Investment Matters

What Matters this week

Just in-case you didn’t notice - it’s been a rough week in the market.

The ASX/S&P500 continued the decline we have seen since October after a brief rally in the start of November. It was given another kick down the stairs on Tuesday after the NASDAQ tumbled 3.8% over the morning.

In a Groundhog Day moment, the FANGs (Facebook, Amazon. Apple, Netflix and Google) led the market on its way down. Once again, growth stocks (those that are priced based on high growth in future earnings) were punished domestically.

Furthermore, the price of oil took an unexpected nosedive on Wednesday (Brent Crude -7%), taking anything resources related with it (Rio Tinto -3.2%, Woodside Petroleum -2.1%, Origin -2.64%).

It seems like the market’s outlook for future growth is tempering, with uncertainty around US-China negotiations and the possibility of a hard Brexit weighing on investor confidence.

On the subject of oil, Viva energy delivered a shocker, flagging that underlying EBITDA for FY-18 will be $524m vs the $605m outlined in its prospectus. Margins have suffered as a result of higher crude oil prices and growing gasoline stocks while retail volumes have been weak (in line with Woolworths’ quarterly announcement earlier this month). Those that participated in the IPO have taken quite a haircut during their brief ownership – with shares down 32% since July.

Myer (-12%) came out and confirmed that sales have slumped by 4.8% in Q1 (over the previous quarter) late last Friday, after the AFR’s Rear Window obtained data showing a 5.5% drop in sales (year on year). The company continued repeating its mantra of ‘profit before sales’ instead – highlighting that its Q1 FY-19 NPAT loss was lower than Q1 FY-20. Let’s hope Santa gifts them some profitability during the all-important Christmas season - particularly given consumer discretionary spending has been looking soft.

Coles hit the boards on Wednesday, stepping out of the shadow of its bigger brother Wesfarmers. It received a warm welcome with shares up 2% for the week at $12.75 (as of close Thursday). Wesfarmers finished at $31.32, resulting in a combined price of $44.07 - lower than Wesfarmers’ closing price of $44.22 on Tuesday – indicating the market was largely indifferent to the merger (although Wesfarmers shares have dropped ~11% since the demerger announcement).

Allensford Pty Ltd is looking to Reject Shop shareholders for a bargain. The company has issued a no-frills $2.70 a share cash on market takeover offer which caused shares to jump 4%. The offer comes after the company downgraded its earnings guidance in October, resulting in a 29% drop. The statement from Allensford read like an act of mercy, saving them from “deteriorating financial performance ….and risk”. It is clearly no such thing – a cash offer with no request for due diligence indicates Allensford sees some value at these prices.

Meanwhile Fairfax (+4.1%) shareholders voted overwhelmingly in favour of Nine’s takeover, with the vote receiving 81.49% shareholder approval.

APA looks like it’s being stood up after the consortium led by CK Group failed to revise its offer after Treasurer Josh Frydenberg rejected CK Group’s acquisition proposal on the grounds of national security.

Finally, the ‘Hayne-pain’ continued for the banks this week, with senior executives and board members fronting the Royal Commission. We heard from a conciliatory Matt Comyn (CBA’s CEO) who was grilled about remuneration and a lack of risk and compliance, Catherine Livingstone (CBA Chairman) who was challenged about an ineffective board and Brian Hartzer (Westpac CEO) who was challenged on Westpac’s decision to retain its wealth management arm.

One piece of evidence speaks volumes about risk culture and governance at the banks: CBA’s board took just 10 minutes to approve full payment of executive bonuses in 2016 – a year where there were clear signs the bank had poorly dealt with risk (CommInsure scandal, fees for no service and anti-money laundering issues).

 

- Paul Grace