliance Worldwide (RWC) – the stock down -25% off the bat and there wasn’t a lot to like about today’s mkt in the early stages. The banks + Macquarie dragged the index down 30 points on the session (ANZ & MQG did trade ex-divi) with CBA doing most damage taking 11 points from the ASX 200 by the close – however it wasn’t all bad news with the market showing strength in the face of some pretty negative influences

Overall today, the ASX 200 lost -13 points or -0.21% to 6297. Dow Futures are trading down -300pts / -1.15%.

It was clearly a resilient performance from the mkt today as we once again ignored the bulk of the weakness coming from US Futures during our time zone, while Asian markets were down, but not aggressively so. Hong Kong was closed for Buddah’s birthday!  

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Commonwealth (CBA) – 2.52% - hit after announced a 3rd quarter trading update that was weaker than expected, a cash profit of $1.7B for and a statutory profit of $1.75B. The main areas of note being $715M in additional customer remediation provision, an overall decline in non-interest income and no growth in net interest income from the quarterly average of 1H19 to 3Q19, as a result of margin decline offsetting loan growth. Expenses are up 1% from the quarterly average of 1H19 to 3Q19 on an underlying basis and asset quality deteriorated with past due home loans increasing. Capital was low at 10.3% however the completion of the announced asset sales should take this ratio to 11.5%. All in all, a weak result, income down, expenses and bad debts up.

At Shaw, this has prompted a downgrade forecast EPS by the tune of 9%, 8% and 6% for FY19, FY20 and FY21, respectively. Our analyst cut the stock from buy to hold  and dropping PT from $76 to $73. Not CBA’s finest hour

Commonwealth Bank (CBA) Chart 

Reliance Worldwide (RWC) -15.62% down sharply on an earnings downgrade however they were worse early on, off by 26% at the worst. We saw a lot of flow through the desk today in that name, Rog who sits on the Insto team behind me had been pushing the short thesis on the stock for a while and today it came through in a big way. A great call but what now?? Their new FY19 Ebitda guidance is range of A$260M-A$270M, down from A$277m-A$287m with the market sitting at $282.4 before today’s update. Assume $265m midpoint, that’s a 6% downgrade at the Ebitda line and more at the profit line. They also said that  while tariff changes are not likely to impact FY19 Ebitda, they may potentially have negative impact on Americas in FY20 – RWC generates ~70% of  revenue in the US. While we like the stock technically below $4, the stocks now on 20x with no growth – expect downgrades to flow through tomorrow.

Reliance Worldwide (RWC) Chart

Lend Lease (LLC) +8.71%... on news that a Japanese company is circling LLC . LLC denied the approach however where there is smoke….Shares rallied strongly today, and the sellers of the early spike were run over in the afternoon and buyers held firm into the close. Now one firmly on our radar.

Lend-Lease Chart

Real-Estate…The Govt has promised to help support lower income first-home buyers by helping fund part of the deposit. A proposal that was matched by the opposition today. The 5% cut to the deposit rate is a boost for listing volumes and that helps the likes of Domain & REA Group – the latter rallying today on the news.

REA-Group (REA) Chart

Broker moves: 

·         Technology One Raised to Buy at Bell Potter; PT A$9.50

·         Fletcher Building Cut to Neutral at Forsyth Barr; PT NZ$5.25

·         AGL Energy Downgraded to Sell at Citi; PT A$20.87

·         Cochlear Downgraded to Neutral at Citi; PT Set to A$198

·         Oil Search Downgraded to Hold at Deutsche Bank; PT Set to A$8

·         Evolution Upgraded to Add at Morgans Financial; PT A$3.55

·         FlexiGroup Upgraded to Outperform at Macquarie; PT A$2.04

·         Credit Corp Upgraded to Hold at Morningstar

·         GrainCorp Upgraded to Buy at Morningstar

·         Domain Holdings Cut to Negative at Evans and Partners; PT A$2.42

OUR CALLS

No changes today

Have a great night

James & the Market Matters Team

Disclosure

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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