What Mattered Today; Clydesdale eyes off Virgin Money, the market awaits the Budget

James Gerrish

All eyes appear to be on tonight’s Federal Budget with low volumes and a lack of direction seen across the board today. For the fourth day in a row the market poked its head above 6100 but failed to close ahead of the milestone. As suggested in the AM report this morning, the market feels a touch “tired” around the 6100 area and a few more day’s consolidation &/or a pullback towards 6040 would not surprise.

Banks were firmer today with Westpac the strongest link on the back of yesterday’s strong result - the bearish UBS report on the bank now a distant memory after it seemed WBC CEO Brian Hartzer tore apart the data set that was used to support the rationale…UBS have a SELL and $26.50 PT on WBC (not shown below as they have pulled the feed from Bloomberg it seems) while the rest of the market sits well above that – Bell Potter the latest to upgrade WBC to a BUY from hold yesterday…We remain keen in the banks into the current vortex of negativity and can see the next leg higher in the market largely being driven by buying in the sector.

WBC Broker Calls

Westpac (WBC) Chart

Looking elsewhere, the resource stocks saw some selling after a period of strong performance in recent times however we continue to think that a short term top courtesy of a resurgent US currency is a short term headwind. Overall the ASX 200 closed up 7 points or 0.12% to 6091, around 20 points below the intra-day high.

ASX Chart

ASX Chart

CATCHING OUR EYE

Broker Moves; Platinum was helped higher on upgrades from two brokers, rare good news for an asset manager. Woolworths was slightly softer after Shaw & Partner’s Danny Younis questioned the supermarket’s multiple and lack of growth.

  • REA PT Raised to Street-High on Expected Ad Growth, M&A: Morgans
    • May have agent-oriented service within 6-9 months
  • Premium Hike Cap Plan May Hurt Australia Health Insurers: MS
    • Medibank Private, NIB have price targets cut on margin concerns
  • Platinum Asset Surges Most in Eight Months on Return to Inflows
    • April inflows ~2.5% annualized rate: Morgan Stanley
  • Woodside May Take Short-Term Hit on Potential PRRT Changes: Citi
    • Economics of Scarborough and Browse could be questioned
  • Westpac Gains for Two Days After ‘Old School’ Earnings Result
    • Can achieve underlying revenue growth in FY18: MS
  • Woolworths Ltd. shares don’t deserve 45% premium to market because company is set to deliver only 4%-9% profit growth in FY19, Shaw and Partners analyst Danny Younis says in report.

ACTIONS:

  • Woodside Downgraded to Sell at Citi; PT A$28.68
  • Origin Energy Downgraded to Neutral at Citi; PT A$10.13
  • Decmil Rated New Buy at Citi; PT A$1.45
  • Platinum Asset Upgraded to Buy at Ord Minnett; PT A$6.50
  • Platinum Asset Upgraded to Neutral at Credit Suisse; PT A$5.50
  • Woolworths Group Cut to Sell at Shaw and Partners; PT A$27.75
  • Macquarie Group Reinstated Buy at Shaw and Partners; PT A$117
  • Macquarie Group Upgraded to Neutral at Citi; PT Set to A$110.25
  • Kogan Rated New Buy at UBS; PT A$10.60
  • Qantas Downgraded to Sell at Morningstar
  • Alumina Downgraded to Sell at Morningstar
  • Aurizon Downgraded to Underweight at Morgan Stanley; PT A$4
  • Westpac Upgraded to Buy at Bell Potter; PT A$31.90

Clydesdale (CYB) $5.51 / -2.3%; CYBG was weaker today following news of a potential merger between the UK bank and Richard Branson’s Virgin Money. The proposal sees an all scrip offer to Virgin Money shareholders that would have valued Virgin at a ~31% premium had their share price not run 14% in the last few days, which looks like some market participants new of the impending announcement. As of last night’s CYB close, it was equivalent to a ~15% premium for VM holders. The deal looks like a good fit for both parties, it merges a strong personal banking group in Virgin Money with a business banking focussed Clydesdale. Virgin is also light on in terms of a digital footprint, while CYBG has its own digital banking business. This announcement is early days in the process and the ultimate deal is a long way off, however as with a lot of businesses that embark on a large corporate transaction that will bear fruit in the long term, the short term share price can suffer. Our $6.00 price target for CYB was looking good…now less so.

CYBG Plc (CYB) Chart

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Have a great night

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer


James Gerrish

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

Expertise

ASX:WBC ASX:CYB

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