What Mattered Today; Myer & Mortgage Choice - hard stocks to like...

James Gerrish

A rise in the Oil price overnight helped to support that sector today with Santos and Oil Search both up more than 1% while Woodside edged +0.35% higher. BHP opened with a bang however sellers came in and pushed the stock lower throughout the session – sell strength still clearly the play in the resource sector for now. The banks were interesting today – still not a lot of good news floating about however they’ve started to brush off the negative sentiment and push up from recent lows…

For the month (March) the ASX is now down around 1% which is weak from a seasonal perspective however we are starting to recover from the lows – basically the mkt will now be dictated by the fate of the banks in the short term and March / April is (still) the most bullish period of the year. The Bank Royal Commission has clearly had an impact in 2018 however it remains too premature to lose faith in our view.

The market added+13points today or +0.23% to close smack on 5950

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

A lot of focus on the Fed Reserve in the US tonight around interest rates. The market is positioned for a hike (as per below) however commentary plus the DOT PLOT the important aspect.

Myer (MYR) 41.5c / -3.49%; Reported half year results this morning with the underlying profit number already guided to in early February – at the same time they had their 3rd consecutive profit downgrade. At that time they said NPAT for the half would be between $37- 41m and they printed around ~$40m today however they also took some large non-cash impairments which they had flagged in February – the magnitude though was the variable component. The market had feared that the level of impairments may impact banking covenants but that wasn’t the case – the stock seeing a relief rally early but then those who bought saw sense - reality set in and the stock got pummelled into the close – which was the right reaction. Banking covenants or not the only issue here - this is a retailer in trouble and bottom feeding is simply too hard in MYR….

Myer (MYR) Chart

Mortgage Choice (MOC) -1.32 /.$1.875; We had a good question about this stock today and we haven’t looked at it for some time. Obviously the Banking Royal Commission and focus on mortgage brokers has this stock feeling some pain so I dug around to look at what we wrote last time we covered it. This was before the Royal Commission was announced about 8 months ago however the views are still relevant today. We have no interest in MOC.

26/7/2017 Mortgage Choice (MOC) Forecast P/E of 14.5x Yield of 6.3% FF

MOC is a mortgage broker that looks attractive from an historical valuation perspective trading on a discount of ~15% to its long term PE – currently around 14.5x. with a yield of 6.3%, paying a forecasted half year dividend of 7.5c FF. Mortgage Choice would seemingly be a great choice for the income portfolio, however the company is facing considerable headwinds. The mortgage broking industry has been facing scrutiny around unethical practices and many are pushing for reform that would shake up the commission based fees. Even the most basic of reforms, such as a push to pivot commissions where broker compensation is increased as the LVR falls, would significantly hit Mortgage Choice’s profits and valuation. Clearly this is an income opportunity that carries too high a risk to capital for the income portfolio. (VIEW LINK)

Mortgage Choice (MOC) Daily Chart

Have a great night

James & the Market Matters Team

The above is an extract from the Market Matters afternoon Report. For a free 14 day trial of our service CLICK HERE

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About this contributor

James Gerrish

James Gerrish

jgerrish@shawandpartners.com.au, Market Matters / Shaw and Partners

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:MYR ASX:MOC

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