Stocks consolidate recent gains – Wisetech in the crosshairs again (WTC, WBC, NST)

James Gerrish

Market Matters

The market consolidated yesterday’s gains today with the index trading in a relatively tight range for the session – chopping around within +/-30pts of the high and low before closing flat. Not a bad effort really given the negative update from Westpac (covered below) this morning, the +110pt move we saw yesterday and growing commentary around how the actual implementation of the phase 1 trade deal between China and the US would work In any case, stocks were marginally up or marginally down, Utilities the weakest link although they were best on ground yesterday while the real-estate sector showed some form today.

Asian markets were higher heading to their highest close since mid-2018 – most markets up more than 1.2% on the session while US Futures were trading marginally down.

Overall, the ASX 200 fell -2pts /-0.04% today to close at 6847. Dow Futures are trading marginally higher up 7pts/0.02%

ASX 200 Chart

ASX 200 Chart


Wisetech (WTC) -2.42%: More questions being asked about WTC today, this time from Bucephalus Research Partnership which is a research firm that delves into the accountancy practices of companies – fund managers use them as an outsourced research function and today they’ve weighed into the WTC debate following the recent attack by J Capital. In short, they don’t agree with all of J Caps assertions however they do cast a further shadow over the way WTC accounts for things. The focus remains on the definition being used for organic growth along with their capitalisation policies. Those running an IT based business would know that there are a number of ways to handle the costs of software development – MM is no different, so we’ve had some experience here. By capitalising costs, it essentially makes the shorter term look better than if costs were expensed in the period they were incurred. CSL is an example of a business that uses an expensed approach to their R & D spend.

In short, the firm concluded that if WTC followed similar policies to other software companies, it would be losing money. They go further by saying that while the balance sheet looks healthy now, most of the cash will have been consumed within 18 months and they believe that to avoid insolvency it needs to keep issuing stock. It simply all seems hard here at the moment

Wisetech (WTC) Chart

Westpac (WBC) –0.85%; just when it started to look like the storm had passed, the bank was hit with another issue today similar to what happened with CBA after their Austrac run in. APRA has forced Westpac to hold an additional $500m operational risk capital while it reviews the bank’s governance, accountability and culture and examines the steps taken to strengthen risk governance in recent years. The investigation will ensure Westpac is on the right path and will ultimately ensure these issues aren’t an ongoing concern for the market – but the $500m additional capital will hit the CET1 ratio by 16bps in the meantime. Not a major issue, but still a negative all the same.

Westpac (WBC) Chart

Northern Star (NST) unch; remained in a trading halt for a second day today while launching a $A800m placement to fund the $US800m purchase of the Newmont stake in WA’s Super Pit mine. The deal follows Saracen (SAR), who bought the other stake of Barrick Gold last month. Norther Star paid a small amount more for their portion as it gives them controlling stake. Northern Star intends to continue the current operating plan and expects the mine to add up to 140kOz of production in FY20. Northern Star have acquired well in recent years and this deal looks to have added another quality gold asset to the mix. The cap raising will sap demand from the broader gold sector.

Norther Star (NST) Chart

Broker moves;

· Xero Rated New Neutral at Credit Suisse; PT A$80

· Perenti Global Cut to Hold at Moelis & Company; PT A$1.82

· Perenti Global Cut to Hold at Argonaut Securities; PT A$1.95

· SmartGroup Cut to Neutral at Macquarie; PT A$7.66

· SmartGroup Cut to Neutral at Credit Suisse; PT A$8.25

· IOOF Holdings Cut to Underweight at JPMorgan; PT A$6.75

· Sandfire Reinstated Neutral at Goldman; PT A$5.40

· Pro Medicus Raised to Buy at Bell Potter; PT A$29.20

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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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