Category: Australia & NZ

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Australian households are spending more than they are earning | ABC

Interesting chart from Stephen Letts at the ABC:

Thomson Reuters: Australian Consumption v. Disposable Income

Household consumption is growing at a faster rate than disposable income, with savings rates (net savings / disposable income) falling. This is clearly unsustainable. Savings rates, which include compulsory super contributions, fell to just 1.0% in Q2, with savings outside of super being rapidly eroded.

That relationship is even more unsustainable now house prices are falling, according to Deutsche bank’s Phil Odonaghoe.

“Strengthening housing wealth accrued by the household sector has been an important factor supporting the decline in saving. With house prices now falling, that support has been removed.”

From Households are now spending more than they are earning — and that’s not sustainable | Stephen Letts | ABC.

Hat tip to Macrobusiness.

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Gold stocks face selling pressure despite plunging Aussie Dollar

The Yuan continues to test support at 14.5 US cents.

CNY/USD

The Dollar Index recovered above support at 95. Respect of support would confirm another advance, with a long-term target of 103, but bearish divergence on the Trend Index still warns of selling pressure.

Dollar Index

Gold is testing resistance at $1200/ounce but Trend Index peaks below zero warn of strong selling pressure. Respect of the descending trendline would indicate another decline with a long-term target of the 2015 low at $1050/ounce.

Spot Gold in USD

The Australian Dollar is plunging, having broken short-term support at 72 US cents. Trend Index peaks below zero indicate strong selling pressure. Expect a test of the 2015/2016 low at 70 US cents.

Australian Dollar/USD

The falling Aussie Dollar may cushion local gold stocks, to some extent, from weaker gold prices but the All Ordinaries Gold Index (XGD) continues its downward path. Tall shadows on the last three candles flag selling pressure. Breach of short-term support at 4550 is likely and would offer a long-term target of 4000/4100.

All Ordinaries Gold Index

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ASX 200: Banks & miners lead correction

The ASX 300 Banks index continues to test support at 7700 after respecting its new resistance level at 8000. Breach of support is likely and would signal another test of primary support at 7300.

ASX 300 Banks Index

The ASX 300 Metals & Mining index broke short-term support at 3600 and is headed for a test of primary support at 3400. A sharp fall on the Trend Index warns of selling pressure.

ASX 300 Metals & Mining

The ASX 200 is testing medium-term support at 6150. Bearish Divergence on the Trend Index warns of (secondary) selling pressure and breach of 6150 is likely. Expect a correction to test the rising long-term trendline at 6000.

ASX 200

I avoid commercial banks because of higher funding costs, falling credit growth and rising default risk. Also hold few mining stocks because of exposure to volatile commodity markets. I remain cautious on Australian stocks, holding over 30% cash in the Australian Growth portfolio.

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Gold reacts to Dollar weakness

The Yuan continues to find support at 14.5 US cents.

CNY/USD

The Dollar Index is testing support at 95. Respect of support would confirm another advance, with a long-term target of 103, but declining Trend index peaks warn of selling pressure.

Dollar Index

Gold rallied to $1200/ounce but failed to make further progress. Respect of the descending trendline would warn of another decline with a long-term target of the 2015 low at $1050/ounce.

Spot Gold in USD

The Australian Dollar respected resistance at 73.50 US cents, warning of another decline. Trend Index peaks below zero reflect selling pressure.

Australian Dollar/USD

The All Ordinaries Gold Index (XGD) continues its downward path, tall shadows on the last two candles reflecting selling pressure. Breach of short-term support at 4550 is likely and would offer a long-term target of 4000/4100.

All Ordinaries Gold Index

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ASX 200 hesitant

The ASX 300 Banks index found support at 7700 and retraced to test its new resistance level at 8000. Respect is likely and would confirm another test of primary support at 7300.

ASX 300 Banks Index

The ASX 300 Metals & Mining index made a weak retracement to test 3750, suggesting strong selling pressure. Breach of short-term support at 3600 is likely and would test primary support at 3400.

ASX 300 Metals & Mining

The ASX 200 rallied above the 6300 watershed but selling pressure is evident in the tall shadow. Bearish Divergence on the Trend Index warns of selling pressure. Breach of 6200 is likely and would warn of a correction, testing 6000.

ASX 200

I am wary of banks because of higher funding costs, falling credit growth and rising default risk and cautious on Australian stocks, holding over 30% cash in the Australian Growth portfolio.

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ASX 200 hurt by banks, miners and politics

After a false break above 8100 the ASX 300 Banks index completed a bull trap with reversal below 7900. Expect a test of primary support at 7300.

ASX 300 Banks Index

Resources stocks continued their correction, with the ASX 300 Metals & Mining index finding short-term support at 3600. Follow-through is likely and would test primary support at 3400, with fears of a US-China trade war undermining commodity prices.

ASX 300 Metals & Mining

The ASX 200 retreated below its new support level at 6300. Political upheaval may have contributed but penetration of the rising trendline would warn of a correction (already signaled by bearish Divergence on the Trend Index).

ASX 200

I remain wary of banks because of higher funding costs, falling credit growth and rising default risk and cautious on Australian stocks, holding over 30% cash in the Australian Growth portfolio.

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Support for the Yuan lifts Gold

China’s PBOC stepped in with belated support for the Yuan, holding the line at 14.5 US cents.

CNY/USD

The Dollar retreated, with the Dollar Index testing support at 95. Respect of support would confirm another advance, with a long-term target of 103 — if central banks like the Fed and PBOC don’t intervene.

Dollar Index

Gold rallied as the Dollar weakened, testing resistance at $1200/ounce. Respect of the descending trendline would warn of another decline with a long-term target of the 2015 low at $1050/ounce.

Spot Gold in USD

The Australian Dollar also rallied, reducing the benefit to local gold miners.

Australian Dollar/USD

The All Ordinaries Gold Index (XGD) continues its downward path, with a long-term target of 4000/4100.

All Ordinaries Gold Index

China is conserving its capital account as best it can, after losing $1 trillion in foreign reserves supporting the Yuan in 2015 – 2016.

China: Foreign Reserves excluding Gold

But failure to support its currency is sure to antagonize the Trump administration and elicit further trade tariffs.

….Trade is drying up and China is stuck with debt it can’t repay or rollover easily. This marks the end of China’s Cinderella growth story, and the beginning of a period of economic slowdown and potential social unrest.

~ Jim Rickards at Daily Reckoning

If that’s the case, expect the Dollar to strengthen and further gold weakness.

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APN Outdoor (APO) – Sell

Stock: APN Outdoor
Symbol: APO
Exchange: ASX
Financial Year-end: 31 December
Latest price: $6.70
Date: August 24, 2018

Sector: Consumer Cyclical
Industry: Marketing Services
Investment Theme: Structural Trends

APO is positioned to benefit from the rise of technology, with fast-growing revenues from digital billboard advertising.

Company Profile

APN Outdoor is a leading outdoor advertising company with 28% market share in Australia and 30% in New Zealand.

Competitors & Markets

APO will rank second behind the combined 50% market share of oOhmedia and Adshel if their proposed merger goes ahead.

APO is active in billboards (55% of total revenue), transit (26%), airports (11%) and rail (8%). Digital advertising grew 18% in FY18 and contributes 42% of total revenue, with 134 large format digital panels across Australia & New Zealand. Non-digital advertising declined 5% due to loss of the Melbourne Yarra trams contract (won by JCDecaux).

Outdoor advertising sites are secured by 5- to 10-year leasehold contracts and may be subject to competitive bidding on renewal of larger sites.

Financial performance

Revenue Growth

Revenue growth slowed to 4% in HY18, compared to an average of 6.7% over the previous two years.

Revenue and EPS

Earnings per share (right-hand scale) declined slightly from FY16.

Margins

EPS decline is a result of tighter margins.

EBT Margins

Cash Flow

Cash flows declined relative to net income as APO invested in digital displays.

Net Income & Free Cash Flow % of Revenue

Dividends

APO declared fully franked dividends of 7 cents (H1 FY18) and 12.5 cents (H2 FY17), amounting to a 2.9% dividend yield.

EPS and Dividends

Capital structure

APO uses debt to fund new digital billboards, maintaining a net debt to equity ratio of 35%. This could render it vulnerable in an economic down-turn.

Net Cash/(Debt) % of Equity

Weaknesses

Outdoor advertising revenues can be volatile over the economic cycle.

Recent management changes leave APO with new leadership after the retirement of CEO Richard Herring (having led the group since 2004) in September 2017 and CFO Wayne Castle in January 2018.

Takeover Offer

French outdoor advertising giant JCDecaux tabled a AUD 6.70 per share cash offer in June 2018, to acquire 100% of APO. The offer was recommended by the APO Board of Directors and is likely to go to a shareholder vote in October 2018.

The Australian Competition and Consumer Commission’s (ACCC) cleared the proposed acquisition on August 23 but the deal still remains subject to a number of conditions, including approval of APN Outdoor shareholders, court approval, the Foreign Investment Review Board (FIRB) and the New Zealand Overseas Investment Office (OIO) approval, and the satisfaction or waiver of certain other conditions outlined in the Scheme Implementation Agreement lodged with the ASX on 26 June 2018.

APO is expected to declare a fully franked special dividend of up to $0.30 per share just before the takeover. The AUD 6.70 offer per share would be reduced by the cash amount of the dividend but shareholders would benefit from up to $0.13 per share in franking credits.

Valuation

With expected annual revenue and earnings growth of 7%, APO is projected to deliver low annual returns of 6%, or 7.6% after franking credits.

Technical Analysis

APO broke resistance at $6.00 after the JCDecaux offer. Twiggs Momentum (50-week) and Trend Index (50-week) recovered to positive territory but remain weak.

Twiggs Momentum & Trend Index

Conclusion

Sell at $6.70. Prospects of 13 cents in franking credits are not sufficient incentive to hang on to APO.
[**Note added 26/08/18: Clarification is required regarding the upcoming dividend of 7 cents plus 3 cents franking credit. Sellers prior to the ex date of September 5th will forego the dividend. Sellers after the ex date are likely to receive a price, probably 7 cents lower. They may wish to wait until September 5th for the benefit of the 3 cents franking credit but need to weigh this against the increased uncertainty.]

Disclosure

Staff of The Patient Investor may directly or indirectly own shares in the above company.

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ASX 200 breakout

Strong earnings reports and continued interest in major banks lifted the ASX 200. Rising Trend Index troughs signal buying pressure. Breakout above 6300 offers a short-term target of 6500.

ASX 200

The ASX 300 Banks index followed through above 8100, indicating another rally with a medium-term target of 8500 (long-term 8750).

ASX 300 Banks Index

But the ASX 300 Metals & Mining index broke support at 3750, warning of a test of primary support at 3400. Fears of a US-China trade war are likely to undermine commodity prices.

ASX 300 Metals & Mining

I am also wary of banks because of higher funding costs, falling credit growth and rising default risk .

So the primary trend on the ASX 200 is up but I remain cautious, holding over 30% cash in the Australian Growth portfolio.

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ASX 200 buying pressure

The ASX 300 Metals & Mining index continues to test support at 3750. Breach of support and the rising trendline would warn of a correction to 3400.

ASX 300 Metals & Mining

The ASX 300 Banks index recovered above 8000, the false break suggesting another rally, targeting 8500.

ASX 300 Banks Index

I remain wary of banks, however, because of higher funding costs, falling credit growth and rising default risk .

The ASX 200 continues to test resistance at 6300. Rising Twiggs Money Flow troughs signal buying pressure. Breakout above 6300 would present a short-term target of 6500.

ASX 200

The primary trend is upward but economic indicators and the potential impact of a US-China trade war make me cautious. I hold more than 30% cash in the Australian Growth portfolio.

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