David Novac – Trading Day – 31 Jan 2017

  • January 31, 2017
  • Kate Sheehan

David Novac on Sky BusinessDavid Novac, Guest Host on Trading Day, Sky Business, Channel 602

Please join David for his insights on the stock market, share investing, companies and local & global financial trends.

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Trading Day – 31 Jan 2017

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Video Transcripts below

Video Transcript: Trading Day – 31 Jan 2017

Video 1

Nadine Blayney: Welcome back to the program, or welcome if you’re just joining us. We’ll get you across with the local market is doing, it’s a down day, in fact I think the losses that we’re seeing are more significant than perhaps we were expecting at the start of the session. Down by 0.6% to 5,627.

Fortescue though, looking pretty good thank you very much, up by close to 2.5%. The company continuing to take a knife to costs, and it is being seen in its production update.

On the flipside, Virtus Health tanking after issuing a profit warning, as other players muscle into its high margin business. I’m Nadine Blayney, also making news this hour, Navitas reporting solid growth in the education sector in the half year result. We’ll be speaking with the company’s CEO Rod Jones in about half an hour.

And business conditions rebounding in December, that’s according to the latest read coming from the NAB, confidence remaining pretty flat.

Joining me in studio is my guest host David Novac from Wealthwise Education. Perhaps, David, to start the program, welcome, good to be here with you again.

David Novac: Thank you.

Nadine Blayney: Talk to us about the levels that we are seeing in the Australian market. 5,628, down by 0.6%. Clearly we had a negative lead-in from the United States, but it does appear as if there’s a bit of a pullback happening in this market, we’ve lost all of our gains for 2017, what are you charts telling you?

David Novac: It’s telling me that we should be cautious here. I said this when I came back from holiday in early January. I said, the market up here above 5,800 looks a bit stretched, particularly with the banks, and I wouldn’t be surprised to see a pullback of at least 100, 200 points, and that’s exactly what it’s done.

Now with the US market pulling back overnight, we’ve got a pattern, where you’ve got a lower peak. If it breaks below the previous low, which was around 5,600 level, then that’ll confirm there’s a short-term change in trend from up to down.

The key level to watch is if the market breaks below where the previous support breakout was at 5,500 on the ASX 200. That means the trend will certainly be questionable in terms of its bullish momentum.

But right now, the charts are simply telling me not to be rushing into buying in this market. In fact, probably look at taking some profits in particular stocks, especially the resources that have had a good run, and the banks as well.

So, a bit cautious, especially with the US market stretched to where it is at the moment, and the DOW closing above 20,000 for the first time. You’ve got to expect there’s going to be some profit taking in that market, sooner or Later.

Nadine Blayney: Well the DOW now down below that 20,000 level. I know you’re charts man, however I know you look at things fundamentally as well. After your years in the market I suppose you think this is a bit of a healthy correction for the SMP ASX200, and if we do see further pullbacks in some of these resources names, I mean BHP is down by 2.4%, ahead of the financials we expect to pick up, in this next month, are there some great buying opportunities that you think that will be thrown up in the next few weeks?

David Novac: I think there’s always some great buying opportunities, it’s just choosing which sector, and being selective. I’m mainly focused on the mid-cap area, rather than the big end of town. I just think the big end of town looks a bit stretched in valuation. It’s going to be interesting with earning season kicking off next week. A few stocks going ex-dividend, CBA being one of the big ones. And then Fortescue came out with their production numbers today.

But I’ve been focusing on the iron-ore sector, the gold sector and energy. They’re the three sectors that I’ve been playing the most. And there are some good opportunities there. The gold sector is performing very well, given the Aussie Dollar gold price and the cost of production for a lot of these producers, there’s a healthy margin in that sector.

Healthcare and telecoms. The telecoms space looks interesting to me. The likes of TPG and Vocus also look interesting. I mean Bellamy’s-

Nadine Blayney: Yeah, Bellamy’s has seen some buying over the past few sessions.

David Novac: Yeah, I don’t mind that sector either. And I think with Bellamy’s, it could have a good technical bounce back to the $5.50 – $6.00 level. It did get a lot of support after the big drop, after the announcement, there was a lot of buying volume. But the jury’s out on this one until they report.

Nadine Blayney: Yeah, I mean possibly if you’re a trader, but if you’re a long-term holder it still isn’t telling a very good story is it?

David Novac: No, I think you’ve just got to hold on. What’s that saying, be a BHP investor, buy, hold and pray. Not in Bellamy’s in particular, not the right strategy to take going forward.

Nadine Blayney: I guess, no surprise today to see some of those Australian gold plays doing well. We did see a bit of safe haven buying in gold through the overnight period. OceanaGold is up by about 3%, Gold Road, Alacer Gold. Newcrest, one of the only positive movers that we’re seeing on the ASX 300 metals and mining index. Let’s take a look at some of the best performers now on the 200.

So, this is by percentage change, we’ll get David to weigh in. There’s Bellamy’s, told you there’s been some buying, up about 6% today. Fortescue Metals you mentioned, we had its quarterly production report out today, up by 2.5%. What are the charts telling you about FMG?

David Novac: FMG’s been very, very bullish since the beginning of last year. And the uptrend is still intact. The only time you’d say one should exit Fortescue is if there’s a break or close below $5.70, in my view. So it’s still a long way from there at the moment.

And their production numbers that came out were excellent. 42 million run rate shipped. And its costs have come down yet again to US$12.54 per ton, and they averaged around $67.80, which is a pretty good margin. So, it’s pretty hard to be negative on Fortescue while the iron ore price remains elevated.

Nadine Blayney: Let’s take a look though at the flip side of this picture, worst performers. Orocobre, the market disappointed by that company’s update coming out over the last, I believe it was yesterday or the day before, no it would have been yesterday, this being Tuesday, down by about 4%.

Sims Metal Management, had a broker weigh in on that one today, and Navitas in the wake of its half-yearly update, we mentioned that we will be speaking with CEO Rod Jones a little bit later in the program, down aby about 5%.

Fundamentally, how do you view that education story, obviously it has international exposure and also David, what are the charts telling you about Navitas?

David Novac: It’s the code NVT I think?

Nadine Blayney: Yup.

David Novac: Yes, the chart’s looking pretty awful, ordinary I should say. It’s had that high spike back in June, July last year, and it’s taken a huge retracement. The trend is certainly negative. I would not be rushing to buy Navitas at this level. I’ll just have a quick look at their fundamentals here.

Look, their earnings have not been, they’re pretty flat actually. They’ve been flat for the past year, so I don’t know what today’s report said. There are some valuations around $5, but given the stock reaction today…

Nadine Blayney: Well it’s one of those companies that are at the mercy of funding reform. And it does mention vocational funding reform in Australia has had a negative impact. Also unfavourable currency translations. And by the final impact of two closed university partnerships, colleges.

So underlying earnings came in at about 8%, excluding those closed colleges, and only a 1.7% margin increase at its core university partnerships division.

David Novac: Yeah, it’s showing me here on fundamentals that it was trading at a very high multiple. Especially at that previous high, it must have been around 25, 30 times up there. And now, down here, it’s coming back to a normalised earnings multiple that you’d expect for a stock that, especially for one that does not have a high growth earnings profile.

And then these announcements today, saying the rate of growth is likely to slow down further. So, this is not a stock that I would be buying myself.

Nadine Blayney: Okay, now Virtus Health was on one of those worst performers, today it was down by, it’s currently down by more than 17%, this after it issued a profit warning. So, what’s happened is that it’s very high margin business, the company is flagging, that other people clearly want a slice of the pie. Moving into some of its markets in Sydney and Melbourne, and it mentioned Brisbane in particular, so this is the IVF fertility clinic and the treatments that go along with that. Not only an operator in Australia, but also in Ireland as well, but boy the market has taken a very swift and severe reaction to this downgrade coming through.

David Novac: Yes, this one a surprising reaction. It really has been belted. I don’t mind this one. At this level it looks like an overreaction, just on the charts. There’s certainly been a big gap down here today, and from what I know technically, I mean big volume as well, it’s what they call, the technical term is a capitulation.

And that means there’s a surge in selling today, and that usually marks an interim bottom, and you could start to see the stock consolidate here. Normally you can also get a stock like this filling the gap from where it’s gapped down.

So, I would let the dust settle here. But it looks to me like there’s a capitulation, which usually can indicate a short-term low in the stock.

Nadine Blayney: I’d like to just give you a heads up, we’ll talk Aconex next, it’s down a further 1% today, a raft of broker revisions to the company after it’s significantly reduced its full-year guidance. UBS, while maintaining its neutral rating on the stock, has cut its price target by 58% to $3.40 per share. The broker saying that outside of the Americas, UK continues to be weak.

Meanwhile Citi nearly halving its price target, down to $4.95 from $8.69. However it has retained its buy rating on the company. And Credit Suisse still rates the company can perform, a target price of $3.75.

Morgan Stanley, I’ll add that voice to the chorus there, it has also questioned its outlook in the wake of its update, but Morgan Stanley says that it remains cautiously optimistic. Aconex, David, you can’t get past the fact that it’s trading at 55 times expected earnings, so this is still an expensive looking stock.

David Novac: It sure is. A lot of expectation based in this stock, and this is what happens when these kinds of stocks have this kind of expectation factored in, and there’s a negative news item that comes out. It’s not a surprise that we get this kind of reaction, we’ve seen it time and time again.

So, I would avoid this one right now, it looks horrible on the chart, and like you said, the multiples are still very, very high here. I’d prefer to wait to see the reality, which is the earnings coming through, before I commit to buying a stock like this. And I don’t see that fundamentally, and I don’t see that on the chart right now.

Nadine Blayney: Alright, David, great to have your insights coming from the charts there as well, we’ll take a short break, when we return, we’ll get a wrap of the latest economic news. St. George’s senior economist, Janu Chan is joining us live, next.

Video 2

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Live on Sky News Business, this is Trading Day.

Leanne Jones: Hello and a warm welcome to Trading Day Live, where we are taking your calls. The number to ring is 1300 30 34 35, if you have any questions about what is happening today. Now this is what we’re watching, the ASX 200 is under some pressure there, and it’s down to the energy and materials stocks that are dragging the market lower, we’re down about 0.6%.

Navitas shares in focus, the company posting an 18% rise in first-half profit, although those shares are down over 5%, we’ll have managing director Rod Jones, will be live shortly on the result. We’ll also be speaking with Fortescue managing director Nev Power ahead in the program, those shares, you can see, are up 2.4 right now, as it continues to cut costs.

I’m Leanne Jones, also making news this hour, shares in Virtus Health tanking off 17% as the company issues a profit warning. And on the economic front, NAB’s latest business survey revealing a mixed result. Conditions recovering in December while confidence remaining fairly flat.

Joining me in the studio this afternoon is my guest host David Novac, from Wealthwise Education. Now we did mention there the market is tracking lower today, let’s get straight into it, check in on the best and worst performers in the session.

We’re going to start off with the top movers there, just pull them up right now. You’ve got Bellamy’s right at the top there, up 5.7%. Asaleo Care. Fortescue Metals 2.4% higher. That seems to be defying some of the weakness across the materials base. QBE, and Aurizon Holdings also amongst the top movers there.

David, just a thought from you before we move on to the worst performers. What stands out in that list there? There’s a lot for us to digest today, but what stands out in those top movers?

David Novac: Well I look Fortescue. Bellamy’s is obviously a percentage turn, and not surprising after the huge fall it’s had. I’m not surprised that technically it’s having a bounce today, but Fortescue’s production numbers today were very impressive. They keep reducing their costs, their run rate is 42 million tons shipped for the quarter. They’re projecting that they’ll ship 165-170 million tons.

If you do the numbers, they average nearly US$68 a ton, there’s a great margin, so grossed up they’re certainly producing a lot of cash flow. They’ve reduced their debt by a further $1 billion in the December quarter, so now their net debt is $4 billion, which is 30% gearing on their balance sheet.

So, they’ve got a good credit rating as well. Fortescue has certainly gone from going out the back door, to being the darling stock of the year.

Leanne Jones: It has been a phenomenal stock, we’ll get across all that with Nev Power a little later. We’ll actually find out exactly what they’ve been doing to reduce those costs so much. But a phenomenal result, $6.64 right now for Fortescue, up another 2.5% today.

At $6 everyone was saying, look, it looks fully valued, we’re not going to get into the stock, is it going to move higher?

David Novac: Yeah, I can’t see that. Again, it gets back to the iron ore price, what the average price will be for this year, who knows? But if it remains anywhere between US$60 and US$80, then I can’t see Fortescue being overvalued up here, assuming the iron ore remains in that range.

And it depends on where the Aussie Dollar is, but they’re getting a fantastic margin here. I like Fortescue, I wouldn’t mind if there was a pullback to tell you the truth. I mean, I picked this stock at $1.50, I can’t believe I got it when it was above $2. And no one could have forecast the iron ore price, the way it was going to go.

But at these levels, it’s certainly not what I’d call over-valued. But again, with the caveat that the iron ore price remains elevated.

Leanne Jones: Alright, let’s move on. Check in on those worst performers, and it’s probably no surprises that Virtus Health is right at the bottom of the list there off 16.6% right now. Syrah Resources among those movers and Navitas down 5%. Orocobre and Nine Entertainment among those.

But Virtus Health really stands out doesn’t it? The company issuing this profit warning and the market not taking it well today.

David Novac: Yes, I think it might be a little bit harsh today, this selling. It’s just my feeling. Looking at the chart as well, it’s a great business, and it doesn’t deserve to be down this much today, nearly 17%. I don’t think so.

I was just talking about this a moment ago, before 1 o’clock, that there is a capitulation in the selling, so it could mean that this is a short-term bottom. But it does look a little bit overdone to me. I’ve got to say.

The business has been performing very well in the health sector. The numbers that I’m looking at here, return on equity 18%, but again, there’s obviously uncertainty about the competition earnings going forward. But it could be a good buying opportunity.

Leanne Jones: Okay excellent. Well almost 17% there, $5.17 right now. What is your thought more broadly on the health care space? Obviously very good update that’s come from CSL, expectations going into reporting season looking pretty good, certainly for CSL.

But more broadly, the health care space, do you like it at the moment?

David Novac: I don’t play that space very much. I like ResMed and Ramsay Health Care, those big, end of town companies. CSL obviously after their profit upgrade trading update. It certainly surprised the market, and the stock jumped 16% in three days.

So, I’m not sure. In this area just sticking to the big end of town. I do actually like the aged-care sector. I think there could be some good opportunities there. Estia is one that I’m looking at closely with the change of management.

So, that’s in the retirement village sector. Apart from that, I don’t know. There’s not that many that I focus on.

Leanne Jones: Alright, let’s move on, because we are of course taking your calls. 1300 30 34 35 is the number if you have any questions about what is happening today or any stock in particular that you are watching at the moment.

We are also going to get to some of your emails, yourmoney@skynews.com.au. We’ll get straight into it, Michelle is writing in asking, can I have David’s thoughts on AWE off the back of today’s quarterly result.

And if we just take a look at AWE, it is off about 4.1% right now, 58.5c. What is your thought on AWE?

David Novac: I haven’t looked at this stock in a while, but just looking at the stock numbers, the production numbers that came out today. It isn’t that impressive. There was a production drop for the quarter in natural field decline. The earnings before interest and tax for the quarter was much lower than the previous quarter, it came in at 2.6 million versus 16.7 for the previous quarter.

They’ve still got net debt of 20 million, the company, it has a market valuation of about 300 odd million, so to me, it’s not my preferred stock in the energy sector, and the chart doesn’t tell me to buy this stock at all.

I prefer other stocks, the one I’ve been looking at, that I bought, is Sundance Energy, SEA is the code. I got into this stock when it was about 12c, and it’s around 21c today. It’s pulled back actually. It went up to a high of 24c. It’s just pulled back. But this was one I like. They’re looking at production of up to 9,000 barrels per day.

They do have debt, but their interest cover is well and truly covered by their oil production in the US. So, I quite like this one. And their leases as well, I think it’s undervalued, particularly with the recovery in the oil price. So, that’s one that I do particularly like, and it is a smaller cap stock if you look at it compared to WEA. The valuation is slightly lower at about 250 million, but I think it’s got more potential upside.

Leanne Jones: Okay, excellent. Michelle perhaps have a look at Sundance Energy there. Advice from David, thanks for your thoughts on that and thanks for the email as well.

Now we mentioned there that Navitas is taking a bit of a tumble today. It posted an 18% rise in first-half profit with higher student enrolments, offsetting the impact of campus closures. Net profit coming in at $53 million in the period, that was up from $45 million a year earlier, but group revenue took a hit, falling 8% to $479 million.

The education provider reaffirming its full-year guidance, expecting earnings of $164 million, the FY17, which is flat on year, shareholders will receive an interim dividend of 9.4c a share.

Video 3

Leanne Jones: Joining me in the studio is my guest host, David Novac from Wealthwise Education. We are going to get straight into some calls and emails, in fact straight into a viewer email from Jenny. Jenny’s asking, can I please have David’s thoughts on Mount Gibson Iron, MGX is the ticker code there. With cash alone per share at about 40c, why are shares trading below this right now.

So look, Mount Gibson, it’s about 37c right now, what is your thought on MGX?

David Novac: I’ve been in this stock since this time last year. I accumulated a few shares at around 18c, which has doubled since then. I’ve taken half my money off the table on this particular company.

Now, that’s a very good question. As standard, when I was buying the shares at 18c, it was trading at a 35% discount to cash, would you believe. It was just crazy. I phoned the company several times and spoke to their investor relations person and said, why is the board not doing a share buyback, if I give you $100 right now, would you give me back $65? I mean it’s a no brainer really.

So, they said that the rhetoric was that they were looking for opportunities, but I still can’t see where you can get a better opportunity than 35% immediate return. It doesn’t make sense to me at all.

Anyway, they’ve been hoarding a lot of cash. They’ve got now, $447 million in the bank. With a market cap of 410. So Jenny, I think it’s trading at a discount, and has been ever since I bought it, but it’s actually closed the gap now. To answer your question, is the fact that the iron ore price has recovered very strongly.

Their iron-ore operations are not anything to get excited about, they had a 10 million surplus for the quarter. They produced 1.8 million tons for the half-year. It’s the mid-west operation which is a high cost operation, still cash-flow positive. But the jewel in the crown is the Koolan Island operation, which is one of the highest grade iron-ore deposits in the world.

Now they’re talking about recommencing that because they had this cyclone a couple of years ago up there that damaged the seawall and they got an insurance claim, I think it came in late last year of about 118 million, no it was 87 million, and that is what boosted their cash resources.

Now if they get that started, that’s a very profitable long-life mine of 20 years. Then people will get really excited in Mount Gibson, so they’re evaluating that at the moment, and to start it up it will cost anywhere between 80 and 100 million, which they’ve got resources to do.

So, that could certainly spike up a lot of interest back into the company again, and they’re looking at other opportunities. But in the meantime, I’ve got to say I’ve been disappointed with the lack of capital management initiative by the board, as well as not giving a capital return back to shareholders.

Now, the board is dominated by a large Chinese group, they’ve got just under 40% of the shares, so they dominate the share register, and they really pull the strings. That’s probably another reason why institutions have not been terribly au fait with it. But look, that’s my criticism, I think the share price, if they had done a share buyback last year, this share price should have been 50, 60c by now.

Leanne Jones: Alright

David Novac: So, that’s my view. I’ve sold half and I’m holding the other half.

Leanne Jones: Right, well we hope that answers your question, I’m sure it does, some great insight there. Mount Gibson, it’s up about 1.3% right now, at about 38c as we mentioned. So, Jenny thanks so much for the question there.

We’ll take a break, when we return, we’ll still be answering your questions, do give us a ring, 1300 30 34 35 is the number, you can email us, yourmoney@skynews.com.au.

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