Morning Report / Subscribers questions (BSL, FMG, TLX, SSM, IGL, ABP, CLW, GOLD)

By Market Matters 21 December 20

Subscribers questions (BSL, FMG, TLX, SSM, IGL, ABP, CLW, GOLD)

Market Matters Morning Report 21st December 2020  

It’s now only 4-days until Christmas but for people in NSW and all of Australia watching the COVID outbreak on Sydney’s Northern Beaches its likely to feel much longer – 30 fresh cases yesterday and while we saw zero spread outside of the area the full city lockdown scenario currently feels around 50-50, at least the Avalon area has the reputation as being the “insula peninsula” for a reason, it may just save both our Christmas and New Year.

Moving onto more positive news the Sydney property market remains extremely strong as buyers look through the short-term coronavirus crisis, this month I saw a great house just around the corner from us sell for over 10% more than it did in April 2017. Usually ~3% p.a. gain wouldn’t be that big a deal for residential appreciation in Sydney but as the chart below illustrates that was supposed to be the top 3-years ago, from what I’m witnessing on a number of occasions we are definitely posting fresh all-time highs for many parts of Sydney.

Overall, the bullish theme remains in play across asset prices from the volatile new beast that is Bitcoin to the relative calm of property prices with equities nestled nicely in between and while central banks keep global liquidity at unprecedented levels MM is likely remain core bullish e.g. there are plenty of 4-year fixed home loans available below 2% dramatically increasing affordability.

Source: Urban Developer

As the Christmas rally threatens to fizzle out before it really got going courtesy of the new COVID cluster we remain keen buyers of any meaningful pull back as a vaccine is coming and central banks / governments will continue to stimulate the global economy for the foreseeable future. From a technical perspective our ideal buy zone is ~6400, only 4% below Fridays close so definitely not worth dismissing in today’s volatile and uncertain environment.

MM remains bullish Australian stocks in 2021.

ASX200 Index Chart

We’ve mentioned a number of times through 2020 that Bitcoin is an excellent leading indicator to what is looming for the stock market. Interestingly there’s been a 5-day lag relationship over recent quarters which has gained increased importance this week as Bitcoin prices soared from the 18,000s to above 23,000 in the last 5 trading days.  The US S&P500 tends to reflect Bitcoin’s price movements but with muted magnitudes, however this Bitcoin move was huge, perhaps stocks will pop into Christmas / New Year – at MM we believe this relationship makes sense because the crypto currency is an indicator of the “free” speculative cash in circulation looking for a home.

Interestingly when Bitcoin prices form a blowoff top, there is typically a corresponding significant spike in open interest in Bitcoin futures.  An important insight because currently there is no open interest spike at the moment i.e. these technical indicators are not warning off a top.

MM believes Bitcoin is close to a period of consolidation but not a top.

Bitcoin ($US) Chart

Thanks again for the much-appreciated questions as we enter the Christmas week, I hope all the shopping and wrapping is already done!

Question 1

“Hi James and Team, after reading your weekend report with a strong look on the Resources Super Cycle . Was wondering why BlueScope Steel (BSL) Wasn’t included? If it is on your radar what price target would you be looking at? Pullback buy price target? Wishing you and the Team a Merry Xmas and all the best for an exciting New Year.” – Cheers Craig B.

Morning Craig,

BlueScope Steel (BSL) wasn’t mentioned simply because we can’t discuss them all, BSL as a supplier of steel products and solutions fits nicely into our bullish reflation outlook. Short  term the stock looks destined to break above this years $18.24 high but a pullback below $17 in Q1 of 2021 would not surprise from a technical perspective hence MM is looking to exhibit some patience with regard to increasing our sector exposure.

MM likes BSL initially targeting a test of post GFC highs ~$19.

BlueScope Steel (BSL) Chart

Question 2

“I've searched AAIG, looking for the Corporate Police to help me have a Director or someone in this company to buy my shares back. I bought shares February 2012. They've offered a tranche now @ 0.27, but I assured them I won’t add. I'm willing to pay for information on how to get them to buy my shares so I can be free of them. I'm 76, I've been thinking I'll be dead before they float. I'm asking you as you responded to Nick in March 2020.” – Michael O.

Morning Michael,

We’ve had a few emails on this company that own brands like the Australian Stock Report amongst others after I mentioned them in a report a while ago. If you have a similar concern i.e. was sold stock on the basis of an imminent listing, drop me an email directly [email protected], I aim to compile a list of impacted people and try and help if I can. As I said before, I was astonished when I saw two new clients of mine hold this stock and hear about how they had acquired it, and the misrepresentations given.

Question 3

“Team--Thanks yet again for your work-profitable, even in such an ordinary year --and easy to follow. May be already done (I have been out of action for a week or so), but could you pass an opinion on the best thing to do for those of us holding iron ore stocks--particularly FMG, which I’m currently showing 170% profit on? “Let your winners run” may be good advice (it has been for me) , but the China squabbling I’m sure has many investors in the space quite worried. Is it time to cash out of FMG et al and look to re-enter at a later date? -- or are there other overlooked factors in the iron ore market that make holding a wiser option?” - Merry Xmas to all, Paul A.

Morning Paul,

As we covered in the Weekend Report MM is bullish the Resources Sector and while we acknowledge the risk around China trade our view is the reflation theme will dominate over the next 1-2 years. Hence, we are far more comfortable buying weakness as opposed to selling strength, it’s very easy to lose a position by being too micro / short-term i.e. day to day noise is random but trends are meaningful.

MM is a buyer of weakness in iron ore stocks like Fortescue Metals (FMG).

Fortescue Metals Group (FMG) Chart

Question 4

“Hi James, I hold TLX from lower levels. What are your views about the stock and the reason for the recent price action (adjustment)? Do you have access to consensus broker recommendations and target price ranges? I wish you and your team a well-deserved break.” – Regards Graeme K.

Morning Graeme,

Telix Pharma (TLX) roared higher in November after entering into an attractive agreement to buy TheraPharm a Swiss-German biotech company which specialises in the hematology space. This Melbourne based business which operates worldwide now has a market cap of $1.1bn with its focus on radiation therapy for prostate, renal and brain cancer which are unfortunately growth areas.

The stocks is covered by 7 brokers and all have a buy on it with rice targets between $2.75 and $5.50. We also like that almost 20% of the companies stock is held by “insiders”, while these guys don’t sell things feel good.

Source: Bloomberg

Technically MM can see TLX testing $4.50 before a period of consolidation.

Telix Pharma Ltd (TLX) Chart

Question 5

“Hi , just wondering do you guys know much about SSM has fallen the last few days on no bad news ....? and IGL I am holding a small amount do you think it is in recovery mode ?....I was thinking to top up to about 3% still looks cheap and the chart looks ok ?” - Thanks love your work . Glenn G.

Morning Glenn,

Service Stream (SSM) fell over 20% last week, the network servicing stock Service Stream (SSM) was unceremoniously smacked after announcing it will be sharing a major NBN contract with 3 other providers hence significantly diluting its forecasted revenue as analysts expected it to get all / more of the pie. However, SSM has paid a steady yield ~5% fully franked for many years making it a contender for our Income Portfolio, especially when it becomes more obvious the selling pressure is starting to dry up – perhaps one for the new year. MM has SSM on our radar for the Income Portfolio.

Service Stream Ltd (SSM) Chart

IVE Group (IGL) is certainly in recovery mode after bouncing over 600% from its lows, this is a company not covered by many analysts hence when volatility picks up it get exacerbated and put into the too hard basket by many players. As an investor / holder we have to keep our finger on the pulse, following their recent AGM we’ve seen some increased activity on this stock with Bells (who are ranked No 1 on the stock) upgrade their price target to $1.60 while retaining their buy recommendation. To MM, one thing stood out from their note, namely that cash flow in October was strong, around $6m for the month which is significant given it was the first month without Job Keeper. Looking into 2021 and beyond the stock sitting on a P/E of 7x, has a buy back in place, FY21 guidance was reconfirmed & the likely resumption of dividends all feels supportive hence we think it’s worth continuing to hold our position.

MM remains bullish IGL 

IVE Group (IGL) Chart

Question 6

“A question for Mondays report. Are you planning to take up the share offers in ABP & CLW.” - Thanks Ian C.

Hi Ian,

Earlier in the month Abacus Property (ABP) went into a trading halt pending a cap raise with the company launching a 1 for 4.8 entitlement offer for shareholders, looking to raise $402m at $2.90, a 6.5% discount to its last trade. Already the company has spent $926m in deals since the start of FY20, mostly acquisitions of office and self-storage assets and after the latest raise, Abacus will have over $900m in acquisition capacity before it reaches its target maximum gearing level of 35%.

We hold ABP in the Income Portfolio and plan to take up the raise.

Abacus Property (ABP) Chart

Property operator Charter Hall REIT (CLW) was previously earmarked for the chopping block from the MM Income Portfolio to make room for the purchase of Metcash (MTS), but just before we pressed the “sell button” they went into a trading halt to raise $250m through an institutional placement at $4.65, a 3.3% discount to last trade. We’ll now hold fire on that sale until this raise washes through. We’re in no great rush to sell CLW, however we are very low on cash in this portfolio and did not contemplate increasing our position : MM Income Portfolio

This equity raise was to fund the purchase of 3 good properties. 76-78 Pitt Street in Sydney via a sale and leaseback to Telstra (TLS) for $280m, a new Bunnings property to be developed in Caboolture for $28m and they bought a 49.9% interest in a pub in Darwin for ~$10m.

We continue to hold CLW but are not going to increase our position size through the raise

Charter Hall REIT (CLW) Chart

Question 7

“It’s a pandemic-just look at how there is little wearing of masks and no social distancing-that’s how there is a major outbreak. I’m flabbergasted that you are flabbergasted.” – Robert A.

Morning Robert,

It’s a frustrating subject I would rather not dwell on but if we didn’t let the virus back into Australia via flight crews etc social distancing would be irrelevant. However, what’s more important to MM is the impact its having on stocks and at present its actually helping create a huge liquidity driven tailwind for risk assets.

MM remains bullish risk assets.

ASX200 Index Chart

Question 8

“Hi James, I currently hold NCM... and looking for more gold exposure, If buying at current prices, which would you consider a better buy for gold exposure.” – thanks Alain M.

Morning Alain,

There a number of solid alternatives to Newcrest (NCM) including Evolution (EVN), Northern Star (NST) plus of course a gold facing ETF. At MM we like the risk / reward for gold & precious metals to make fresh recent highs in 2021 but I wouldn’t be surprised if many gold stocks fail to scale the dizzy heights achieved in late July when “Fear of missing out (FOMO)” buying was washing through the complex. For subscribers looking for some diversification we like the locally listed GOLD ETF shown below, Newcrest (NCM) for a lower risk single stock pick and Evolution (EVN) for a higher risk single stock pick.

MM is bullish precious metals and related stocks.

Australian GOLD ETF Chart

Have a great day,

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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