- Australian shares have dipped through the middle of the session.
- Corporate Travel Management have confirmed their guidance.
ASX falls on industrials and IT loses
Australian shares lost ground in trade on Wednesday despite opening in a strong position.
The S&P/ASX 200 Index closed 37.90 points, or 0.57 per cent, lower at 6659.2.
Medibank Private was one of the worst hit. The company lost 8.53 per cent to close $3.11 after revealing it had been hit by an increase in claims by policy holders.
The industrial and IT sectors both fell by about 1.8 per cent.
Transurban Group shed 2.32 per cent to close at $14.75, Sydney Airport Holding retreated 2.9 per cent to $8.71 and Aurizon fell 1.55 per cent to close at $5.72.
Appen lead the tech stock falls after falling 7.85 per cent in the session. It was closely followed by Zip Co, which dropped 6.27 per cent.
Corporate Travel Management soared 9.96 per cent to $19.76 after reaffirming full-year guidance at its AGM in Brisbane.
Investment manager Pendal Group rose 9.48 per cent to $8.20 despite unveiling a drop in full year profit of more than 20 per cent.
Technology One: Bell Potter looking for positive surprises in upcoming results
Bell Potter analyst Chris Savage will be looking for Technology One to hit a few upbeat performance measures when it releases its results later this month.
“We expect Technology One to achieve its FY19 guidance when it reports later this month but, perhaps more importantly, we expect there to be some very positive aspects to the result,” the broker’s research note said.
Among the outcomes it will be looking for is software-as-a-service fees growth, another special dividend and the troubled UK expansion to reach profitability in the second-half.
“Technology One remains our no. 1 pick in the tech sector,” Mr Savage said.
“We acknowledge the stock does not look cheap on an FY20 PE ratio of [about 36 times] but we believe it looks value relative to other mid to large cap software stocks like WiseTech and Altium.”
PBoC should cut further
Economists say more stimulus will be required following the People’s Bank of China’s decision to cut its key medium-term lending facility (MLF) rate for the first time since 2016 on Tuesday.
The central bank cut the MLF rate by 5 basis points to 3.25 per cent, with expectations it will also lower its loan prime rate (LPR) by 5 basis points to 4.15 per cent in two weeks time.
“This is a small step towards future policy rate cuts, and it also signals that China’s central bank will finally start to follow other central banks in lowering its policy rate,” said Citi Group chief China economist Li-Gang Liu.
He also forecast the bank would be cutting rates further.
“We have argued a 5-20 basis point MLF rate and SLF (standing lending facility) cut could be possible in Q4. Given the small-scale rate cut [on Tuesday], it means further rate cut could be possible in the remainder of the year,” Mr Liu said.
“While the scale of [Tuesday’s] cut may be inconsequential to addressing private firms’ funding costs, the impact on market expectation on China’s monetary policy stance remains significant.
“It means that the PBoC will use both quantity and price tools to ease China’s monetary policy ahead, thus establishing an unambiguously accommodative monetary policy outlook.”
Small-cap mineral sands prospect attracts Rich Lister Brian Flannery
The family office of Rich Lister and resources veteran Brian Flannery has tipped capital into mineral sands prospect Diatreme Resources.
The $3.63 million placement raised funds to progress Diamtreme’s Galalar Silica project in Far North Queensland.
The project is in the same region as Mitsubishi Corporation’s decades old Cape Flattery silica mine.
After completing a scoping study for the project in September, Diatreme is now working toward a mining lease application and feasibility study.
“This strong support from such a highly credentialed resources investor is significant and offers a vote of confidence in our strategy.” Diatreme’s chairman Greg Starr said.
New car sales slide 9.1pc in October
New vehicle sales slumped by 9.1 per cent in October compared with the same month a year ago, extending a downturn in the industry which now stretches for 19 consecutive months.
The bleak numbers mean that 78,000 fewer new vehicles have been bought for the first 10 months of 2019, compared with last year.
The Federal Chamber of Automotive Industries said that while the drought and brittle consumer confidence were having an impact, the biggest drag was much stricter regulation of the financial sector which was preventing some buyers from accessing finance.
The weak automotive sales figures are another sign of a struggling economy and come after figures early this week which showed growth in retail sales of 0.2 per cent in September, half the consensus expectation.
Other industry players believe broader structural shifts in buyer patterns are also having an influence on the market.
Read the full story here.
UBS: Fortescue growth contrary to iron ore price movement
UBS analysts warn that Fortescue Metals Group’s share price has decoupled from the iron ore price since the commodity started to fall in late July.
The UBS analysts compared Fortescue’s 8 per cent share price rise since July to the falls seen by its iron ore mining peers: BHP and Rio Tinto are both down more than 10 per cent over the period.
Among the reasons for the difference is a strong operational performance, better product mix and higher price realisation, the analysts said.
But while there were explanations for the decoupling, UBS maintained its negative outlook for the stock.
“We maintain our sell rating and $7.50 price target in line with our [net present value] estimate with concerns that further forecast falls in the iron ore price may see the multiples and [free cash flow] yield stretched,” the analysts wrote.
IT sector losses pulls ASX into negative territory, falls lead by Appen and Afterpay
Declines in the information technology sector has wiped off early market gains and dragged the ASX into negative territory by mid afternoon.
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The S&P/ASX Information Technology index has lost 1.42 per cent to 1302.8 points.
The losses are topped by Appen which has fallen 6.56 per cent to $20.24. Not far behind is Afterpay, which has retreated 4.17 per cent and is trading at $25.99, and Bravura Solutions, which is down 4.1 per cent at $3.98.
Trade deal unlikely to lift equities
The possibility of a trade deal is unlikely to support a rally in global equities, with sluggish global economic growth set to weigh on stocks regardless of the outcome of trade negotiations.
The reaction from global equity markets to news that the US was considering removing tariffs on China has been only slight so far, with economists suggesting a sustained rally is unlikely.
“Even if a ‘mini-deal’ is finalised, tensions surrounding trade are unlikely to go away completely. Some of the more controversial issues, like currency manipulation, are yet to be addressed,” said Capital Economics markets economist Simona Gambarini.
She added that economic growth remained sluggish across the globe and this was likely to weight equity markets.
“Admittedly, Markit’s global manufacturing PMI ticked up to 49.8 in October, from 49.7 in September, suggesting that the downturn in global manufacturing might be turning a corner,” she said.
“But once the official Chinese PMI numbers are substituted for the Markit data, the global PMI is yet to pick up. Against this backdrop, the equity markets’ euphoria hardly seems justified.”
RBC Capital Markets chief US economist Tom Porcelli said while the sentiment had changed, the underlying factors had not.
“Just a few weeks ago we were walking out of meetings and felt saturated by negativity – this is something that had been happening over the last year or so. But now, all of a sudden, clients seem a bit more chipper – though certainly there are some staunch holdouts,” he said.
“We find this all a bit amusing since nothing has really changed over the last couple of weeks.”
While noting the possibility of a trade deal was likely a strong contributor to the growing confidence, Mr Porcelli said there remained several other weak points in the economy.
“We would hasten to add, when people talked about their ‘why-the-sky-is-falling’ thesis, it rarely began with trade,” he said.
“It was always a potpourri of other factors – including why there are cracks in the consumer profile.”
Seven questions with Weimin Xie
Do you own iSignthis, and do you think the unicorn valuation is appropriate?
We don’t own ISX and never had. We looked at the stock at around 14¢ a year ago and decided to not invest. The area of business that ISX focused on are high-risk merchants that the major banks choose not to deal with, this entails large latent risks which are now being revealed by the ASX queries.
The company was guiding a very low cost base and very high profitability at a small scale. Given the commoditised nature of payment processing, we are not clear about the sustainability of the current profit margin.
To achieve the company’s earnings guidance and using the margin assumptions provided by the company, ISX will need to increase its business turnover from an immaterial amount to $5 billion within 12 months, a feast that even Afterpay can’t claim to achieve.
The governance matter is not great but I have seen worse in the small-cap space. At the end of the day, if a business is real and valuable, the governance will generally fix itself at some (potentially very large) expense of dilution.
How can Nearmap restore confidence after its near 40 per cent decline, and do you have an opinion on competing mapper Aerometrex?
The best way to restore confidence is solid execution of the business plan. Stocks like Altium and Pro Medicus had experienced large valuation correction then proceed to go up 10 times and more. A 40 per cent drawdown is nothing to be concerned about in this case as the business is growing solidly.
Aerometrex has a different business mix compared to Nearmap. In the core Mapping as a Service, Nearmap has further invested in the product roadmap and has scale advantage compared to Aerometrex. If Aerometrex starts to hire salespeople and expand into the US like Nearmap, it won’t be able to maintain its profitability.
Given the large market opportunity, we believe Nearmap is creating value with its investment.
Weimin Xie is the chief visionary officer and portfolio manager at MX Capital.
Corporate Travel confirms guidance
Corporate Travel Management has confirmed its underlying earnings guidance of between $165 million and $175 million at the travel firm’s annual general meeting in Brisbane.
The guidance represents growth of 10 to 16.5 per cent above the prior year’s earnings.
Managing director Jamie Pherous noted the challenging macro environment but that management has “pleasingly” continued to execute on its strategy.
“Despite the macro-economic factors, CTM continues to focus upon enhancing its value proposition to customers to ensure a sustainable competitive advantage over the long term.”
Corporate Travel’s shares traded 0.17 per cent higher at $18.00. The company has been the subject of a high profile activist short campaign by hedge fund VGI Partners.
The chairman Ewan Crouch said the company had strengthened its management and renewed the board as he took at short sellers.
“In the past year, there has been a surge in activity of targeted campaigns to create confusion about our company and receive media attention. We welcome scrutiny so long as it is informed and fair,” he said in his address.
“We have been transparent and open – inviting our critics to meet with us so we can have better dialogue but they avoid this kind of engagement because, I believe, their purpose is not to understand the company but promote their own interest.”
“We have addressed the short seller claims, answered media questions put to us and held ongoing discussions with investors and analysts.