Investment Matters

What matters this week: China, Surfstitch, car dealers, Ansell.

Perhaps the most significant news of the week, from the Australian market perspective, was Moody's downgrade of China, and the associated commentary.  China's rating was downgraded from A1 to Aa3, a rating it has had since 1989.  More pointedly, but unsurprisingly, the ratings agency pointed to China's high and growing debt levels, along with the country's lack of fundamental economic reform.

Moving to company specific news:

The very troubled online retailer SurfStitch has downgraded profit expectations again.  Subsequently it has received a class-action law-suit, and gone into a trading suspension probably until the end of August.  Since listing with much hype in Dec-14, it has been a disaster for shareholders, and with more twists and turns than Days of our Lives.

The most notable downgrades of the week (from our perspective) were from the two listed car dealerships, AP Eagers and Automotive Holdings Group (AHG).  AP Eagers is expecting a 7-9% profit fall in H1 (to 30-Jun-17, a FY = CY company), because of a 2.8% fall in car sales nationally, including a 5.9% fall in Queensland where a significant portion of the company's operations are located.  Expectations were for growth in, or at least equal, car sales versus pcp.

AHG similarly downgraded their profit guidance for FY-17, citing a weakening auto market including on the east coast - which therefore can not assist to offset continued sales declines in WA.  The company also noted tightening credit conditions in the auto finance market.  There is more on our thoughts about investing in the current economic conditions below.

Ag investing is really a story of feast and famine - and not at the same time.  After Graincorp's recent splendid result (beating the already pumped up market expectations), this week Murray River Organics (sultanas and the like) and Select Harvests (almonds) both disappointed the market.  The former's lower than expected crop yield have lead to a downgrade in expected earnings for FY-17, and an expected breach of its debt covenants at 30-Jun-17.  Not a good look for a company which only listed last December.  The latter has also downgraded its crop estimates, which 'will have a material impact on full year earnings'.

Global testing house ALS released its FY-17 results (period ending 31-Mar-17).  It was a good result, meeting expectations.  One level down, their resources division outperformed (a positive read through for exploration and mining activity), where as the life sciences division (includes food and environmental testing) underperformed.

Things are booming for poker machine manufacturer, Aristocrat.  It reported a strong H1 result (to 31-Mar-17), and confirmed its full year guidance for earnings growth of 20-30%. 

And finally, Ansell has sold its sexual health (condom) division for a healthy US$600m, following a strategic review.  Ansell will reward shareholders with a share buyback, and will also continue seeking acquisition opportunities.