Weak earnings + Trump Tweets put the kibosh on the market

Volatility was back in town today thanks to Mr Trumps barrage of tweets over the weekend and subsequent escalation of the China – US trade tussle. US Futures opened sharply lower this morning building on Friday’s losses and that put pressure on stocks from the get go. Amplifying the negativity was company reporting that was generally weak, particularly when it came to outlook commentary for FY20. The table below provides some fairly sombre reading with the average decline of those companies that released results today of over 9%.

While it was clearly a negative session, the market did open on its lows and improved throughout the day closing near the session highs, with a lot of activity through the SPI Futures market in the last 15 mins of trade, around 7000 SPI Futures contracts traded pushing the market up +30pts is quick succession, about ~$1bn worth of exposure…BIG. That trade was around 4pm while news broke on Bloomberg around 4.55pm saying **TRUMP SAYS CHINA CALLED, WANTS TO RESTART TRADE TALKS** with no further detail. Reminds me of the Elmo ap that I still have on the my phone from when the kids were younger….US Futures have just turned positive.

At a sector level today, it was all red with energy hardest hit down by more than 3% while the defence REITS help up well – Gold bounced from recent weakness with the likes of Evolution (EVN) +10% & Northernstar (NST) +8.68%. Asian markets were understandably lower while US Futures were down but recovered around 1% from their lows during our time zone.

Overall, the ASX 200 lost -83pts today or -1.27% to 6440. Dow Futures are now trading down -130pts /-0.51%.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE;

Stocks today: The table below looks at the share price performance of those companies that reported today. Not a pretty picture today unfortunately.

Fortescue Metals (FMG) –5.28%%; managed a record profit of $US3.2b thanks to the iron ore price tailwind seen in the second half of the year, topping up its total dividend to $AU1.14 – to put this in context, FMG was trading below $1.50 for a period in 2016. Their outlook remained unchanged, with Fortescue maintaining 170-175mt in shipment expectations, and costs to be in the range of $US13.25-13.75/wmt. This is a reasonable jump in costs vs the FY19 average of $US13.11/wmt and reflects the general rising costs theme in the resource space seen by many of Fortescues peers.

We remain keen buyers of weakness across the iron ore names.

Fortescue Metals (FMG) Chart

Boral (BLD) –20.56%: The stock took a bath today after they missed FY19 expectations and were more downbeat about the outlook for FY20. Back at the start of June, BLD held an investor day which split analyst opinion, Morgan Stanley who was bullish the stock said the most important aspect of the day was ‘no news is good news’ in terms of downgrades and they became more positive on the building material company. Credit Suisse was on the other side of the ledger downgrading BLD at the time, as it turns out, not aggressively enough – although they were right. BLD are facing a barrage of challenges, similar to Adelaide Brighton (ABC) and the expectations for a decline in earnings of 5-15% in FY20 versus markets expectations for a 1% decline was the nail in coffin today. A difficult period ahead for BLD.

Boral (BLD) Chart

IOOF (IFL) -6.92% Reported FY19 earnings numbers this morning and the stock was down as a result. They missed on the profit line and they cut their dividend saying “In one of the most challenging years for our company and for the industry, we have focused on the imperatives of stabilising the business, with a view to delivering better outcomes for our clients and our shareholders”

While the result was a miss, the underlying performance of the business was reasonable. Total funds under administration and advice (FUMA) increased while their adviser net promoter score was up +17% versus the industry average which was down. While it’s going to be a long road for IFL and the acquisition of the ANZ Wealth Business was completed at the wrong time, the decision today to cut the dividend, conserve cash, protect the balance sheet and bed down for a challenging operating environment we think is the right one.

IOOF (IFL) Chart

G8 Education (GEM) –16.06%; a tough start to the year for G8 which saw earnings squeezed by higher costs and an oversupply of childcare spaces dragged on occupancy and thus earnings. The company remains cautious heading into the year-end despite seeing signs of moderating supply growth and some benefit from the Government’s childcare subsidy. Full year EBIT guidance for $140m-$145m was well below the market’s expected $172m and the stock was smashed as a result.

G8 Education (GEM) Chart

Japara Healthcare (JHC) -0.95%; the aged care provider outperformed the market today but couldn’t finish higher despite an in line result. The space has come under pressure with the Royal Commission into providers coupled with wage inflation rising faster than CPI squeezing profits. Revenue was up strongly for Japara, however this all came from two developments coming online as well as a few acquisitions. Occupancy rates fell marginally, and FY20 isn’t expected to see too much in the way of a recovery. We own competitor Estia (EHE) in the Income portfolio which was upgraded by both Macquarie and UBS last week after they reported.

Broker moves;

• Ardent Leisure Upgraded to Buy at Baillieu Ltd; PT A$1.55
• Costa Downgraded to Hold at Morgans Financial; PT A$3.48
• Steel & Tube Upgraded to Neutral at Forsyth Barr; PT NZ$1
• Comvita Upgraded to Outperform at Jarden Securities; PT NZ$3.61
• Skellerup Cut to Underperform at Jarden Securities; PT NZ$2.05
• Orocobre Downgraded to Neutral at Macquarie; PT A$2.50
• Hansen Tech Downgraded to Sector Perform at RBC; PT A$4.15
• Skellerup Downgraded to Hold at Deutsche Bank; PT Set to NZ$2.45
• Rhipe Upgraded to Buy at Blue Ocean; PT A$3.60
• ERM Power Downgraded to Hold at Morgans Financial; PT A$2.47

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