Afternoon Report / The market ends the week on a soft note despite bank buying (LLC)

By Market Matters 09 November 18

The market ends the week on a soft note despite bank buying (LLC)

Market Matters Afternoon Report 9th November 2018


WHAT MATTERED TODAY

In a topsy turvey session, the market closed marginally lower this afternoon despite the best efforts from strength in the banks. Despite the slightly soft finish, the market managed a solid 1.2% gain on the week. Energy dragged today as oil prices entered bear market territory, sliding more that 20% from recent highs. A downgrade from Lend Lease ensured that the real estate stock was the worst in the top 200 thanks to a downgrade on poor engineering business performance. A bounce from APA saw utilities higher – the market is forecasting a revised bid for the gas pipeline company which was recently targeted by Hong Kong’s CKI.

Overall, the index closed down -6 points or -0.11% today to 5921 – up a +1.2% on the week. Dow Futures are trading up 11points / -0.04%.

ASX 200 Chart

 

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; Wilsons put out a note on Afterpay (APT) downgrading the stock to hold. They say that while APT is showing “clear momentum” in the U.S., there is a risk that margin expectations for the next couple of years are too high.  The acknowledge that  the U.S. remains a significant opportunity given Afterpay has 900 retailers, with another 1,300 in the pipeline but warn that regulatory risks remain given ASIC report due in December, potential lawmaker inquiry in February. They cut to hold vs buy; PT slashed 38% to A$15.64 from A$25.03

RATINGS CHANGES:

·         Netwealth Group Upgraded to Buy at Wilsons; PT A$8.49

·         Platinum Asset Cut to Underperform at Credit Suisse; PT A$5

·         CSL Upgraded to Buy at UBS; PT A$220

·         REA Group Upgraded to Outperform at Macquarie; Price Target A$90

·         REA Group Downgraded to Neutral at JPMorgan; Price Target A$79

·         McMillan Shakespeare Raised to Outperform at Macquarie

·         McMillan Shakespeare Raised to Outperform at Credit Suisse

·         Lovisa Upgraded to Equal-weight at Morgan Stanley; PT A$8.40

·         APA Group Upgraded to Hold at Morningstar

·         ANZ Bank Downgraded to Hold at Morningstar

·         Corporate Travel Raised to Add at Morgans Financial; PT A$26.72

·         OceanaGold GDRs Rated New Neutral at Goldman; PT A$4.30

·         Northern Star Reinstated at Goldman With Sell; PT A$7.50

·         Resolute Mining Rated New Neutral at Goldman; PT A$1.10

·         Regis Resources Reinstated at Goldman With Sell; PT A$3.80

·         Saracen Mineral Rated New Buy at Goldman; PT A$2.80

·         Evolution Mining Reinstated at Goldman With Buy; PT A$3.40

·         St Barbara Reinstated at Goldman With Buy; PT A$4.90

·         Newcrest Reinstated at Goldman With Neutral; PT A$21

Sectors this week; Banks lead the financials higher this week, while although APA bounced today, the weakness this week dragged utilities.

 

Stocks this week; Syrah rallied as production progress is made, and Eclipx bounced on merger news. On the other end, James Hardie and Domino’s soft updates to guidance ensured the two stocks struggled this week.

Lend lease (LLC) $14.20 / -18.34%; This morning Lend Lease (ASX:LLC) came out with a downgrade saying that they anticipate taking  a ~$350m after tax impairment charge against its Engineering division in 1HFY 19. This has been a problematic part of the LLC operation for some time with such slim margins offering very little cushion if one of two projects have issues.

From the conference call with management;

·         Cost inflation in projects

·         Wet weather and lower productivity issues

·         NorthConnex plus some smaller projects problematic

·         Spin off of Engineering business a possibility

Importantly, this highlights the cost pressure coming through infrastructure projects and other companies to be potentially impacted would be (ASX:DOW), (ASX:BLD) and (ASX: CIM) – something we need to be conscious of given our CIM holding in the Platinum Portfolio

LLC has spent a number of years de-risking the business however the one area that has always been problematic has today caused the share price to tumble around 18% at time of writing. It seems like when times are good, margins are under pressure and when its bad the margins are under pressure.

The market will now focus on whether or not LLC will spin out the engineering division, and the CEO alluded to that on the call. Citi put out a note back in October outlining why that could be a good strategy sighting;

1.      LLC is worth more today without engineering based on applying a higher multiple to the stocks ex-engineering

2.      Engineering is a management distraction

3.      Engineering lacks scale and building scale will increase risk (which then had a negative influence on the multiple the market will pay for the group)

4.      Limited synergies with development and funds management

5.      An in-specie distribution avoids selling the business at the wrong time

Lend Lease (LLC) Chart

 

OUR CALLS

No changes the portfolios today.

Watch out for the weekend report. 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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