Local futures were pricing a drop of 30 points on open this morning with weakness in the commodity / energy complex the main driver, however news that the much talked about meeting between Mr Trump and Senor’ Un was back on sparked a recovery in US Futures (Dow Jones +84pts at time of writing) which helped our market initially before sellers took hold and we tracked lower for most of the session – dipping briefly below the 6000 handle.
Metcash (MTS) announced the loss of a major customer + plans for a new distribution centre in South Australia while they also said that earnings would be flat on last year (the market was more bullish) so the shares dropped -17.66%, Reliance Worldwide (RWC) was firmly on the other side of the ledger putting on +26% coming back online after announcing plans to buy European focussed plumbing supplier John Guest and raise $1.1bn in new equity, $946m of which was completed through the institutional raise at $4.15 a share. A big transaction, a big raise, and a big share price reaction. More on that later. Elsewhere, Fischer and Paykel Health (FPH) was down smalls after their full year result that beat on FY18 but missed in terms of guidance – we remain neutral that stock.
Overall, the ASX 200 lost -28points or -0.48% today, no real bounce from the daily low with the index finishing at 6004.
CATCHING OUR EYE
Broker Moves; It was only Thursday last week that we mused about the strong performance of Metcash with the perma bear JP Morgan upgrading the stock to a buy only to see (4 days later) a lost customer ($270m rev pa), new spending plans in Sth Australia and what effectively equates to an underwhelming earnings update (relative to consensus) – the stock dropping all the way back to $3.03, down -17.66% on the day. $3 is support for the stock so will be interesting to see how it performs here + its cheap (13x) versus an expensive sector (WOW 22x and WES 17x).
- ERM Power Downgraded to Hold at Morgans Financial; PT A$1.64
- ERM Power Downgraded to Underperform at Macquarie; PT A$1.39
- ERM Power Downgraded to Neutral at JPMorgan; PT A$1.69
- Reliance Worldwide Upgraded to Buy at Bell Potter; PT A$5.40
- Wesfarmers Downgraded to Sell at Citi; PT A$41.50
- Spark NZ Upgraded to Neutral at Macquarie; PT NZ$3.60
- Computershare Upgraded to Hold at Morningstar
Reliance Worldwide (RWC) $5.60 / 26.63% ; The stock stormed higher today coming back online post the announced acquisition of John Guest for $1.22bn. A big acquisition for a $2.4bn Aussie plumbing supplier however importantly it makes sense, gives them true global reach (they are mostly focussed in the US now) with JG a UK / European facing business, but importantly the purchase is +20% earnings accretive – hence the big pop in the share price today. The interesting aspect is from a ‘shorting perspective’. About 17m shares are short sold (11 days to cover on normal volume) but those shorts are now also short the rights – which is big given it’s a 1 for 1.98 issue. That short interest just expanded significantly creating demand to buy stock on market to cover. For those who think shorting is predatory, this story will clearly warm your heart! A great trend / success story in RWC.
Fisher & Paykel (FPH) $12.12 / -0.57%; The healthcare equipment manufacturer showed a solid result doesn’t always translate into buying, reporting profit at $NZ 190.2m and dividend of 12.5c, above expectations of $NZ 188.7m and 11.3c respectively. Guidance though was the issue. Consensus was at ~14% growth, while the company predicts ~10%. Forecast revenue and Gross margins also fell short of what the market was expecting, and trading on 40x next year growth is required to justify the price. FPH should remain in a holding pattern while earnings catch up.
Have a great night
James & the Market Matters Team
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.
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.