ASX hit on virus, drops below 7000 (RWC, GEM, NHF)

James Gerrish

Market Matters

The market was hit today, and hit fairly hard being the first major market to soak up the coronavirus news over the weekend. The Aussie market is often used as a place to hedge exposures pre-US open when US Futures are getting sold off, today they were down another ~1.4% during our time zone. That put added pressure on our market and we saw the higher beta sectors hit hardest. The Energy sector was weakest today, however Woodside did trade ex-dividend so stripping out that influence the IT stocks were worst on ground.

Some big moves playing out there with EML Payments (EML) down another ~10.15% taking its pullback since reporting to ~27% while others in that high growth, priced for perfection basket have also felt the pinch, Altium (ALU) off another 4.48% today taking its decline from recent highs to more than 20%, even Xero (XRO) which has been a bell-weather for the sector saw a -4.35% decline today to close at $83.50, a stock that looks interesting around ~$80.

Obviously weakness in US Futures during our time zone however Asian markets were also hit, but to a lesser degree. Japan only down smalls, China off around ~0.20% on stimulus expectations while Hong Kong stocks lost around 1.70% - not a bad effort given we were off 2.25%.

We saw weakness in companies that reported today, Reliance Worldwide (RWC) took the cake down 26% on a weak update and guidance, while Bluescope, NiB and G8 Education also struggled. Gold stocks the only real place to hide today, most of them doing very well led by Ramelius (RMS) which added +14% and Saracens which put on 7%, even Newcrest (NCM) closed +5% higher.

Reporting schedule available here: CLICK HERE

Overall, the ASX 200 lost -160pts / -2.25% today to close at 6978. Dow Futures are trading down -407pts/-1.40%

ASX 200 Chart

ASX 200 Chart


Reliance Worldwide (RWC) -26.45%: A tough day for the plumbing supply business which reported a softer than expected 1H20 result plus they downgraded full year guidance. They delivered underlying NPAT of $63.7m versus ~$75m expected while printing underlying like-for-like sales growth of +4.2%. Guidance here was also downgraded for the full year, although even the downgraded numbers come with a bunch of caveats. Adjusted NPAT was to come in between $150-$165m, however now they say it will be $140-$150m. The market was at $157m so at the midpoint of the revised guidance it’s an ~8% downgrade, however I get the vide that confidence in meeting that number is low. A lot of work to do for RWC in the 2nd half to get close, hence the big decline in SP today. We have no interest here.

Reliance Worldwide (RWC) Chart

G8 Education (GEM) -5.21%: The childcare operator delivered a reasonable set of 1H20 numbers today relative to where the share price is trading. Conditions have been tough in childcare with rising costs and falling occupancy, however todays result showed a slight improvement in occupancy at least. They delivered underlying EBIT of $132.5m for the half which was inline with recent guidance. Occupancy increased by +1.1% at the group level, and now sits at 75.9% (up from 74.8% in 2018). That number is still too low and they also said that the start of calendar 2020 has been tough, a bunch of external factors, bushfires, virus’s are having an impact, and that makes guidance difficult. More information due out at their May AGM, however its hard to get excited about this stock until then.

G8 Education (GEM) Chart

NiB Holdings (NHF) -7.13%: Todays 1H20 update from private health insurer NiB showed that just 44.1% of Australians now have private hospital cover, the lowest level since 2007. That’s clearly a difficult backdrop for the insurers particularly when it’s the younger demographic dropping off (they essentially fund the older members’ higher claims expense). Today NHF reported an underlying operating profit of $83.2 and reconfirmed they would meet their recently downgraded guidance of FY underlying operating profit of $170m.

It seemed like it was a frustrating period for the insurer, they managed to grow the top line with revenue up 6.4% however the costs of servicing claims was a real headwind. A break below $4.65 would start to look interesting technically.

NiB Holdings (NHF) Chart

Elsewhere in reporting:

Bluecope (BSL) -7.88%: Steel spreads still a major issue for BSL and while this was a known issue, there seems to be no respite in sight. (tighter spreads a result of higher input costs and lower steel prices). They talked about the coronavirus significantly impacting their Asian operations with uncertainty the main takeaway. They did extend their share buy back which was a positive. BSL is at the pointy end of global growth, when growth stabilises and China (potentially) stimulates this will be a stock that bounces hard.

Audinate (AD8)-14.38%: Another high value growth stock that blamed 1. The trade war then 2. the coronavirus for missing the mark today. That said, on quick read through of their numbers it seems their core business is still doing okay, and the impact should be shorter term in nature (if indeed it is simply a macro driven slowdown). This is a stock we like (I owned it at the IPO but sold too soon). Now on the radar again.

MMA Offshore (MRM) +6.67%: Was hard to find a stock that beat and traded higher today however MRM did just that after releasing 1H20 EBITDA of $18.9m, +50% on pcp and well above expectations for around $16m. This is a highly indebted business however they are in a turnaround phase, and if they can continue to grow earnings, they should be able to pay down their mountain of debt which sits at $275m, scary versus its market cap $138m. In terms of outlook they said “Expect continued growth in EBITDA through 2H FY2020”, which they need and its all dependent on the utilisation of their vessels. Worth watching if you like cheap turnaround plays!

Broker Moves: Interesting moves in Inghams (ING) post their results last week.

· Infigen Cut to Neutral at Macquarie; PT 77 Australian cents

· Australian Finance Raised to Add at Morgans Financial Limited

· Bravura Cut to Market-Weight at Wilsons; PT A$5.67

· Raised to Hold at Morningstar

· Iress Raised to Hold at Morningstar

· New Hope Raised to Buy at Morningstar

· Boral Cut to Hold at Morningstar

· Mayne Pharma Cut to Hold at Morningstar; PT 41 Australian cents

· Inghams Raised to Outperform at Credit Suisse; PT A$4

· Inghams Raised to Buy at Goldman; PT A$4

· Village Roadshow Cut to Neutral at JPMorgan; PT A$4

· Sandfire Resources Raised to Buy at Bell Potter; PT A$6.02

· Senex Raised to Outperform at Credit Suisse

· MyState Raised to Buy at Bell Potter; PT A$6.10

· Select Harvests Cut to Hold at Bell Potter; PT A$8.75

· City Chic Collective Ltd Raised to Buy at Baillieu Ltd

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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