Investment Matters

What matters this week: Tatts, Tabcorp, Woolworths, Harvey Norman

The oil price came under a bit of pressure this week, based on oversupply fears - down around 5% (WTI) for the week.  This flowed through to energy companies on the ASX (for example, Woodside -3.9% for the week, Santos -2.5%, Oil Search -2.4%). 

It was a 'risk off' week for the banks as well (with the exception of a strong market on Thursday), with Moody's downgrade of the banks' credit rating.  This wasn't that unexpected (following on from the other two major rating agencies).  But it did act to remind the market of the systemic risks the banks are facing, which flowed through to a dampening of their share prices.

The 'are you serious?' moment of the week was South Australia's proposed introduction of a state bank tax.  Does SA provide any implicit government guarantee, is it responsible for the regulation of the banks, and will the banks withdraw operations, lending and support to parties in the state?  Obviously the banks are up in arms.  But there is also wider backlash, along with a potential constitutional challenge.

In one of the larger corporate deals we have seen in recent times, the $11 billion merger of Tatts and Tabcorp has been approved.  This follows a charged review and court approval process over the last eight months, and objections from many parties, including Australia's competition regulator, the ACCC.

The retailers continued their dour mood this week, again on the back of Amazon related concerns.  Woolworths (-3.5%) and Harvey Norman (-5.3%) were notable this week.  One analyst called the market's reaction to Amazon as overdone.  But Amazon is shaking things up, in a way we have not seen in a long time.  A few examples that have been announced in recent days:

* Amazon has purchased Whole Foods Market, a food and liquor retailer many Australians would dream of having here, and very different to the Woolworths / Coles model.  Their intentions as to how they plan to leverage this purchase are not clear.  But no doubt they will.

* Nike is reportedly planning to sell directly through Amazon (Nike products, as with many many others, can only be purchased through third party retailers currently).  It might be a limited product range (e.g. sale items), but even then traditional retailers would be cut out of the loop.

* Amazon is launching Prime Wardrobe, a try-before-you-buy service, with free shipping in each direction - taking away the risk of whether a piece of clothing fits.

* Amazon is expanding its auto business, with plans to sell cars directly to European customers.   

Maybe in the short term the analyst referred to above will be right.  But Amazon's disruption is set to continue in the medium to long term.  This, combined with the economic climate in Australia (low wage growth, higher electricity prices, high debt levels), means conditions are tough in retail land with no respite in sight.

Speaking of which, it has been mostly clothing and discretionary retailers that have made the headlines this year.  But it was a food and coffee retailer, Retail Food Group (Michel's Patisserie, Brumby's, Crust Pizza, Gloria Jeans and other chains), that released a downgrade this week, and flagged a $22m writedown.  Profit will be ~$76m for FY-17 (previous forecast ~$80m).   The market wasn't happy: -10.4% on the day of the announcement.

Other company news this week was the property group Dexus raising not an insignificant amount of new money - $500m equity, plus up to another $50m equity from a SPP, plus $288.6m of new debt.  The proceeds with be used to purchase two office buildings and part ownership of a third, all in Sydney, along with a pool of industrial assets in Melbourne.  Analysts are predicting that it will be dilutive for FY-18 earnings, and the security price fell 5.0% after the institutional raise was wrapped up.

Less money being spent at the shops, but more on travel.  Sydney Airports is booming.  International traffic from the airport in May was 8.1% higher than in May-16.  Domestic travel is on the improve, with 2.7% growth versus the May-16 pcp.   Qantas isn't the only airline experiencing positive conditions, with Air New Zealand this week reporting good growth in passenger numbers, and higher load factors.