What Mattered Today; Telstra higher ahead of investor day tomorrow

James Gerrish

Australian stocks enjoyed a strong hour or so of outperformance this morning with the banks again offering support to the index, however the war of words between Donald Trump and his Chinese counterparts over trade intensified putting pressure on US Futures which turned sharply lower – Asian markets also copped selling while Gold rallied during our time zone. The steepest slides were seen in Hong Kong and China -- where the Shanghai Composite Index headed for a two-year low.

On the local bourse we saw some aggressive late selling, although we slid for most of the session from our early highs - the defensive areas saw most love, Healthcare enjoying an uptick in volatility and a bounce back in Ramsay Healthcare (RHC) while the Telco sector was okay, Telstra (TLS) adding +1.39% to close at $2.91 ahead of a much anticipated strategy day tomorrow. Andy Penn is clearly in the pressure cooker, more so now given the stock has rallied ahead of the update! One we’ll be watching very closely tomorrow and I’ll provide updates throughout the day.

Overall the ASX 200 index lost -0.03% or -2 points to 6102 while the DOW Futures are trading down -368pts at time of writing.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; The Morgan Stanley upgrade of Macquarie garnered most attention today – a topic we’ve covered in more detail below, while analysts seem to like the CYBG deal for Virgin Money despite the share price feeling the pinch today.

Here’s the current broker calls….

· Macquarie Upgraded to Outperform at Morgan Stanley PT A$130.00

· Super Retail Downgraded to Neutral at UBS; PT Set to A$8.70

· Senex Upgraded to Buy at Canaccord; PT A$0.50

· Ramsay Health Upgraded to Buy at Wilsons; PT A$65

· Mayne Pharma Downgraded to Sell at Bell Potter; PT A$0.77

· Mirvac Group Downgraded to Neutral at Credit Suisse; PT A$2.38

Macquarie (MQG) $118.50/ 1.80%; Morgan Stanley have put out a bullish note on Macquarie (MQG) today, pinning a $130.00 price target on the stock. They give 10 reasons to underpin their bullish stance, notably - (1) Earnings and ROE upgrade cycle continues; (2) Geared to the real economy, not just financial markets; (3) Leading Alternative Asset Manager; (4) Lumpy revenues pipeline is growing, reducing near-term earnings risk; (5) Initial guidance is usually conservative, implying upside risk to consensus; (6) 5 year growth potential gives us longer term confidence; (7) Offshore earner; (8) Leveraged to segments with structural growth; (9) Flexibility on the compensation ratio; and (10) Strong capital position. (source Morgan Stanley)

Their earnings expectations now sit about 10% above consensus – a bullish stance (clearly)! Here’s current broker calls…although Morgan Stanley is hot off the press so has not yet been updated on Bloomberg.

Source; Bloomberg

While the trend in Macquarie is clearly bullish, and Morgan Stanley make some good points, we can’t help but think their change of stance will prove to be the tipping point for the stock – or in other words, the catalyst for a meaningful high in Macquarie. Equity markets were weak today led lower by US Futures on another Trump trade tantrum – with the futures pricing a drop of -368pts when the Dow Jones opens in the US. Macquarie is an equity linked play, and any weakness in the market should be amplified in the MQG share price. We sold too early, however we don’t share the short term optimism from MS.

Macquarie (MQG) Chart

Insurance Australia (IAG) $8.42 / +2.43%; IAG has sold out of its businesses in Vietnam, Thailand and Indonesia in two separate transactions following a strategic review into its Asian operations. The sales will add $200 mil to next year’s NPAT, coming 6 months after the review was announced. IAG still hold minority stakes in businesses in Malaysia and India, however today’s announcement sees the end of IAG controlling assets in the region.

Overall, the review found the businesses weren’t contributing to the company’s growth in a meaningful way, and the fund’s generated will find their way into shareholder’s pockets one way or another. Another example of the ASIAN push for growth, followed by the RETREAT! It’s a positive for the company in the shorter term given likely capital management, however we are reluctant to chase the share price at current levels, preferring Suncorp and QBE for insurance exposure.

IAG Chart

Clydesdale Bank (CYB) $5.45 /-2.61%;Clydesdale’s takeover of Virgin Money is all but set after both board’s unanimously supported the deal for a new 1.2125 CYB shares for each Virgin Money share. It’s unusual for a takeover to be a win for both companies but this one seems to be. From the Virgin side, the +20% rally in the stock price obviously helps the all scrip deal while CYB will benefit from the Virgin brand and distribution channels. The combined entity will now have a much larger revenue and funding base and will become the 5th or 6th largest UK Bank.

This deal makes sense because the company with the inferior performance (CYB) was trading at a higher share price multiple while the company with the superior performance was trading on the lower share price multiple (Virgin Money). The former is substantially owned by Australians and the latter is not. CYB announced cost synergies of £120M, which represents one-third of the Virgin Money cost base. Such a planned reduction is common place amongst takeovers of financial companies.

CYBG (CYB) Chart

Have a great night

James / Harry & 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:IAG ASX:MQG ASX:TLS ASX: CYB

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