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Weekly Insights (30-3 September 2021)

Economics here and abroad…

The ASX200 Index closed last week up 0.42 per cent with most of the gains coming through on Friday after resources and utilities led the way. A number of less popular stocks finished the week strongly including Ramsay Healthcare (ASX:RHC), up 3 per cent and Whitehaven Coal (ASX:WHC) 7 per cent after a strong trade surplus was announced. Over the five days both cyclicals and defensives staged a rebound, with real estate and energy both adding over 2 per cent and outperforming their more popular growth counterparts. The underlying trend, however, was all about the removal of dividends from the market making it difficult to get a true read on the direction of the market. Motorcycle part retailer AMA Group (ASX:AMA) entered an unexpected trading halt amid speculation over their solvency but quickly corrected the market confirming they have over $60 million in cash. The week also marked the end of August, with the market gaining for an 11th straight month, finishing 1.9 per cent higher. Real estate was the standout in August with the likes of Charter Hall and Vicinity Centres recovering despite the extended lockdowns in NSW and Victoria. National Australia Bank (ASX:NAB), Macquarie Group and South32 all reached new 52 week highs this week, buoyed by the better than expected GDP result. Over the next 2 months the market will see roughly $40 billion in dividends being paid from the August Reporting Season.

What we think…

Locally, reporting season is over and with it brings dividend season. There was an interesting chart in the Coppo Report (below) which shows roughly $40bn in dividend payments coming through this month with the fourth and fifth weeks recording the largest payment figures.

A general theme throughout reporting season was the massive dividend cuts, management have once again rained cash on income starved shareholders. On the one hand, this is a positive for those relying on this income for their lifestyle, on the other, it suggests these companies have little confidence in their ability to reinvest this capital. Either way, it leaves investors with a difficult decision; Reinvest? Diversify or Cash out? With reporting season just finished in both the US and Australia, the market will now focus on economic data for direction, in which case volatility is likely to increase; for this reason I’d be holding onto some cash for the time being. This week saw another rebalancing of the ASX indices, the highlights being the inclusion of Resmed into the ASX50, and removal of two old-fashioned commodity businesses in Ampol and AGL Energy. Pinnacle Investment Management finally re-joined the ASX200 after an incredible year, joined by EFTPOS terminal provider Tyro Payments, which replaced embattled tech company Nuix and G8 Education. Australia’s GDP result was another surprise, gaining more than double the level predicted by economists courtesy of significant government support. Despite the positivity it is clear that conditions are becoming more difficult for businesses meaning investors must choose wisely with their capital. 

Highlights for August

• BHP Group (ASX:BHP) fell by 6.9 per cent on Friday which equated to $3.09 cents per share, which naturally attracted headlines. Yet the company was trading ex-dividend for a payment of $2.74 cents per share, which shareholders will receive in a few months’ time excluding, meaning the actual fall was just 35 cents per share or 0.7 per cent.
• Woolworths (ASX:WOW), was down 63 cents with a dividend of 55 cent on Friday.
• There are rumours this week that GQG Partners, a $100 billion fund manager and one of the leading investors in the  world may be listing their company via IPO on the ASX before the year is out.
• Metcash (ASX:MTS) reported weaker sales that send Woolworths (ASX:WOW) down in unison.
• All eyes were on the June quarter GDP result last week, with the spread of predictions ranging from the beginning of another recession to a more positive below trend result. Once again, the consensus was wrong and significantly so, with expectations of 0.3 per cent growth beaten by a result that saw the Australian economy expand by 0.7 per cent. It is somewhat surprising that Government spending was the key driver in the June quarter, with public investment contributing 0.4 per cent and government consumption also 0.3 per cent higher. The result took the 12 month expansion to over 9 per cent, however, the worst is still to come as lockdown hit in the second quarter and show no signs of easing until well into November.
• Harvey Norman (ASX:HVN) waited until the final day of reporting season to deliver their report, and it was a blockbuster. Profit jumped 78 per cent to a record $1.18 billion, benefitting from less discounted and the removal of support to franchisees that are now booming. The group’s underappreciated property portfolio was revalued $291 million higher and now exceeding $3 billion. Management confirmed they had repaid their Job Keeper receipts given the strong year and also cut the dividend to 15 cents form 18 in 2020, sending shares down 3.2 per cent.
• Retail sales in Australia are down 19 per cent in July and August from 2020 levels.
• Cettire (ASX:CTT) reported a quadrupling of revenue to $124 million and narrowing their loss to $300,000. The company was under pressure from brokers in recent months concerned about the sustainability of sales.
• China’s services sector has contracted in August with manufacturing growth also slowing as another round of lockdowns hit the economy.
• Resimac (ASX:RMC) reporting an 87 per cent increase in profit to $104 million on the back of a 29 per cent increase in interest income. The growth is coming from a boom in home loans as the residential construction sector continues to drive the economy, in the short-term at least.
• Sandfire (ASX:SFR) also reported a record profit, up 132 per cent to $170 million with physical production and inflated copper prices creating the perfect storm. Shares were flat despite the record dividend.
• Fortescue’s (ASX:FMG) strong earnings result; more than doubling its final dividend to $2.11 per share, representing a 10 per cent yield on its own. The company has been a clear beneficiary of the surging iron ore price with revenue 74 per cent higher and net profit more than doubling to US$10 billion.
• Temple and Webster (ASX:TPW) is among one the few such companies to broach their pandemic highs after reporting an 85 per cent increase in revenue. Earnings jumped 141 per cent and most importantly the group made a profit, albeit of just $14 million on revenue of over $300 million. The group’s more diverse product range has seen sales growth continue at 49 per cent into August.
• Altium (ASX:ALU) was the latest tech darling stock to feel the brunt of earnings season, falling on a weaker than expected result. The company reported revenue growth of just 6.4 per cent but a tripling of profit to US$107 million. Recurring revenue growth, or subscription based, was 29 per cent stronger and now represents two third of their total. The group has struggled in a highly competitive environment.
• Crown (ASX:CWN) barely moved as revenue was confirmed to have fallen over 30 per cent in the financial year, resulting in a $261 million loss. The dividend remains on hold whilst the multiple Royal Commissions are underway but takeover offers are clearly in the wings once the air has cleared.