What Mattered Today: Our view on RIO

James Gerrish

Market Matters

It seemed like there was a decent sell order in ASX 200 Futures this morning that prompted selling amongst the large cap stocks – usually happens with an overseas fund is taking a negative bet on Australia and getting set via Futures – the weakness was obvious on open, a slight recovery when traders went to lunch then the market slid into the close. RIO reported strong Dec QTR production numbers today but ended lower on the session, Bellamy’s upgraded earnings with good margin guidance, Afterpay Touch (APT) traded up by +16% on the back of a very strong quarterly update, while some of the diversified financials did well, Perpetual (PPT) which we bought recently in the MM Income Portfolio continues to do well adding another +2.61% to close at $52.38 , BT was also strong – ditto for HUB24. The buying in Bellamy’s flowed over to other Chinese facing names with A2 Milk putting on +6.46% to close at $7.42 while Blackmores (BKL) added +6.17%. Really a day where the market collectively was soft yet a few stock specific stories helped to keep things interesting.  

Overall, the Consumer Discretionary stocks were strong, an upbeat article in the FIN this morning on JB Hi Fi saw those shares up  +1.17% however Nick Scali (+2.71%) and Harvey Norman (+1.13%) were also strong in a weak market. On the flipside,  the Telco’s had a poor day, Telstra the biggest drag down -1.62% to $3.65 while the smaller players were also soft.  An overall range today of +/-  35 points, a high of 6077, a low of 6042 and a close of 6048,  down -28pts or -0.47%

ASX 200 Intra-Day Chart

ASX 200 Daily Chart


1.RioTinto (RIO)  $81.26 / -0.66%; posted Q4 production numbers this morning which are important in terms of their full year results (given RIO is December year-end) with the stock down despite a good result (i.e traders already positioned for it) They met Iron Ore and Aluminium production guidance, and only a small miss on Copper which is likely to be offset by strong prices throughout the quarter. Copper wasn’t all bad with Escondida producing  a higher grade despite running at a lower run rate than had been expected.

Reasonable Q4 numbers across the three main drivers of RIO point to a strong calendar year result due out in early February, and the market laggards (analysts) are likely to now upgrade price targets reflecting; 1. They beat in terms of iron Ore guidance from around 330mtpa to a range of between 330 – 340 mtpa while the spot price is running at a ~26%/$19 premium to consensus.

Thinking about RIOs leverage to the Iron Ore price,  a $1 move to the average price received on Iron ore is around $250m to after tax earnings for RIO – which is massive.  

In our view, todays price action shows the mkt is now long RIO (and others for that matter) however if playing the sector, which we want to do this year, we’re likely to see final December QTR upgrades (DB out today with one) + Jan revisions ahead of early Feb full year results which will focus on cash generation and capital management  - so you BUY now for those themes to play out given the mkt always gets ahead of itself however don’t set and forget, look to sell in May and rotate funds back towards $US.

I covered RIO this morning on SKY BUSINESS just as the result was landing.

Rio Tinto Daily Chart

RIO versus Iron Ore – clearly tracking Iron Ore prices from the ~$US40 low 15/16 with RIO now ~$81 and Iron Ore at ~$US74

2 .Bellamy’s (BAL) $13.68 / 24.82%; Rocketed today on a big upgrade in terms of earnings + margins, although it smelt fishy yesterday, jumping nearly 6% without any news flow! A big improvement in EBITDA margin rising to 20-23%, up from 17-20% while expected revenue growth was revised to 30-35%, up from original guidance of 15-20% + the commentary was upbeat which underpinned strength across the broader sector. The stock ripped higher today and is now just ~$2 below the all-time high.  

Bellamy’s Daily Chart

3.Afterpay (APT) $7.62 / 16.87%; The chart below says it all with Afterpay in more outlets, doing more transactions and earning more revenue than ever before – massive uplift QoQ which is obviously driving share price, some regulatory risk here in terms of Govt intervention on consumer credit however the company clearly has a lot of traction with both merchants and users - now a ~$1bn mkt cap.

Afterpay Daily Chart

The other interesting stock in the sector is ZipMoney (Z1P) capped at $230m on a run rate of $380m in transaction volume – these guys obviously smaller, and with a solid share register + bank backing look interesting around current levels.  

ZipMoney Weekly Chart

4.BITCOIN; Getting more questions about BITCOIN these days however the price clearly coming back in recent weeks. Wait for people to start losing money on a 'sure thing' then prices will really struggle!!

Bitcoin Daily Chart

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Have a great night

James & 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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