Investment Matters

What Matters this week

China brought out the big guns in response to the “The Coronavirus” panic. On Sunday, it pledged to inject US$173 billion into its financial system and cut interest rates. The market, which reopened after Lunar New Year seemed to take some comfort - though the Shanghai Composite Index was in freefall (-7.72%) on Monday, before finding support later in the week.

First-half results from Australian companies have begun to trickle through, marking the start of the February reporting season, it is generally the “unknown-unknowns” or unexpected announcements pre-reporting that keep shareholders up at night (ask anyone who owned Treasury Wine Estates last week….).

Speedcast (in a trading halt) revealed one of these “unknown-unknowns” on Monday. The global satellite communications provider voluntarily suspended trading of its shares after announcing the resignation of CEO and founder/raison d'être PJ Beylier. The company has saddled itself with debt as part of a failing acquisition led strategy, which has now left it on shaky grounds. The announcement was accompanied by (yet another) downgrade to expected earnings. Whispers are that the company’s bond holders (the likes of Macquarie, Credit Suisse, Citi and ING) are looking to unburden themselves for a price of 70c on the dollar. Yikes.

In direct contrast (and despite low interest rates, increasing regulation and low credit growth) CBA (-1.2%) has reached a new high, in terms of its valuation – reaching a PE ratio of 18.3x. According to UBS, this multiple is “unprecedented globally for developed market, large cap banks”, exceeding the value of ANZ and NAB combined or Lloyds Banking Group and Barclays.

And upstart Xinja provided a salient reminder this week of what is knocking on the doors of our treasured four financial pillars. The neo-bank (or fintech), which is looking to offer a more seamless, digital friendly banking experience has managed to attract AU$100m in deposits in the 19 days it has offered accounts to customers. Still, this is not quite as large as the $462 billon CBA has on deposit. Furthermore, given Xinja provides a no-frills deposit rate of 2.25%, it is likely the “banking experience” did not have much to do with the sudden influx (to be fair, the “banking experience” it provides at the moment is not all that different to that of the big four stalwarts…).

Furthermore, Tesla (+14.0%) still handily beats CBA when it comes to the relative size comparison game. Its market capitalisation of US$132.43 billion now equates to that of Volkswagon and BMW combined. After posting better than expected deliveries, we witnessed what was perhaps the mother of all short squeezes (a short squeeze is where those “betting” on its share price going down are forced to cover their bets, sending a company’s share price higher). Casualties this week included notable names such as Steve Eisman (of “The Big Short” fame – Steve Carell’s character) and Australia’s own L1 Capital - sending the stock 18% higher on Monday. Putting this into perspective: a company which produced 86,550 cars in 2018 is now worth more than the combined value of two companies that produced 13.5 million vehicles in the same year. That calls for a lot of growth, and a lot more ghastly looking polygon trucks.

Back to the trickle of results from the ASX this week:

  • Coles (+0.5%) provided a trading update for 1H-20 - posting impressive sales numbers, with Q2 like for like sales growth in supermarkets +3.6% (thanks to a successful Christmas campaign). The company upgraded its earnings guidance though this was mainly due to one off gains (property and release of workers comp provisions) which offset a contraction of margins in liquor.
  • Nick Scali’s (+12.9%) sales slid, but less than expected, with net profit higher than guided and margins holding up relative to expectations. It also had the honour of being the first company during reporting season to mention “The Coronavirus” – which has provided enough “uncertainty” for the company to not provide guidance for the full year…
  • Property group Mirvac (-2.0%) continued to be weighed down by its residential property exposure (although recovering) – with lower margins on its projects dragging its result down,
  • Mortgage insurer Genworth (+5.6%) reported an uptick in written premiums, as Australians responded to recent rate cuts by gearing up and purchasing more real estate.

And more to come next week…

Note: Price changes for the week to 10:30 am on Friday.