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05/02/18
       
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The Australian market made solid gains on Friday after a surge in energy stocks and improvements for the big banks turned around from a mixed overnight lead out of the US. 

Energy stocks drove ASX gains on Friday after a survey showed that OPEC countries are sticking with commitments to restrict supply more than offset rising US oil production, which has hit 10 million barrels for the first time in almost 50 years. Santos added 4.3% to $5.37, Oil Search 2.9% to $7.87, Woodside Petroleum gained 2.1% at $34.24, and Origin Energy 2.2% to $9.60.


James Hardie (JHX) shares rose rose 6.7% to $23.65 after the maker of building materials raised its forecast for full year operating profit to a range between US$260 million and US$275 million, raising the lower part of the range from at least US$245 million. JHX reported that group net sales rose by 9% and 7% respectively to US$495 million for the quarter and US$1,528.6 million for the nine months compared to the previous corresponding period (pcp). Adjusted net profit rose 33% to US$69.9 million for the quarter and 6% to US$205.5 million for the nine months compared to the pcp. JHX said that outlook assumed housing conditions in the U.S. continued to improve in line with its forecasts.

Telstra rose 0.8% to $3.67 despite the telco giant announcing it will take a $273 million first-half impairment on its US video streaming business, Ooyala - a measure that cuts the value of the business to zero.
 

International Markets

Worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields have sent investors fleeing equities with the Dow Jones Industrials Average dropping almost 666 points, for its biggest daily percentage loss in 20 months.

It was the biggest daily point fall in the Dow since December 2008 during the financial crisis.

With Friday's rout, Wall Street's three major indexes logged their biggest weekly losses in two years, after closing at record highs the previous week. The S&P 500 and Dow saw their worst weeks since early January 2016 while Nasdaq had its worst week since early February 2016.

Stock price losses accelerated after the US Labor Department reported employment grew more than expected in January with the biggest wage gain in more than 8-1/2 years. The picture of workers commanding higher salaries fuelled expectations that inflation is on the rise, which could prompt the Federal Reserve to take a more aggressive approach to rate hikes this year.

That caused the 10-year Treasury yield to surge to 2.845 per cent, the highest since January 2014.

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Research Report - Technical Analysis: Aristocrat Leisure (ALL)

Anticipating an upside breakout ahead of its HY earnings results in May

Key Points

• Aristocrat Leisure has been one of the better large cap growth stories over the last few years with solid revenues and earnings being generated from the sales of its pokie machines with the majority of its earnings coming from North America. Over the past five years the compound annual growth rate in revenue is 26% and EBITDA has risen by 53% per annum.

• Recently ALL finalised two acquisitions worth around AUD$2b (Big Fish and Plarium) via debt funding. The acquisitions will allow business revenue to be more diversified with 38% being sourced from online social gaming, propelling ALL as the second largest company in the social gaming sector in the world. Mobile gaming is expected to represent the fastest growing segment in the gaming industry.

• With more than 70% of revenue being sourced from North America, ALL is expected to benefit from the US tax cuts announced by Donald Trump which will see corporate rates fall to 21% from 35%. It’s also expected that the lowering of personal tax brackets is likely to see increased spending on gaming which will also benefit ALL over the next few years.

• Following the acquisitions, consensus expect FY18 metrics to rise to:

  • Revenue – AUD$3.3b from $2.4b in FY17 (up 37.5%)
  • EBITDA - AUD$1.2b from $1b in FY17 (up 20%)
  • Underlying NPAT - AUD$663m from $543m in FY17 (up 22%)
  • EPS - $0.95 from $0.78 in FY17 (up 22%)
  • Net debt to equity – 141% from 48% in FY17 (expected to reduce to 63% by FY20)


• Over the past seven months ALL has been consolidating in a sideways range between $20.00 and $24.50 following a strong uptrend which has been in place since 2012. Since September, the stock has been forming an ascending triangle which is a bullish setup pattern. Typically, we tend to see that the breakout occurs in the direction of the prevailing trend, which we anticipate will be to the upside, as the market prices in revenue and earnings growth ahead of the half year results due out in May.

• Resistance can be seen around $24.50. A close above this level will confirm the breakout. Although $25.00 may act as a psychological resistance level in the near term, we would expect this to be overcome with the longer-term uptrend prevailing.

• A support level of $22.50 is likely to act as a buffer where buyers are expected to accumulate the stock on any pullback in the near term. A break below this level would likely indicate further downside is possible with $20.00 acting as a major psychological support level. Either of these levels could be used to place a stop loss to protect downside risk.

• On a breakout above $24.50 we have an initial pattern projection target of around $28.50 which we estimate by projecting the recent trading range of $20 to $24.50 upwards.

• Consensus currently has an overweight rating and an average price target of $26.10.

 

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Research Analyst
Michael Ron

Research Report - Avanco Resources Ltd (AVB)

December Q Production Report, 2017

Avanco Resources Limited (ASX:AVB) released its production report for the December (4th) Q. Although AVB achieved production guidance for copper and gold, production issues with blast hole drilling has kept costs higher than anticipated. Higher costs are likely through the first part of Q1 2018 but should stabilise and improve through Q2.


KEY POINTS

• Higher open pit mining costs: AVB are still dealing with blast rig drilling issues in Stage 2 that has resulted in the mining being focused towards the periphery of the ore body where confidence in tonnes and grade are lower. As a result, lower ore tonnes were mined at a lower grade than predicted in the reserve model. Increased waste movement, lower grades stockpile adjustments during Dec Q resulted in increased unit operating costs q-o-q.

• Production guidance achieved: However, AVB comfortably achieved FY17 copper (14,101 tonnes) and gold (11,366 ounces) updated production guidance. Management wisely dialled back the processing plant during December to undertake maintenance and to take the pressure off the open pit. This has allowed the mine to accelerate waste movement and replenish ROM stocks before the onset of seasonal rains. An updated resource estimate for Antas is scheduled for completion by end Q1 to define the FY2018 production schedule and FY18 production guidance. We anticipate lower production costs as FY18 progresses.

• Operating Cash flow: AVB still made operating cashflow of US$2.1m for the Dec Q resulting in US$16.8m for the FY. However, US$5.6m was received post 31 December. AVB had cash of US$24.3m at Q end after having paid US$3.9m in capex, project and exploration costs plus US$2.0m for the accelerated acquisition of CentroGold.

• Development studies on-track: AVB also increased resources at it’s Centro Gold project by 45% during the Q with the addition of a maiden resource at Chega Tudo. The Centro Gold Scoping Study is due for completion during Q1 with a decision on licencing anticipated by the end of Q2. The Pedra Branca Feasibility Study remains on track for completion by end Q2 2018.

• New exploration project, Pantera: Subsequent to the end of the Q, AVB agreed terms for an option to acquire (100%) the Pantera Project from Vale at an acquisition cost of $0.04 per lb. Pantera is located 110km west of Pedra Branca and close to existing infrastructure. The project has the potential to significantly add resources and reserves and fits into AVB’s strategy for expanding its footprint of development projects in the Carajas of Brazil.

• Slight change to Antas valuation: We make some changes to our forecast costs, recoveries and metal production for Antas to reflect higher operating costs in 1H 2018. We drop our valuation for Antas slightly to US$114.2m compared to our original valuation of US$124.9m. This drops our AVB valuation by 1c per share (rounded) to $0.22 from $0.23.

• Recommendation: We maintain a Buy recommendation on AVB and a valuation of $0.22 per share, assuming development of CentroGold and Pedra Branca.
 

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Head of Research
Paul Adams

AWE Limited (AWE) - Takeover Update

Another bidder ups the ante on the AWE bidding war

 

30 January 2018

Current Price: $0.98

 

Key Points

 

·         Mitsui bids for AWE at $0.95 a share: Mitsui has made a bid for AWE at $0.95 a which values AWE at $602 million. The new offer is a 14% premium to MIN bid which has been accepted by the AWE. Apparently, the bid from the Japanese group already has the backing of the foreign review board.

 

·         Mitsui is one of the largest corporate groups in the world: Mitsui is a large Japanese conglomerate who has a share in four producing oil and gas producing projects in Australia. Mitsui is also the one-sixth owner of the North West shelf liquified natural gas project as well as having a share of four producing oil and gas projects in Australia. Mitsui also has a history with both the Waitsia asset and AWE in that it partnered with AWE when it bid for $200m Waitsia in 2016 when Origin owned it.

 

·         The offer was unexpected, considering the AWE board had already recommended the MIN offer: The offer was unexpected as the AWE board had already recommended that shareholders accept the MIN offer. If the AWE board accepts the new Mitsui offer AWE will have to pay MIN a $5.2m break fee as per the agreement with MIN. The MIN offer was a combination of MIN shares and cash compared to the Mitsui offer which is all cash.

 

·         The CERCG all-cash offer is still in the mix at $0.73 per share: The original CERCG all-cash bid of $0.73 is still valid, and the bidder’s statement was lodged on the 25th of January.

 

Our View

 

We believe this process is positive for several reasons. It shows oil and gas assets are once again attractive after a prolonged period of inactivity from companies and investors. Its also a strong validation of the Perth Basin and the value of the Western Australian gas market. The wells in the Waitsia field have performed very well with a well flowing at 90mmscf/d which is an unprecedented flow rate. These positive factors have contributed to large player wanting to own and develop assets in the basin. This is a positive development for all companies operating in the area.

 

Research Analyst
Michael Eidne

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SPECULATIVE BUY – Potential 10% or more outperformance, high risk
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