19/01/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from The Trading Room - 3.30pm
Across Asia, stocks are mostly lower for a second straight session, led by Australian financials and Japanese manufacturers on concerns about earnings growth for 2010. The Kospi is higher by 0.2% while the Shanghai Composite, Nikkei 225 and Hang Seng are all down 0.3%.
Further south, the Australia 200 CFD Index is 0.7% lower at 4876.9 after trading as high as 4930 this morning. The market opened the session slightly stronger but by mid-morning, the financials had begun to lead the sell-off.
The broader market outperformed by more than expected yesterday so this maybe why we’re seeing it underperform today. There wasn’t a lot in the way of leads due to the Martin Luther King holiday in the US, with very thin trading volumes continuing to exaggerate trading action.
The financials sector is detracting the bulk of the points with Commonwealth Bank of Australia falling the most, down 2%. It’s quite surprising to see Commonwealth Bank of Australia down so much given its profit upgrade on Friday was seen as a positive for the sector. Many had thought this might have been the catalyst for a rally in the sector but it doesn’t look this way at the moment.
Also, energy and industrial stocks are seeing some selling despite a higher oil price overnight.
Looking ahead, it’s going to be tough for the market to make new highs ahead of the local reporting season in February. So far, what we’ve seen from the US in terms of Q4 reports have been mixed at best, with no clear direction at all.
Rather than buying now ahead of all this uncertainty, we may see investors happily sitting on the sidelines, biding time before committing more funds to the market.
Market Update from the Trading Room – 1.30pm
Australia 200 CFD Index: 4870.2 (-0.8%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Information Technology | 6.0% | Industrials | -1.4% | |
| Healthcare | -0.2% | Property Trusts | -1.4% | |
| Materials | -0.4% | Financials | -1.2% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Computershare | 2.2 | Commonwealth Bank of Australia | -6.7 | |
| Suncorp Metway | 0.8 | Westpac Banking Corporation | -4.5 | |
| CSL | 0.5 | National Australia Bank | -2.7 |
Computershare – Computershare is 9% higher at midday after announcing this morning that their first half 2010 management EPS will be 20% higher than their half-yearly results for the 2009 financial year. Management warned the second half of 2010 may not be as strong as the first, given the first half was supported by "a number of significant transactions" that took place over the period. In a report from Credit Suisse, they said previous guidance called for flat year-on-year growth so this 20% upgrade, which would translate into 10% year-on-year full-year growth if the second half is indeed flat, surpasses investor expectations for the group, adding that consensus estimates called for 5% growth for the full year. The broker added that IPO activity is picking up, which should contribute to growth in the second half, meaning Computershare has the potential to continue to outperform.
Karoon Gas – Karoon Gas is 3% higher at midday after management said this morning that it will retest the Poseidon 2 well from early next week after "analysis of the first test attempt indicates that it is highly likely that no connection between the well bore and the reservoir was achieved," despite preliminary analysis of a 60 meter core sample suggesting "the reservoir should flow gas." While initial inconclusive test result last week saw Karoon dive 24% from around $10.50, it appears some investors are willing to give Karoon the benefit of doubt over the potential company-shaping field. In a note from Merrill Lynch, they suggest well estimates could swing Karoon’s valuation within a $4.50 to $16.00 price range.
AGL Energy – In a note from Merrill Lynch, AGL Energy could seek to raise up to $2.5 billion in equity in 2010 to fund the acquisition of NSW energy retailers in the upcoming privatisation process, noting that both AGL Energy and Origin Energy could conceivably buy 2 of the 3 retailers, Integral and Country, without competition concerns. The broker retains its ‘neutral’ rating and $15.00 target on AGL Energy, noting the stock's low return on equity of around 7% is well below European peers at around 20%, but says low purchase price for NSW power is the key upside risk.
Lihir Gold – In a broker note from Morgan Stanley, Lihir Gold’s experience in West Africa will be critical for their new CEO after the resignation of Arthur Hood, given the company is targeting production expansion to over 1 million ounces annually from current 150,000 ounces from its Cote D'Ivoire's Bonikro project. The broker said FY09 gold production of 1.12 million ounces was better than its estimate of 1.08 million ounces with cash costs in line with guidance and forecasts FY09 NPAT of US$282 million on February 18.
CSL – In a broker report from Citigroup, they upgraded CSL to ‘buy’ as it sees the stock being attractive where it's trading considering the broker’s earnings expectations. Citigroup said at this price, investors are paying a reasonable, but not excessive, price for the underlying business and getting the 'blue sky' components for 'free' - most notably if IVIG proves successful in the treatment of Alzheimer's disease. Elsewhere in the healthcare space, the broker cut Healthscope to ‘sell’ saying growth prospects for private hospitals and pathology are reasonable but consensus per-share earnings forecasts don't appear to factor in a "likely" increase in interest costs. It reduced its target price to $4.53 from $5.10. The broker cut Sonic Healthcare to ‘hold’ on valuation grounds, saying shares are fairly priced. The broker initiated coverage on Primary Healthcare with a ‘hold’ rating while also raising Cochlear’s price target to $71.59 from $63.95. It also said ResMed remains a potential merger and acquisition target.
BHP Billiton – In a note from UBS, it suggests BHP Billiton could look to reintroduce its share buyback program at its interim result next month. UBS said since suspending its buyback program in December 2007 with US$4.2 billion outstanding due to the offer for Rio Tinto, BHP has only been able to return cash to shareholders via its regular dividend payment. However, the broker believes that BHP may announce a resumption of capital returns at its interim result on Feb. 10, 2010 given the deferral of the iron ore JV balance payment to Rio Tinto to the second half of CY2010 and better prices and outlook for commodities. The broker believes it's more likely that BHP Billiton would focus any buyback program on the London Plc market given the widening spread. Assuming the remaining US$4.2 billion program is reintroduced in the Plc market, they see EPS accretion of 0.1% in FY10, 0.9% in FY11 and 1.3% in FY12.
Overnight Market Report - 9.15am
With US markets closed for the Martin Luther King public holiday, our attention turns to European trade for leads. Europe’s Dow Jones Stoxx 600 rose 0.7% as firmer metals prices boosted the earnings outlook for basic resource companies.
Elsewhere, oil prices strengthened for the first time in six sessions, gaining 0.9% to $78.68. This came after China Oil, Gas & Petrochemicals forecast China’s crude imports to rise 15% this year as the world’s second-biggest energy consumer starts building the next phase of its strategic oil reserves.
Turning our attention to the local market, the SPI Futures (which closed at midnight) are calling the market to open 1 point higher at 4912.
The materials sector should rebound from yesterday’s decline after BHP Billiton and Rio Tinto gained in London trade, rising 1.5% and 0.9% respectively and base metals were mixed. Copper and nickel managed to advance 0.5% and 0.6%, while zinc and aluminium finished the session lower.
Also, there is a note this morning from UBS suggesting BHP Billiton may look to reintroduce its buyback program at its interim results next month.
The energy sector should be supported following the first rise in six sessions for Crude Oil futures. Since 4pm yesterday, they were up 0.7% to be currently trading at $78.25.
The financials sector will be in focus following yesterday’s strong gains. Leads from London and European financial sectors were supportive with gains of 0.2% and 0.5% respectively.
Given that leads are pointing towards a stronger session for the materials and financials sectors, we are seeing upside risk for the ASX 200 today.
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