The Match Out: ASX higher, Commodities on fire, How does the BHP / WPL deal actually work?

James Gerrish

Market Matters

A choppy session for the ASX overall today with some big divergence between the haves and have nots, the Resources & Energy sectors again the beacon of hope while Healthcare and Staples tapered off. While it was a positive day overall, only around 50% of companies on the ASX finished in the green, and there were some big moves on either side of the ledger.

  • The ASX 200 finished up +34pts/ +0.49% at 7151
  • The Material sector was best on ground (+2.63%) while Energy (+2.56%), although that was off the highs of the session.
  • Staples (-2.26%) although Woolies (ASX: WOW) did trade ex-dividend and Healthcare (-1.32%) the weakest links.
  • Whitehaven Coal (ASX: WHC) +10.61% the standout on strong coal prices, BHP up through $50.
  • The oil stocks higher although they finished well off session highs – we sold Santos (ASX: STO) a day early but content with the call, as great author Bryce Courtenay once said “always leave a little salt on the bread for the next man”.
  • We had a good desk update from UBS Bank analyst John Story today – some brief thoughts below.
  • The up and down nature of the PointsBet (ASX: PBH) share price continued, today it was up +18% on takeover speculation – subscribers can read our thoughts on PBH here.
  • Phil King of Regal (ASX: RF1) was in earlier in the week with his view of the world, it’s getting some airtime in the AFR today with their view similar to our own… “Miners aren’t investing in new supply like last time but are instead returning excess cash to shareholders,” + “It’s getting harder to get new mines approved and it’s getting harder to mine at the same price due to deeper deposits and lower grades. Commodity prices could surprise over the next 10 years.”
  • Iron Ore was up ~9% in Asia today.
  • Gold was flat at $US1925.
  • Asian stocks were mostly higher, Hong Kong +0.46%, Japan +0.91% while China was off -0.24%.
  • US Futures are mostly flat.

ASX200

Whitehaven Coal (ASX: WHC) $3.96

WHC +10.61%: Rallied hard today as did the other coal-related stocks following a huge spike higher overnight, Newcastle Coal Futures for April +46% in a move that seems a clear anomaly, however, those sorts of moves typically play out in a market that is very tight, and getting tighter. While Russia is a key coal supplier (about 15% of European demand), it’s not just a geopolitical issue, the market was getting squeezed from a bunch of different directions over the past year or so;

  • Government intervention - Indonesia a coal export embargo in Indonesia (January 2022),
  • Weather - La Nina - flooding and infrastructure challenges in NSW and
  • Covid - pandemic-related labour shortages in Mongolia and China

So while the rally to MM’s initial target of $4.00 has largely played out, there may be some more juice left in the tank.

Whitehaven Coal (WHC)

Banks

We had John Story from UBS present at lunch today and set out his positive take on the banks overall. He talked about decent tailwinds from an improving macro backdrop (i.e. economic growth post COVID), gradually rising rates helping margins, credit growth supporting revenues and solid balance sheets, plus of course share buy backs will also improve their per-share metrics. Their top pick and highest conviction buy rating is on WBC (self-help), with ~20% upside while they are also buy-rated on NAB(+14%), ANZ (+17% upside) and are Neutral on CBA (+6%). One of the surprises to come out of the recent results was the extent of margin pressure due to low rates, however, it remains MM’s view (& UBS for that matter) that rates will rise gradually alleviating a large portion of this margin issue. On an aggregate basis, UBS reckons the Australian banks have ~14% upside from current levels.

Commonwealth Bank (CBA)

PointsBet (PBH) $4.35

PBH +18.21%: a strong day for the wagering business with the double benefit of corporate interest and a positive broker note. Broker Goldman Sachs revised their earnings forecasts marginally lower but talked up PointsBet’s outlook including their ability to carve out a portion of the growing US market and increasing long term margins and scale while noting promotional intensity had eased. CNBC was also reporting that PointsBet was in discussions with Yahoo Sports who are looking at merger opportunities with a wagering business.

How does the BHP Billiton (ASX: BHP) Woodside Petroleum (ASX: WPL) deal actually work?

BHP and Woodside have agreed on a deal whereby Woodside will acquire BHP’s Petroleum business. BHP shareholders will receive payment in WPL shares with BHP shareholders set to own around 48% of the combined entity.

The scheme documentation will be released in March, Shareholder voting happens in April with BHP’s divestment into this expanded WPL to complete in May (JQ22). Based on the specific NewCo ownership ratio, as at COB 2 March 2022, BHP shareholders are to receive $5.07/BHP share in Woodside stock with the transaction likely to complete this FY.

The $5.07 (as at 2 March 2022 & subject to changes in share prices) has attached franking credits. So, in simple rounded terms, around 10% of our BHP shareholding will become WPL stock, our cost base of BHP will not change given it’s not a demerger, with the cost base for WPL shares being the closing price the day before new shares are issued.

The franking credits stapled to the $5.07 worth of WPL stock is worth a further ~$2.17.

Market Matters provides general investment advice only, not personal advice or tax advice. Consult a relevant adviser accordingly.

Broker Moves

  • Bravura Raised to Buy at Jarden Securities; PT A$2.5

Major Movers Today

Enjoy your night,

The Market Matters team.

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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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