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02/02/18
       
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Australian equities were up strongly with the ASX200 posting its best daily gain in four months as investors anticipate strong half year earnings results for ASX listed companies. The ASX200 finished 0.9% higher with all sectors up apart from telecommunications. The large cap miners and big four banks all saw buying support to trade between 1 and 2% higher.

GUD Holdings (GUD) was one of the best performers, rising by 5.8% after the manufacturer of consumer parts recorded a 61% lift in NPAT on the back of a strong performance from its Automotive division and following the sale of its Oates business.

Vacuum cleaner retailer Godfrey's (GFY) slumped by 17% after reporting that sales over the Christmas period were worse than expected. Are vacuum cleaners for a Christmas present a good idea? Like-for-like sales were also seen falling by 6.2% for the six months to December. The softer underlying performance is expected to lead to a further impairment of goodwill and intangibles which is likely to lead to a net loss after tax of $59m for the half year. Since listing at $2.75 GFY has slumped by more than 80% and last traded at 32c. The Shaver Shop (SSG) has also been another poor performing discretionary retail IPO with the stock last trading at 47.5c and is also significantly down from its $1.05 listing price.


International Markets

Stocks on Wall Street gave up gains as bond yields rose and technology stocks retreated ahead of a host of high profile earnings after the bell.

The market opened lower, a day after the Federal Reserve kept interest rates unchanged, but raised its inflation outlook for the year and flagged "further gradual" rate hikes. Currently the market has priced in three rate hikes for 2018.

Strong reports from S&P 500 companies so far have pushed up analysts' fourth-quarter profit growth estimate to 13.7%, from 12% at the start of the month, according to Thomson Reuters data.

Amazon share's lept by 6% in after hours trading after reporting that quarterly sales surged by 38% over the winter holiday season while Apple missed revenue expectations.

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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.
 

To read the full report CLICK on the image below:
 

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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Recommendation Definitions

SPECULATIVE BUY – Potential 10% or more outperformance, high risk
BUY – Potential 10% or more outperformance
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months.

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