Stocks cautiously higher to start the week (APT, CTX, NUF, BOQ, WBC)

The market was strong on open this morning although the optimism faded from around 11am onwards, stocks declined from early highs to finish up but not convincingly so. Asian markets were strong during out time zone, particularly in Hong Kong with the index up ~1.50% nearing our close with the elections playing a part here while US Futures were trading marginally better, up around 0.2%.

At a sector level today, gains were led by the Telco stocks as Telstra (TLS) put on more than 2% - the stock looks interesting after 6 months of consolidation /decline. Elsewhere, the banks were lower as a sector, although CBA finished in the green, Westpac the worst performer off -1.33% as they start to address the AUSTRAC suit.

It was a busy day for stock specific news. We cover off news from Afterpay (APT), Caltex (CTX), Nufarm (NUF), Bank of Queensland (BOQ) and Westpac (WBC) below.

Overall, the ASX 200 gained 21pts /0.32% today to close at 6731. Dow Futures are trading up 68pts/+0.24%

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Caltex (CTX) +6.97%; continued its climb higher, now almost 50% higher than the panic low set in June when guidance for the half was posted. Today the fuel refiner and retailer updated guidance for the Convenience Retail side of $190-$210m for the calendar year, with the second half far outperforming the first largely thanks to fuel margin improvement despite soft volumes. Refiner margins have rebounded significantly as the year has progressed, with October at $US12.01/bbl vs the 2^nd quarter which averaged just $US7.45/bbl.

Along with the solid progress from the fuel business, Caltex announced plans IPO up to 49% of the groups property portfolio of 250 convenience freehold sites. First estimates of value suggest the sale could free up around $1b in cash for Caltex, with the new trust to receive around $80-$100m in rental payments in the first year. Caltex will remain the majority shareholder whilst also receiving a decent capital injection for “capital management opportunities” – sounds like the shareholders will be rewarded.

Caltex (CTX) Chart

Westpac (WBC) –1.33%; Shares were lower again today as they released an action plan on how they are / plan to deal with the AUSTRAC issues. While there are a lot of unknowns at this point in the investigation the clouds are often darkest at the outset – much like the storm about to roll through Sydney. Westpac has now lost around $6.5bn in terms of market capitalisation since this issue was raised, and that seems an overreaction at this point.

Westpac (WBC) Chart

Bank of Queensland (BOQ) lunch; in a halt today as the regional bank followed Westpac down the capital raise tunnel, issuing around 32m shares to raise $275m in an effort to lift the CET1 ratio by ~85bps. The company is in the middle of the book build for the institutional component with the price to be set between $7.69 and $7.78 – at least a 10% discount to the last traded with a retail component to follow. Upon completion the bank will see its CET1 ratio lift to ~9.85% before sliding back to the top end of the target range of 9%-9.5% implying costs will remain elevated in the half as the bank invests in technology and lays off staff. More detail to come when the insto book is filled.

Bank of Queensland (BOQ) Chart

Afterpay (APT) +7.05%; the independent auditor that AUSTRAC appointed to Afterpay earlier in the year released the final report today which was the catalyst for the share price rally despite identifying a number of breaches. The auditor was looking in to flaws in the systems & processes of Afterpay in regards to its AML compliance. The auditor did find a number of compliance issues prior to an upgrade in May 2018 but was broadly happy with the company’s procedure and noted the continuing efforts to improve. The report has been submitted to the regulator for final approval, and while they do have the option of pursuing Afterpay for the historical breaches, it is unlikely to tear the BNPL business model apart as some feared.

Afterpay (APT) Chart

Nufarm (NUF) -17.53%; the crop protection business saw its shares slugged today after the company flagged a number of issues impacting the first half to the point where the company was not able to give guidance for the six months to January 2020. The problem was the company recognizing a number of sales rebate claims from German customers from FY19 which will drag EBITDA but around $9m, or ~2% of FY19 EBITDA. Nufarm have also needed to implement a review of procedures in handling these claims because a number slipped through the cracks which may also mean increasing costs.

Secondly, the company flagged difficult trading conditions, particularly in North America where falling demand and high inventories will halve the regions EBITDA contribution compared to the first half of 19. This alone is enough to shave ~16% off the first half figure while the announcement talks to soft demand across other regions as well. As a result of the issues, Nufarm says “it has become increasingly difficult to forecast the half year results” but expects it “to be significantly lower than the prior year.” Throughout all of this, the company is trying to offload their South American arm with the $1.2b deal due to be completed in a matter of weeks. With performance continuing to slide, it looks like the company could use the capital. We remain cautious

Nufarm (NUF) Chart

Broker moves;

• Metcash Cut to Neutral at UBS; PT A$2.80
• Metcash Raised to Neutral at Citi; PT A$2.80
• Wesfarmers Rated New Hold at Jefferies; PT A$40
• Chorus Raised to Hold at Morningstar
• ResMed Rated New Sector Weight at KeyBanc
• Pacific Smiles Cut to Hold at Bell Potter; PT A$1.95
• Reliance Worldwide Rated New Buy at CCZ Statton Equities Pty Ltd.

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