The Match Out: ASX flat, Inflation higher again as bond yields rally, A2 Milk downplays growth

James Gerrish

Market Matters

There was plenty happening on the corporate front today as AGMs and trading updates dominated the news flow. We also saw higher than expected local inflation data push bond yields higher and knock equities lower, although stocks staged a recovery in the afternoon.

  • The ASX 200 added +5pts /+0.07% to 7448
  • The Telcos were strong thanks to Telstra (ASX: TLS) +3.16% supported by Healthcare +1.12% and Financials +0.53% while the consumer staples were the weakest link, down -1.98%
  • The three-year yield jumped as much as 24 basis points to 1.01% and the April 2024 security the RBA aims to keep at 0.1% was double that. Traders are pricing in three interest-rate hikes by the end of 2022, up to an official rate of 0.75%. AMP says conditions for the start of rate hikes will be in place by late 2022, pencilling in a small increase in the cash rate from 0.1% to 0.25% in November next year, and a 0.25% hike in December 2022, taking the cash rate to 0.5% by the end of next year.
  • A2 Milk (ASX: A2M) -11.97% fell following its investor day, management suggesting growth is now a few years away.
  • Woolworths (ASX: WOW) -3.24%, with the lockdown sugar hit over, sales are now slowing.
  • Whitehaven Coal (ASX: WHC) +4.04% should start paying dividends again.
  • Nitro (ASX: NTO) +0.85% upgrades guidance – this is an interesting story.
  • Crown Resorts (ASX: CWN) +8.70% has kept its casino licence in Victoria (just), with more on that below.
  • Vulcan Energy (ASX: VUL) has been the target of a short report from J Capital today, the company entering a trading halt to respond.
  • Gold was hit in Asia today, down -$US21 to $US1786 – it just can’t get a move on above US$1800.
  • Iron Ore Futures were also lower, down around 1%.
  • Asian markets were lower, Japan down -0.27%, Hong Kong -1.57% while China fell -1.2%.
  • US Futures are up a touch 

ASX 200 chart

Weekly Video Update

This week’s video update was recorded last Friday and made available on the Market Matters Website at the time. Next week we’ll revert back to our usual Wednesday Update. This week, James and Harry discuss six emerging companies, three we already own in: Nitro, Calix and Capital Health (ASX: CAJ – and three we have on our Hitlist: Audinate (ASX: AD8), Gentrack (ASX: GTK) and Shaver Shop (ASX: SSG).

A2 Milk (ASX: A2M) $6.03

A2M -11.97%: The stock was hit hard today following the company’s strategy update. Management doused expectations for a strong rebound in the short term, instead refocusing the market’s attention on the longer-term strategy. Under this strategy, they’re calling fiscal 2022 a year of stabilising and resetting, while we’ll need to wait until fiscal 2025-26 for the next leg of growth. Management spoke about unprecedented change in the market (China) and the company’s need to adapt – while the market (MM included) was thinking today was a likely opportunity for them to speak about improving conditions as their main competitors had recently done. They did talk to sales growth improving, including a good tie-up with Hershey to produce Chocolate milk, but growth will now come at the expense of margins – which are likely to be high teens versus historical levels of around 30%. We have given this position the benefit of the doubt, but it’s hard now to see near-term catalyst for a change of fortune.

MM is now reviewing its position in A2M.

A2 Milk

Microsoft (MSFT US) $US310.11

The software firm reported after market overnight and there were a few key takeaways, the first being a comment from the MSFT CEO, Satya Nadella, about technology more generally, which I think is very relevant. “Digital technology is a deflationary force in an inflationary economy. Businesses – small and large – can improve productivity and the affordability of their products and services by building tech intensity,” Nadella said.

As a recap, MSFT has a market cap greater than $3 trillion, is forecast to grow revenue at 14% through to June 22 supported by an acceleration in cloud adoption as people and businesses continue to transition online, with 31% year-on-year growth. We saw the likes of Office 365 Commercial +23% year-on-year and LinkedIn +42% over the same period, with marketing solutions growth of 61% – but there was strength across the board. This is simply a dominant business engrained in our everyday lives and that won’t change. It has around US$100 billion in net cash and trades on 34-times earnings which, given 1. Dominance 2. Predictability of earnings and 3. Growth is not that expensive. MSFT has been in our International Equities Portfolio for around 18 months. Over this time, we’ve almost doubled our money but we expect to continue holding this stock well into the future.

MM remains bullish MSFT.


Whitehaven Coal (ASX: WHC) $2.83

WHC +4.04%: Edged higher today following commentary at its AGM, with dividends to resume in the “near future”. The historic highs in coal prices is generating cash at a rapid rate, which is being used to pay down debt. But that will be done soon, opening the door for capital management, quicker than the majority of market-watchers were expecting (not MM – we have been across this for some time). We’ve heard a lot from the company in recent times, so there wasn’t much new information today, but Whitehaven management’s reiteration of its focus into 2022 was worthwhile.

  • Debt reduction and capital management/shareholder returns
  • Narrabri (underground) - Optimise transition to shallower ground in FY23 and Stage 3 extension approvals = lower costs
  • Maules Creek (Surface mine) - Optimise fleet productivity = lower costs.

MM remains bullish WHC.

Whitehaven Coal

Woolworths (ASX: WOW) $39.16

WOW -3.24%: The stock was lower today on a weaker than expected trading update, particularly their comments around October trading to date (post end of lockdown) having slowed further as we all go out and socialise. For first-quarter 2022, sales growth of 2.7% was actually okay given this is being comped on last year, which was particularly strong. But there is clear evidence now that lockdowns gave supermarkets a sugar hit, which is dissolving. On 28 times forward versus around 20 times average, WOW is still expensive and could easily re-rate further towards $30 (it’s worth $27.31 if we price it on its five-year average P/E of 19.9 times).

MM is neutral/negative WOW.


Nitro (ASX: NTO) $3.58

NTO +0.85%: The third-quarter update from the document productivity company was solid today and came with a small upgrade to guidance for the full year, helping to support the stock on a flat day. Subscription revenue was up 50% year on year, underpinning a 2-4% bump in fiscal 2021 revenue guidance to between $US49 million and %51 million. The expected EBITDA loss was also lowered to under US$10 million. The numbers showed Nitro are successfully transitioning sales to a subscription model, which now comprises 68% of revenue versus just 56% in the third-quarter of fiscal 2020. It was a solid update, and in MM’s view, with Average Reoccurring Revenue (ARR), growth is set to underpin a likely re-rate in the share price given it trades at a steep discount to international peers.

MM remains bullish NTO


Broker moves

  • Ampol Raised to Outperform at RBC; PT A$33
  • SG Fleet Raised to Outperform at Macquarie; PT A$2.98
  • Reliance Worldwide Raised to Outperform at Macquarie; PT A$5.95
  • Reliance Worldwide Raised to Hold at Jefferies; PT A$5.80
  • United Malt Rated New Buy at Citi; PT A$5
  • Orica Raised to Overweight at Morgan Stanley; PT A$18.60

Make informed investment decisions

At Market Matters, we write a straight-talking, concise, twice daily note about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. Click here for your free trial.

The Match Out will be available each day after the market close. Follow my profile to be notified when the latest report is live.

Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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.