Metcash shares dumped

Friday’s gradual sell-off continued through the morning today as the index headed lower in the first 90 minutes of trade. Selling was seen in both banks and resources which took 33 points off the ASX200 before buyers slowly wore out the sellers, so that by day’s end the market was trading back in the green – an impressive 48 points from the low.

Telstra was in luck with a broker upgrade from Macquarie, taking their rating to neutral, which led to the telcos outperforming today. REITs also continue to outperform as the low rate environment forces prices of bond-like assets higher in the chase for yield. Consumer names were clearly the worst off with the Metcash result weighing on the sector today.

Energy names were mixed today, but we did see a turnaround in fortunes for Caltex (CTX) and Viva Energy (VEA). Viva initially slumped on a soft first-half update, however the market gave them the benefit of the doubt after slamming the stock down 8% on Thursday's poor first-half update from Caltex. Viva finished +4.43%, while was CTX +1.82% for the day.

Overall, the ASX 200 added +14 points or +0.22% to 6665. Dow Futures are trading down -17 points / -0.07%.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Ausdrill (ASL) +10.48%; Easily the best on ground today was Ausdrill on the back of an announcement subsidiary Barminco had won a five-year, $800m contract with a copper mine in Botswana. The mine is in its early stages and Barminco has been brought in to establish and develop infrastructure, training, diamond drilling and have production up to a rate over 3mt/year.

The contract further validates Ausdrill’s push into the international mining market and the acquisition of Barminco that was completed late last year is already paying dividends. To put this contract into perspective, revenue for Ausdrill in FY18, prior to the Barminco acquisition, was around $1bn with EBITDA margins of around 20%. We own ASL in the Platinum Portfolio targeting the $2 area.

Ausdrill (ASL) Chart

Metcash (MTS) -9.84%; The grocery and hardware wholesaler slumped following the release of their full-year results for the 12 months to April. Despite swinging back into a profit on a statutory basis, the result has missed expectations. Underlying NPAT fell 3% to $210m where expectations were looking for a number in line with last year’s. For the group, EBIT came in at $330m, slightly below last year’s figure and just about in line with expectations. On a segment level, hardware was the standout adding 17%, while food continues to struggle, falling 3% at the EBIT line.

The outlook for Metcash is a little worse than many had hoped. Key to the Metcash plan is continued cost-out initiatives but the company seems to be hitting some roadblocks on the way, noting that benefits from repricing “onerous lease obligations” is expected to be less than anticipated to the food category. In the hardware business, costs savings aren’t expected to offset a slowdown in construction activity. Upside can be seen in the liquor business with continued ‘premiumisation’ of the market and the Porters brand rollout to help, however this is now the smallest contributor to EBIT for Metcash. The market doesn’t seem to have bought Metcash’s swing into a more growth-focussed model at this point in the cycle.

Metcash (MTS) Chart

AP Eagers (APE) -2.86%; The ACCC threw a little spanner in the works between the merger of AP Eagers (APE) and Automotive Holdings (AHG) today, with both stocks closing lower as a result. The car dealership names have been in talks since early April to combine the businesses but cold water was poured on the deal with concerns being raised about the competition, particularly in the Hunter Valley region of NSW. Combined, the business would own 90% of dealerships in Newcastle, and nearly 80% in the wider Hunter Region. While not ideal, the ACCC comments do leave the door open – they will likely recommend a divestment of some of the sites to ease concerns.

AP Eagers (APE) Chart

Broker moves;

• Nanosonics Rated New Buy at UBS; PT A$6.30
• Telstra Upgraded to Neutral at Macquarie; PT A$3.75
• Domino’s Pizza Enterprises Upgraded to Buy at Citi; PT A$44
• Santos Downgraded to Hold at Morningstar
• G8 Education Upgraded to Buy at Morningstar
• Flight Centre Upgraded to Hold at Morningstar
• MC Mining Reinstated at Mirabaud Securities With Buy
• Johns Lyng Rated New Buy at Goldman; PT A$1.70

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