Afternoon Report / RBA Minutes drive the ASX to another high (COL)

By Market Matters 18 June 19

RBA Minutes drive the ASX to another high (COL)

Market Matters Afternoon Report 18th June 2019

WHAT MATTERED TODAY
Once again, the expectation of lower interest rates was enough to drive stocks higher today, with comments from the RBA that implies rates were more likely to go down than up from here…"Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead,"  the minutes said.

While lower rates are indicative of a weak economy, the initial decline in rates is generally supportive of asset prices – like equities. While official cash rates are now at 1.25%,interest rate futures are implying a cash rate below 0.80% by December. That makes investing for income very difficult without taking on more risk, but it also makes equity income more appealing from those companies that can generate consistent returns. Coles is a case in point today, with a decent strategy update implying that they can grow revenue around 3% and improve earnings by more through productivity gains – more from Harry below on COL.

Elsewhere , Emeco (EHL) rallied for a second day on decent volume, up 8.82% to $2.16 while Afterpay Touch (APT) recovered from recent weakness to finish up by 4.93%, however it was Gold producer Silver Lake Resources (SLR) that was the standout today topping the leader board on a new Gold discovery.    

Overall, the ASX 200 added 39points or 0.60% to 6570 – the best close since 2007. Dow Futures are trading down -17pts / -0.07%. 

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Coles (COL) +3.45%; traded up to all-time highs today, snapping a 3-session losing streak with the market digesting the first investor day for the new standalone company. CEO Steve Cain has unveiled a number of new plans that aim to increase profitability and growth to Coles which has lagged behind rival Woolworths (WOW) in recent years. Convenience will be a key part of Coles’ new strategy and is now looking at introducing meal kit style options. The company also recently partnered with UberEats to increase delivery flexibility and in the midst of developing its online store with UK based Ocado. Data targeting is also front and centre for Coles as it looks to take advantage of the huge data pool that is FlyBuys.

While all this is happening, Coles is spending $700m-$800m to build out 2 distribution centres while they also look to cut $1bn worth of costs out of the business by FY23, largely through automation. The company noted 4th quarter sales had been reasonable, with growth coming in between the 2nd quarters 1.8% and the 3rds 2.1%. Coles is looking to match revenue growth to market growth which is estimated to be around 3% each year, while maintaining a payout ratio of 80-90%. Increasing competition is obviously a threat which Coles clearly recognize, hence their investment in a more efficient supply chain along with growing automation. Managing costs and improving efficiencies  the key from here.

Coles (COL) Chart

Broker moves: 

·         AGL Energy Upgraded to Neutral at Macquarie; PT A$20.58

·         Alacer Gold Reinstated at Macquarie With Outperform; PT C$4.50

·         Nearmap Rated New Outperform at Macquarie; PT A$4.22

·         Nanosonics Downgraded to Hold at Morgans Financial; PT A$4.99

·         McMillan Shakespeare Cut to Neutral at Macquarie; PT A$12.62

·         McMillan Shakespeare Cut to Negative at Evans and Partners

·         Aristocrat Downgraded to Sell at Morningstar

·         Qube Downgraded to Sell at Morningstar

·         Freedom Foods Rated New Buy at Goldman; PT A$6.15

·         Accent Group Upgraded to Add at Morgans Financial; PT A$1.51

·         CBA Upgraded to Buy at Bell Potter; PT A$86

·         QBE Insurance Cut to Hold at Bell Potter; Price Target A$13.20

·         Senex Upgraded to Outperform at Credit Suisse; PT A$0.37

OUR CALLS

No changes today


Have a great night

James, Harry & 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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