Investment Matters

What Matters: House Prices matter, Rio Tinto, ALS Limited and AMP

With the share market waiting for the Australian reporting season to kick off in earnest (next week) the big news seemed to be residential property prices.  With a large real estate conference coming at the same time as the Corelogic Home Value Index indicated that property prices continue to drift down the scene was set for almost daily front page discussions and prognostications on house prices, in both the broader and financial media. For the record the home value index declined -0.6% MOM for July, and is down -1.6% YOY nationally.  The short story is the really expensive houses in Sydney and Melbourne have stagnated, (as have the really expensive houses elsewhere around the globe) but to this point, the rest of the market is flat to moderately positive.  What happens next? We shall see… clearly, though it has the potential for risk, particularly for the banking (and non-banking) financial sector in Australia.

Big Miner Rio Tinto kicked off the reporting season for large caps, with a 1H19 financial profit +12% on 1H18. Whilst cost pressures are now rising, and capex is forecast to increase (now through to 2020), RIO is managing to contain them to this point with continued focus on productivity.  It will restock its share buyback with a further US$1b, and will return capital when its estimated US$5b of asset sales complete. The market shrugged, sending the shares down 2.1% in London trading straight afterwards. Key takeaway: Good results are expected from the miners.

That said, ALS Limited a global provider of testing and laboratory services (to the mining sector in particular) noted at its AGM that 1H19 profit could be by up to +25% due to strong demand for its services. The price jumped +11% on the prior close (and rallied further since), indicating that the market has underappreciated the extent of recovery in the service sector still to play out. Even where share prices are already high. On our reckoning, ALS trades on 25x expected profit (i.e. after the further profit increase now expected in 2019).

AMP was again making headlines this week. After last week announcing plans to “accelerate advice remediation” this week its Chairman, David Murray was quoted as looking to rebuild the business by ignoring the ASX corporate governance principles, which he claims are creating a distraction, so that his board can focus on bigger strategic issues, and so that his chief executive can run the company.  Fighting words indeed, it will be interesting to see how that goes, and whether the sentiment, shared by several prominent industry leaders gains wider traction.