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Markets Live: BHP leads ASX higher

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by August 19, 2016 General

That’s it for Markets Live today and for the week.

Thanks for reading and your comments.

Have a great weekend and see you all again Monday morning from 9.

market close

Shares have ended slightly higher for the session, but in keeping with a low-volatility week the ASX closed pretty much flat for the week.

On the day, the benchmark index added 0.3 per cent to 5526.7, while the All Ords gained 0.3 per cent to 5625.4. For the week, the ASX200 slipped 0.08 per cent.

While there were few major global impulses for investors to ponder over the past five session, it has been the busiest week of earnings season and there was plenty of price action in individual shares.

Today, Medibank was one of the stocks being sold down by disappointed investors, falling 4.7 per cent on a gloomier outlook. IAG slipped 0.5 per cent.

Santos couldn’t hold onto initial gains and ended 2 per cent lower, while Woodside trimmed early strong gains to close 1.2 per cent higher. The same happened to Bellamy’s, which ended just 1 per cent higher, after earlier rising more than 7.5 per cent.

Cleanaway Waste results were cheered, with stocks soaring 15.6 per cent, while Ardent Leisure jumped 10.9 per cent on a surprise sale of its gyms business to a private equity fund.

Other strong performers following company reports were Tassal, up 5.6 per cent, and Duet Group, which added 4.8 per cent.

Following are the biggest winners and losers of the week, just about all of them also companies that reported this week:

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A “dividend cut now looks inevitable” for NAB, UBS analysts say, adding that “it isn’t getting any easier for the bank” as the broker trimmed its earnings forecasts for the lender.

“NAB has stated that it believes it should be able to maintain its 99 cents per share dividend and sees a ‘credible path’ to reducing its payout back into its 70-75 per cent target range,” the broker writes in a note to clients this afternoon. “Given the ongoing low rate environment, regulatory changes, competitive forces and normalising bad and doubtful debts off a very low base, we believe this is unrealistic.”

With earnings per share expected to fall by 3 per cent, the analysts don’t see how the bank can keep its dividend steady without pushing the payout ratio into the 80s.

They expect a dividend cut to 90cps from the first half of 2017, and potentially down to 85cps, although a “re-basing” with its second half 2016 result is “very possible”.

What’s more, UBS notes that APRA said “it would be prudent for Australian [banks] to continue to plan for the likelihood of strengthened capital requirements“.

“While the final quantum of additional capital requirements remains uncertain, we expect NAB will need to raise equity in 2017.”

The broker has a neutral rating on the stock and a 12-month price target of $27.50, 20 cents below where it last traded.

NAB is going to cut its dividend, UBS analysts reckon. NAB is going to cut its dividend, UBS analysts reckon. Photo: Rob Homer

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One of the buzzwords of this earnings season is not innovation, it is automation.

Australian companies are trying to convince investors that they will not be left behind in the technology revolution. A slow growth environment and demands for growing dividends mean businesses are looking at costs and technology for an edge. In an economy that has been criticised for being uncompetitive in manufacturing, automation is being viewed as increasingly necessary.

But process automation is nothing new, it has been a trend since the industrial revolution. The real advances are to be found in connected automation which is where Australia is catching up with the industrial internet of things.

There are wide-ranging consequences to all of this for workers, investors and competition. 

On one crude measure, “automation” has been mentioned 135 times in ASX statements so far this earnings season (since August 1), compared with 81 mentions over the same period in 2015, 90 in 2014, 44 in 2013, and 31 in 2012.

From Domino’s Pizza Enterprises and its plans for robot pizza delivery to Transurban’s advocacy for driverless cars which will improve congestion on its toll-roads, businesses – with mixed success – are banging the drum on technology.

Delian Entchev from Watermark Funds Management explains that not everything being sold as innovation is necessarily new. He makes the distinction between “assistive” technology, which is a longstanding source of progress, and “adaptive” technology, which is where the real excitement is.

“We are now moving into the ‘adaptive’ stage where this ‘dumb’ infrastructure becomes connected. Connected roads, smart grids” – from smart meters at the home communicating with a load-adjusting grid – “and the 5G telco network that will bind all of this together”,” he says. “It sounds a bit futuristic at the moment but the idea is everything will become connected.”

He is not alone in thinking that this will rival the industrial revolution.

Read more here ($)

Domino' automation of delivery has the potential to reduce labour costs. Domino’ automation of delivery has the potential to reduce labour costs. Photo: Supplied

Despite a rate cut by the RBA, the Aussie dollar has continued to rise over the past few weeks. What are the factors driving it higher?

The irrepressible rise of the AUD

Despite a rate cut by the RBA, the Aussie dollar has continued to rise over the past few weeks. What are the factors driving it higher?

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Investors should continue to expect poor returns from most of Australia’s top 20 companies, says John Abernethy, chief investment officer at Clime Asset Management.

They are in for a challenging period, he says, as they will struggle to grow earnings due to a number of factors.

In no real order, he thinks the major banks will require more capital and suffer declining margins while interest rates stay low for quite some time while for the building sector it’s clear the construction cycle has peaked.

As for resource stocks, Abernethy isn’t so keen and thinks there is still a lot of supply that will keep commodity prices low. 

In addition, it’s not as if the global economy is growing at a rate of knots so there’s not much joy there for true growth investors looking to make the switch into cyclicals.

The same goes for retailers and stocks in the telecommunications space, he says. They are companies engaged in fierce price wars to ensure they hang on to their market share. 

So if there is limited growth at the top end of town it might be time to look elsewhere.

“The supportive growth trends are better represented in the middle part of the Australian equity market. There are discernible growth trends across inbound tourism, heath care, aged care, retirement living, education, financial services and IT development,” says Abernethy.

Here’s more ($)

Tenants market: residential rents are barely budging.

Global property giant Lendlease, helped by a big jump in development earnings, has delivered a 13 per cent rise in net profit for 2016.

Chief executive Steve McCann said the result was strong with “solid cash generation”  and a development exposure “de-risked” by the forward sale of three major commercial buildings.

The sale of those buildings, two at the International Quarter in London and one at Darling Square in Sydney, will once again raise the issue of the lumpy composition of Lendlease’s earnings.

However one other issue for analysts was put to rest, at least for the time being.

Investors have worried about the settlement risk in Lendlease’s residential operation where the profits are embedded in its apartments and land lots sold off-the-plan but which are still be settled.

Lendlease settled 4790 units during the year, including 1200 apartments. Mc McCann said “non-settlements were at less than 1 per cent versus our historical average of closer to 3 per cent.”

“The high level of residential pre-sales provides good future visibility of earnings.”

All up, development delivered a big, 30 per cent jump in operating EBITDA.

The contribution from the group’s other sectors was lower.

In construction the operating EBITDA rose 3 per cent, with a strong result in Australia eroded by weaker margins in the US business.

Operating EBITDA from the investment sector dropped 4 per cent, because of a reduction in the carrying value of the Singapore shopping centre 313@somerset.

 A final distribution of 30c takes the full year payout to 60c, 11 per cent higher than 2015 despite a reduction in the payout ratio.

The result was also helped a 30 basis point reduction in the effective tax rate, to 19.1 per cent.

Overall, the return on equity improved to 13 per cent.

Group financial officer Tarun Gupta, said Lendlease had entered the new financial year in a strong financial position.

During financial 2016, the group generated more than $850 million in operating cash flow while investing a further $3 billion into development projects.

Balance sheet gearing fell to 6.5 per cent from 10.5  per cent a year ago, and the interest rate coverage was eight times.

Lendlease shares are up 1.8 per cent to $14.37.

Lendlease chief executive, Steve McCann. Lendlease chief executive, Steve McCann. Photo: Louie Douvis

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BusinessDay columnist Elizabeth Knight weighs in on Medibank’s report:

Australia’s largest health insurer, Medibank Private, has given investors a pretty worrying prognosis: industry growth is weakening and it is losing market share. The treatment? It’s time to look after customers.

On the face of it, the 12 months to June 2016 looked like a bumper year for earnings as management capitalised on the first full year of operations following the insurer’s $5.7 billion government privatisation.

But the second half showed that growth is slowing, and the company’s new chief executive Craig Drummond is expecting 2017 won’t be much better thanks to “continued market share loss”.

Investors reacted swiftly and decisively to the statement, pushing the insurer’s share price down more than 6 per cent. 

If the prospect of growth hitting a brick wall wasn’t enough of a concern for Drummond, there’s also the prospect of legal action from the Australian Competition and Consumer Commission over its allegations of engaging in misleading conduct, making false or misleading representations to customers and engaging in unconscionable conduct.

All this – the ACCC says – was an attempt by the insurer to plump up its profit and maximise the value of the company as it prepared for its November 2014 privatisation and sharemarket listing.

It seems clear Medibank is now paying the price for allegedly treating its customers disdainfully. Drummond revealed on Friday that customer numbers had been hurt in the wake of the scandal over the insurer’s conduct, and this trend has continued in the 2017 financial year.

He didn’t put any numbers around how much this has cost the company in terms of customer numbers, revenue or profit, in part because there’s a series of other issues including IT problems and the general level of affordability and value of health care insurance contributing to the outcome.

Read more.

Medibank is paying the price for allegedly treating its customers with disdain. Medibank is paying the price for allegedly treating its customers with disdain. Photo: Christopher Pearce

The competition regulator will take until October to determine an application by three of the big four banks who want access to communications hardware on Apple iPhones so their digital wallets can operate on ‘tap and go’ terminals. 

CBA, Westpac, NAB and Bendigo and Adelaide Bank asked the Australian Competition and Consumer Commission in July to provide “interim authorisation” for them to form a cartel to collectively negotiate with Apple.

The technology giant has locked the banks and other third-party providers of digital wallets off the iPhone platform in favour of its own Apple Pay. It has done this by making Apple Pay the only payments app to be able to access the iPhone’s “near field communication” antenna, which sends information to payments terminal. 

The banks want Apple to take more responsibility for fraud losses, want to talk to Apple about industry standards for digital wallets, and want to be able to pass on fees charged by a third party digital wallet provider.

The banks also want their own digital wallets working on iPhone devices. For this they need to access the NFC antenna on the iPhone. 

But Apple says providing access to the phone’s transmitter to allow bank applications to facilitate contactless payments would compromise the security of Apple’s hardware. “The present application is only the latest tactic employed by these competing banks to blunt Apple’s entry into the Australian market,” Apple said. 

The banks also want to retain as much of their interchange fees as they can for cards loaded onto Apple Pay, but the issue of fees was not included in the ACCC application, with the banks saying fees remain an issue for each individual bank to negotiate. 

Another Apple Pay delay in Australia. Another Apple Pay delay in Australia. 

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Salmon producer Tassal Group’s annual profit has fallen 3 cent to $48.5 million, due to a smaller increase in the value of its fish stocks than in the previous year.

Revenue for the year ended June 30 rose 39 per cent to $431 million, as salmon sales continued to grow and Tassal benefited from contributions from its acquisition of De Costi Seafoods.

The company increased its final dividend by half a cent to 7.5 cents, fully franked.

Shares are flat at $3.95.

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shares up

Ardent Leisure shares have soared as much as 24 per cent on news the company is selling its gyms business to a private equity fund for $260 million.

As flagged earlier today by the AFR’s Street Talk, the company sold its health clubs division – comprising Goodlife Health Clubs and Hypoxi) to funds advised by Quadrant Private Equity.

Shares jumped 24 per cent after emerging out of a trading halt at 11.45am and are currently up 10 per cent at $2.52.

Ardent’s news comes less than one week before it’s due to hand down its full-year results to investors.

Goodlife is one of the largest gym networks in the country, with 76 locations and a membership bas e that’s over 200,000 strong.
 

Ardent Leisure's gyms were expected to make about $20 million earnings in the 2017 financial year. Ardent Leisure’s gyms were expected to make about $20 million earnings in the 2017 financial year.  Photo: Supplied

ASX

Quite a volatile session today, with the ASX briefly falling back into the red shortly after hitting an intraday high. But looks like the 5500-point barrier is holding.

Here are today’s most searched shares on our websites. Quite a mix:

shares up

Woodside has jumped as much as 3.75 per cent and is currently up 2.3 per cent at $29.21, after the oil and gas company upped its production forecast.

Woodside now pegs its oil production  between 90 and 95 million barrels of oil equivalent (mmboe), up from earlier forecast of 86-93 mmboe.

Oil prices also rose overnight for a six straight session after production freeze talks buoyed investor sentiment, buoying energy stocks around the world.

But Woodside’s first-half profit fell 50 per cent due to falling commodity prices during that period.

Bottom line profit for the six months to June 30 fell to $US340 million, shy of analyst consensus forecasts. RBC Capital Markets blamed the shortfall on a loss on LNG trading, foreign exchange and tax. Sales slid 24 per cent to $US1.94 billion.

But Woodside did better on costs, driving down costs more than expected at its Pluto LNG plant, while it upgraded its 2016 production guidance. Total output this year is now expected to reach 90 million-95 million barrels of oil equivalent, an increase of more than 3 per cent from the earlier estimate.

Woodside has upped production forecasts. Woodside has upped production forecasts. Photo: Michele Mossop

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Medibank Private’s weaker than expected 2016 profit result will trigger cheering among consumer groups, doctors and insurance aggregators who claim that the big health insurers are exploiting government regulation, the AFR’s Tony Boyd comments:

The insurer’s return on equity was 26.4 per cent, lower than last year, but nearly twice the banks. But you won’t find it in the CEO’s presentation.

Medibank’s latest result will be dissected closely by all those who believe the Australian health care system favours private health insurers.

Health insurers have been accused of having excessive profit margins and capital returns.

The politically volatile environment, which includes a palpable anti-business sentiment, could explain why Medibank’s results presentation was slightly sombre.

In fact, a weaker share price could be exhibit one in the health insurance industry’s push in favour of continued annual premium increases of 5 to 6 per cent.

Here the whole article on the AFR ($)

Craig Drummond has blamed Medibank's loss of market share and lower revenue growth on the company's failure to deliver ... Craig Drummond has blamed Medibank’s loss of market share and lower revenue growth on the company’s failure to deliver the appropriate levels of “customer experience”. Photo: David Rowe

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Westpac chief economist Bill Evans says governments should urgently embrace infrastructure spending and central banks must reverse and avoid “ill-conceived” quantitative easing schemes that have distorted investment incentives.

In an unusually hard-hitting criticism of official policy around the world, Evans blames central banks, regulators and governments for not understanding why business investment remains weak. 

The best way to address the current malaise, he advises, is to ramp up fiscal policy spending for quality investment and end unconventional monetary policy.

Evans adds that short and disruptive election cycles in Australia, political grid lock in the federal Senate and in places like the US Congress – as well as fear of social disharmony in China – are adding to the problem by making governments fearful of embracing reform.

Evans, one of the nation’s most experienced market economists, says the unprecedented central bank bond-buying and ultra low interest rates have made matters worse by pushing global yields to record lows.

This has further widened a worldwide excess of savings over investment so that savers continue to be squeezed.

“Central banks, regulators and governments have to take some of the responsibility,” Evans says, suggesting that the cost of money is not the reason businesses remain unwilling to invest.

Businesses are worried about disruption through technology which might quickly render long term investments obsolete, he says, and warns that many businesses fear shareholders will react poorly if they take on new investment that cannot generate a 15 per cent return, even with the US risk free rate holding at 1.5 per cent.

Evans also warns that distortions created by monetary policy mean the usual benchmark of risk – the US 10-year Treasury yield – is prompting the US Federal Reserve to maintain unessearily low interest rates.

He suggests that negative European benchmark bond yields – caused by quantitative easing at the European Central Bank, Bank of England and Bank of Japan, are having the effect of directly depressing US bond rates.

“So, if an ill-conceived QE policy in Europe, Japan and now UK is largely responsible for US rates being so low the US 10 year rate cannot really be viewed as a reliable indicator of the global risk free rate,” Evans says.

To repair the savings to investment balance, governments ramp up economic reform that encourages the private sector to raise investment.

Finally QE policies are sending confusing signals across financial markets and should be urgently abandoned.

“Global ‘tapering’ needs to be the national catch cry.

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Oil is trading at 1 2015 high after another overnight rally.

Oil is set for its biggest weekly gain since March after entering a bull market amid speculation that major producers may act to freeze output and as US crude and fuel stockpiles decline.

Crude prices were little changed in early Asian trade, with Brent holding above $US50 a barrel, after advancing almost 16 per cent during the previous six sessions.

OPEC is on course to agree to a production-freeze because its biggest members are pumping flat-out, according to Chakib Khelil, the group’s former president. US crude inventories dropped the most in five weeks through August 12, while fuel stockpiles slid a third week, Energy Information Administration data showed Wednesday.

Oil has climbed more than 20 per cent since closing below $US40 a barrel early this month, meeting the common definition of a bull market.

Russian Energy Minister Alexander Novak said that the nation was open to discussing a freeze after Saudi Arabian Energy Minister Khalid Al-Falih said that informal talks in September may lead to action to stabilise the market. A deal to cap production was proposed in February but a meeting in April ended with no accord.

But freezing production at current levels might not help bolster prices, many analysts said, particularly since Saudi Arabia signalled that it could boost crude oil supplies in August to a new record, even as it prepares to discuss output levels with other producers.

“The latest news from Saudi Arabia is not price supportive at all,” said Carsten Fritsch, senior oil and commodities analyst at Germany’s Commerzbank. “This is a double whammy for the oil market. A test of the lows of early August is quite possible.”

Analysts at Citi also warned of the risks of a price rally based largely on potential future talks on freezing crude output levels given that similar meetings earlier this year failed to produce any such agreement.

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Lest we forget, here are a few of today’s analyst calls, most following yesterday’s earnings flood:

  • AMP: cut to sell from buy at Bell Potter
  • AVJennings: cut to hold from buy by Bell Potter
  • Big four banks: ratings outlook revised to negative by Moody’s
  • Evolution: raised to outperform from neutral at Macquarie
  • Fletcher Building: Cut to neutral from buy by UBS
  • Iress: raised to outperform from neutral by Credit Suisse 
  • QBE: Ratings unaffected by soft result: S&P
  • Stockland: Cut to hold from buy by Shaw 
  • Treasury Wines: Raised to neutral from underperform by CS
  • Troy Resource: Rated new buy at Canaccord Genuity
ASX

Shares have opened flat as losses in the financials sector offset gains in all other sectors.

The ASX is down 0.04 per cent at 5505.5 and the All Ords has lost 0.02 per cent to 5606.2.

Losses are led by the big four banks – all down around 1 per cent except for CBA which has lost just 0.4 per cent after Moody’s put the credit ratings on negative outlook.

AMP is down another 2 per cent following yesterday’s disappointing earnings outlook.

Here are how today’s reporting companies are doing:

  • Medibank: -5.4%
  • IAG: -1.2%
  • Santos: +2%
  • Woodside: +0.9%
  • Bellamy’s: +5%
  • Cleanaway Waste: +11%
  • Duet Group: +2.6%
  • Lend Lease: +2.4%
  • Cover-more: -3%
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The impact of the Moody’s decision to place Australia’s big banks on negative credit outlook will be muted, and the banks are relatively well placed to withstand an actual downgrade, analysts say. 

Deutsche Bank analysts Andrew Triggs said the impact on the banks’ share price from Moody’s change from a “stable” outlook to a “negative” should be minor given the shift follows a similar move by fellow ratings agency Standard & Poors last month. 

“As such we believe the share price reactions of the major banks to the news are likely to be relatively muted given they are already factoring in a material chance of an S&P downgrade,” Trigg wrote in a note to clients. 

The new outlook from Moody’s does not change its rating for the ANZ, Westpac, NAB and CBA, who are all rated Aa2 for senior unsecured debt.

But Trigg said that while a “downgrade would clearly not be helpful for sentiment in the sector” the impact would be manageable. 

Deutsche said the impact of a one notch downgrade would see margins fall by around 2 basis points, and profit would take a hit of around 2 per cent on average “spread over several years”.

Citi credit analyst Anthony Ip said the reasons behind the change in outlook from Moody’s are difficult to argue with. 

“The outlook change reflects the rating agency’s view that Australian macro operating conditions are increasingly challenging, which in itself is difficult to argue against.

“In particular Moodys’ points out that sluggish domestic growth, low interest rates and higher levels of bad debts have put pressure on bank profitability. This was evident in the most recent June quarterly/annual earnings releases from the major Australian banks.”

Moody's has changed the ratings outlook of the big four banks to negative, flagging a possible downgrade. Moody’s has changed the ratings outlook of the big four banks to negative, flagging a possible downgrade. Photo: James Davies

New Medibank Private chief executive Craig Drummond has warned that the health insurer had a bad end to 2015-16, which has continued into the new financial year and will drive market share losses.

“While Medibank has paid $5.1 billon in claims this year on behalf of our customers, some challenges remain with the value we offer to our customers,” Drummond said in a statement, delivering his first set of results for the company.

Medibank reported a 46.4 per cent rise in net profit to $417.6 million, which was short of analyst forecasts of $426 million, according to Bloomberg

Revenue rose 2.4 per cent to $6.2 billion, while the $8.2 billion company declared a final dividend of 6¢ a share. 

Drummond, who began in July coming from NAB where he was chief financial officer, said that revenue growth was soft due to the “underperformance” of the Medibank brand and a slowing market. Medibank sells insurance via its main brand and budget brand ahm.

The company warned that it was likely to continue to lose market share in 2017 and would be impacted by a smaller rise in insurance premiums. On April 1 2016 Medibank premiums rose an average of 5.6 per cent, compared to 6.6 per cent in the prior year.

Medibank warns of slowing growth and market share loss. Medibank warns of slowing growth and market share loss. Photo: Glenn Hunt Back to top

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