CBA drags market into the red

James Gerrish

Market Matters

Another fairly busy session today with weakness in US Futures before our open this morning thanks to Trump’s tweets over the weekend ensuring we opened on the back foot, while a weaker than expected quarterly update from CBA had the banks in the crosshairs + throw in a downgrade for Reliance Worldwide (RWC) – the stock down -25% off the bat - and there wasn’t a lot to like about today’s market in the early stages.

The banks + Macquarie dragged the index down 30 points on the session (ANZ & MQG did trade ex-divi) with CBA doing most damage, taking 11 points from the ASX 200 by the close. However, it wasn’t all bad news with the market showing strength in the face of some pretty negative influences.

Overall today, the ASX 200 lost -13 points or -0.21% to 6297. Dow Futures are trading down -300pts / -1.15%.

It was clearly a resilient performance from the market today as we once again ignored the bulk of the weakness coming from US Futures during our time zone, while Asian markets were down, but not aggressively so. Hong Kong was closed for Buddah’s birthday!

ASX 200 Chart

ASX 200 Chart


Commonwealth (CBA) – 2.52% - hit after announced a third quarter trading update that was weaker than expected, a cash profit of $1.7bn for and a statutory profit of $1.75bn. The main areas of note being $715m in additional customer remediation provision, an overall decline in non-interest income and no growth in net interest income from the quarterly average of 1H19 to 3Q19, as a result of margin decline offsetting loan growth. 

Expenses are up 1% from the quarterly average of 1H19 to 3Q19 on an underlying basis and asset quality deteriorated with past due home loans increasing. Capital was low at 10.3%, however, the completion of the announced asset sales should take this ratio to 11.5%. All in all, a weak result, income down, expenses and bad debts up.

At Shaw, this has prompted a downgrade forecast EPS by the tune of 9%, 8% and 6% for FY19, FY20 and FY21, respectively. Our analyst cut the stock from buy to hold and dropping PT from $76 to $73. Not CBA’s finest hour.

Commonwealth Bank (CBA) Chart

Reliance Worldwide (RWC) -15.62% - down sharply on an earnings downgrade, however they were worse early on, off by 26% at the worst. We saw a lot of flow through the desk today in that name. Rog, who sits on the Insto team behind me, had been pushing the short thesis on the stock for a while and today it came through in a big way. A great call but what now? Their new FY19 EBITDA guidance is range of A$260m-A$270m, down from A$277m-A$287m with the market sitting at $282.4m before today’s update.

Assume $265m midpoint, that’s a 6% downgrade at the EBITDA line and more at the profit line. They also said that while tariff changes are not likely to impact FY19 EBITDA, they may potentially have negative impact on Americas in FY20 – RWC generates ~70% of revenue in the US. While we like the stock technically below $4, the stock is now on 20x with no growth – expect downgrades to flow through tomorrow.

Reliance Worldwide (RWC) Chart

Lend Lease (LLC) +8.71% - on news that a Japanese company is circling LLC. LLC denied the approach, however where there is smoke ... Shares rallied strongly today, and the sellers of the early spike were run over in the afternoon and buyers held firm into the close. Now one firmly on our radar.

Lend-Lease (LLC) Chart

Real-Estate - The Govt has promised to help support lower income first-home buyers by helping fund part of the deposit. A proposal that was matched by the opposition today. The 5% cut to the deposit rate is a boost for listing volumes and that helps the likes of Domain & REA Group – the latter rallying today on the news.

REA Group (REA) Chart

Broker moves:

· Technology One Raised to Buy at Bell Potter; PT A$9.50

· Fletcher Building Cut to Neutral at Forsyth Barr; PT NZ$5.25

· AGL Energy Downgraded to Sell at Citi; PT A$20.87

· Cochlear Downgraded to Neutral at Citi; PT Set to A$198

· Oil Search Downgraded to Hold at Deutsche Bank; PT Set to A$8

· Evolution Upgraded to Add at Morgans Financial; PT A$3.55

· FlexiGroup Upgraded to Outperform at Macquarie; PT A$2.04

· Credit Corp Upgraded to Hold at Morningstar

· GrainCorp Upgraded to Buy at Morningstar

· Domain Holdings Cut to Negative at Evans and Partners; PT A$2.42

Never miss an update

Stay up to date with the latest news from Market Matters by hitting the 'follow' button below and you'll be notified every time I post a wire.

Market Matters publishes daily market reports and sends SMS alerts when we transact on our portfolio. To get our latest market views and hear when we take new positions, trial Market Matters for 14 days at no cost by clicking here.

1 topic

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...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.