IG Markets - Australian Market Wrap August 26 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are all higher, boosted by the late on rally on Wall St as well as weaker yen in Japan. The Nikkei 225 & Shanghai Composite are the best performers, both firmer by 0.6% as blue chip exporters in Japan bucked their recent losing streak. Elsewhere, the Kospi and Hang Seng were lower by 0.3 and 0.1% respectively.

In Australia, the ASX 200 finished the session0.8% firmer at 4356, on its highs of the session. After treading water for much of the early part of the day, the market advanced in afternoon trade thanks to strong performances from the financial, energy and consumer staples sectors, the latter of which is the day’s best performer courtesy of a strong profit result from retail giant Woolworths.

It was nice to finally see US markets post gains overnight, with the S&P 500 convincingly bouncing off important technical support around the 1040 level. The generally feeling was that the market had been oversold, with traders covering their short positions and bargain hunters moving into beaten up blue chip names.

At some point, patient long only fund manager’s are going to find current valuations too hard to ignore. With the S&P 500 currently trading on a PE of 12.8 times, the market is close to its cheapest levels since March 2009. Manager’s who can see through the current haze are likely to find themselves very well positioned for the longer term, particularly with future equity returns likely to be significantly higher than the current returns on offer from cash / treasuries.

In economic news, Citigroup said it has shaved 0.1 percentage points off its Australian 2Q GDP outlook. This followed after weaker-than-expected capex numbers illustrated a weak transition from public spending to private demand. The broker said it reinforces its view that the Reserve Bank is not going to be hiking interest rates anytime this year. Citi also noted that forward capex estimates are quite positive, offsetting any mining tax worries and suggesting 2011 will need more policy tightening.

Across the sectors, the big mover today was the typically defensive consumer staples sector, which added 2%. Heavyweight’s Wesfarmers and Woolworths topped the gainers, rising 2.8% and 2.4%, with Woolworths reporting a strong result.

It reported a $2.02 billion net profit, which was 10.1% growth from a year ago compared to its own forecast for 8% - 11% growth. In the key Australian supermarket division, the group said EBIT grew faster than sales, and that EBIT margin rose to 645% from 5.97%. A couple of analysts were calling for Australian food and liquor EBIT margins to be around 7%. The group said food and liquor gross margins rose on improvements in buying, expansion of company-exclusive brands, and the rollout of new stores.

However, gross margin improvements were offset by lower prices on 4,400 products in what's become an increasingly competitive market for grocers. At its Big W discount department store chain, earnings were about flat on the year on lower sales as the group grew gross margins on better inventory management, improved buying, and reduced discounting. As for its home improvement joint venture with Lowe's, the group said good progress has been made and that they are on track to open its first store in 2011. Management is forecasting 8% - 11% net profit growth again in fiscal 2011and said it would conduct an off-market $700 million share buyback.

The energy sector also had a good session, bucking leads from the US to follow Crude Oil price higher. It rose 1.3% after WorleyParsons (4.6%) recouped a lot of yesterday’s fall. Elsewhere, the likes of Origin, Santos, Caltex and Whitehaven Coal were all up more than 0.7%.

Santos’ 1H profit of $198 million came in at the top end of the company's updated guidance, with it saying it would be between $180 million and $200 million. There's not much more for investors to go on, however, with no update on the status of customer negotiations for its Gladstone LNG project. Santos committed to its end-of-year final investment decision target for the project, for which it has already agreed to sell some gas to JV partner Petronas. However, it needs to find an external customer to make up the balance and give the project some third-party validation. The company also stuck to its annual production guidance of 49 million - 52 million BOE, despite disruptions to 1H output from flooding in central Australia.

Financials were supportive too, rising 12%. Suncorp – Metway was the top performer, gaining 3.6% after a few broker upgrades while the big four banks were all firmer between 1.1% and 2.3%.

Consumer discretionary names were buoyed by strong US leads and a good corporate result from Crown. The sector added 0.7%, with Crown and Tattersalls both higher by 3%.

Crown reporting normalised earnings ahead of what analysts were expecting, with normalised net profit rising 2.7% to $288.4 million from $280.7 million a year before. Analysts had been expecting earnings of $276.7 million, according to a Dow Jones Newswires poll of seven brokers. In other encouraging news for investors, the group said that in the first seven weeks of financial year 2011, main floor gaming revenue grew by about 4% at its Australian casinos, which include Burswood in Western Australia and its flagship Crown Melbourne casino. Management also said VIP program play volumes have started the year "encouragingly". Expansion at both casinos hurt overall operating margins at the two sites, however, with refurbishment disruptions having a negative effect. Still, the trends at the start of the year are encouraging and have given investors a reason to bid up the stock.

The heavily weighted materials sector took a back seat today, finishing the session unchanged. Fortescue Metals Group was the top performer, adding more than 3.5% after a strong result while Rio Tinto and BHP Billiton were mixed, rising 0.2% and falling 0.1% respectively.

Amcor posted a marginal gain of 0.2% despite the packaging giant’s 13.6% decline in profit. For the year ending June 30, earnings of the world's largest maker of plastic soft drink bottles came in at $183.0 million, down from $211.7 million a year earlier. The result was dampened by acquisition costs related to its earlier purchases of Alcan and Ball Plastics. However, the firm expects both deals to catapult it to growth next year. CEO Ken MacKenzie said the firm is well positioned for strong earnings growth in the 2011 financial year.

Ben Potter
Market Strategist
IG Markets

ENDS

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