David Novac – Trading Day – 14 Feb 2017

  • February 13, 2017
  • Kate Sheehan

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

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Trading Day – 14 Feb 2017

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Video Transcripts below

Video Transcript: Trading Day – 14 Feb 2017

Video 1

Leanne Jones: -guest hosts who join me in the studio this afternoon. David Novac from Wealthwise Education and Scott Phillips from the Motley Fool. David and Scott, thank you very much for joining us.

Just a thought on this read. Obviously, it’s just breaking so you haven’t had much of a chance to get across it yourself, but overall it looks like the trend of this data, this positive momentum is continuing.

Scott Phillips: Yes, very much positive momentum Leanne, and as you say there really is a good gain in those inflation numbers. Now, we’re used to in Australia inflation being a bad thing, in China it kind of talks to the changes in the economy, the movements around where people are spending money. How the Chinese economy is being created.

We know the big risk in China is it needs to become a consumer economy, and out of an investment economy, and that transition. It is at unprecedented levels historically, so, China’s government has got a lot to do to try and do it without causing undue problems.

Good news for the market there is that the CPI numbers are decent, the PPI numbers are very strong, this does talk to by the way the changing nature of the Chinese economy. Back in the day China was the low cost economy. It was where you went to have things made, manufactured, created.

These days that producer price inflation, increasing with time, makes China slowly, but surely, less price competitive against its competitors. So it has to encourage this move again towards local consumption, internal consumption economy. Rather than a pure investment and manufacturing economy.

Leanne Jones: I guess that raises the question then about what it means for monetary policy as well, if they look to start tightening financial conditions. Just a thought from you David, do you think it’s any surprise, because obviously, we’ve been seeing this pick up in commodity prices, so is it any surprise seeing continuing, rising inflation?

David Novac: No, I don’t think so. Just like Scott was saying, we’re seeing this move up, an inflationary trend that I think is going to eventuate this year. Particularly in the US and we’re seeing the price increase that demonstrates those numbers.

So, I think that was expected, and like you said, solid number.

Leanne Jones: Yes, absolutely. Alright, well in fact we’ll be bringing in Chris Weston a little bit later in the program for more analysis of those figures, so we will come back to that China data in a moment. Let’s get back to the market though, just check in and see how we are tracking right now.

The ASX 200 up 0.3%, approaching those 21 month highs there. SMP futures extending their record gains as well. So that is certainly helping out and our big banks and miners doing very, very well off the back of that. And it looks like maybe that 5,800 target is now in reaching distance, 5,784, Scott.

Scott Phillips: More good news from the US, more good news at home and again the Chinese data over the weekend was good. The numbers today, a shot in the arm for the market. So, adding it all together, there’s a lot of optimism on the market. Trump trade continues largely unabated.

We’ve had a little bit of a wobble over the last week or two, but very much still the sense of commodity and construction boom remains largely unchecked. The iron ore price of course, the 9 in front of it, and looking towards triple figures.

There’s a lot of optimism, a lot of positive momentum around the economy now. Whether that’s sustainable, whether we get a bit ahead of ourselves is the open question. But as you say, we’re now within a throwing distance of 5,800.

Leanne Jones: Yes, and a lot of macro, global factors I suppose, playing in. But then of course, internally we’ve got reporting season, we’ve got CBA, Telstra, the big ones coming out this week. So that’s really going to give us a better idea I suppose of where the index heads form here.

David Novac: Yes, especially tomorrow with CBA reporting. The sentiment, particularly in the US market, is extremely bullish. I follow the Investor’s Intelligence reading, and it has a bullish sentiment, and last time it got up here, it’s above 85% right now, usually you have to be a bit cautious.

There’s usually a correction when sentiment gets extreme, as it is right now. So a little bit of caution, we’re approaching that major resistance of 5,800 on the index. So, maybe it’s time to take some profits, we’ll wait and see. But tomorrow’s going to be the big day, with CBA reporting.

Leanne Jones: Yes, it really looks like any pullbacks we’re seeing right now, are being bought. And the market’s just continuing to grow higher and higher.

Scott Phillips: Totally, as you both said too. The banks, the Commonwealth bank this week, but the banks in particular are really going to determine where the market goes. And I have to say, if we don’t continue to see big gains across the market, I think it’s time that investors look a little bit below just the headline numbers.

The banks, the financial services companies, we know about 44% of the index, so where the bank goes, is effectively where the index goes. That’s great when the banks are riding high. But when the banks aren’t riding high though, that doesn’t mean that no one’s making money or no one’s getting share price gains or no one’s doing better business. It just means that it’s not at the top end of the market.

We’ve seen the banks, Bankwest came back yesterday on how it’s assessing investor loans, in terms of reducing the negative gearing impacts or eliminating those from its assessments. I wouldn’t be at all surprised to see the banks dragging the chain on earnings growth over the next four or five weeks.

That doesn’t mean that they’re terrible investments, it certainly doesn’t mean that the index is terrible. But if the banks don’t get decent share price growth, we’re not going to see those big gains in the index, and I think that’s where you might be a bit mislead in terms of looking at the big numbers, the big ASX 200, or All Ord’s numbers, they might be going too far too fast, if the banks are stable, but there might be a lot of work, as you know, the old duck screaming on top of the water, a lot of stuff going on beneath the surface with those mid-cap and small-cap companies.

So, even if you’re someone who looks at the index, who watches the ASX 200. Just be careful to look beneath that as well and see where there’s opportunity, because I think there’ll be plenty there.

Leanne Jones: Okay, excellent. Let’s move on, and check in on the best and worst performers in today’s session. We’re going to start off with the top movers there, we’ve got Aconex right at the top, up 6.5%. you’ve got South32, 4.3% higher. Southern Cross Media, Asaleo Care and Henderson Group.

Interesting that not a lot of reporting companies in that list there. Aconex up, what 6.5%, they haven’t come out with any major news there today, but look Scott, anything that sort of stands out in that top movers.

Scott Phillips: Aconex is interesting in that it really does, this stock got knocked out 48% on bad results last week, or bad results relative to what the market was expecting, and since then it’s pretty much gathered pace and gained more ground, and gained more ground. There is definitely a lesson here for investors who are possibly throwing out the baby with the bathwater.

I think it was up about 5% yesterday, and another 6.5% now. There are times when it is worth saying, look the results were disappointing, and they were, but did it really deserve a 50% haircut, probably not, and certainly if you’re an investor, buying a quality business at a low price, you have been getting benefits from Aconex through that period of time.

South32 of course, mineral pricing, commodity pricing really, you know, a different commodity basket to most of the miners we look at, we’re normally looking at the big iron ore guys, the coal guys, the petroleum guys. South32, almost everything else, the rest of the basket. So decent numbers there.

And look, the Asaleo Care numbers, I wouldn’t be surprised at all if this has been a pre-earnings jockeying. There has been some concern about what will happen with that business. I think you might find that there’s a bit of speculation going on there, a bit pre-earnings.

Leanne Jones: Okay, interesting. David, anything that stands out to you?

David Novac: The South32 with base metal prices is rallying strongly, nickel is up, copper is jumping. So, that one in the resource sector is really the one that’s lifting all the boats right now.

Leanne Jones: And we’ve been talking about Fortescue today as well, just under $7, it’s sort of nudging those 52 week highs there as well.

David Novac: Well that darling iron ore futures just keeps going and going. For how long, who knows. But the resources have been on a tear. And Aconex, I was just looking, I haven’t been following the stock that closely, but it’s certainly had a very sharp correction, a gap down, that you can see was in January or February, from their announcement.

But I’d prefer to wait to see their earnings come through. It was trading at extremely high multiples at the peak there. There’s a high expectation obviously, and since then it’s fallen sharply.

So, I’d rather see their numbers come out first, before I make further comment.

Scott Phillips: For what it’s worth Leanne, that share price has jumped almost 50% from its low point post that announcement. As an investor, if you own the stock at $8.75, which is the yearly high, you’re still well and truly under water, you’re licking your wounds. But equally, if you like the story, and you like the company, the market’s probably oversold it, and I think it probably did. It’s about a 40% odd, 45% gain since the lows of $2.87. A very nice bounce back, I’m not saying always buy the bounce, I’m not saying always buy the stuff that the market throws out, because often the market does get it right. But if you do see an attractive opportunity for an oversold business that does have some fundamental strength, that is the time to go shopping.

Leanne Jones: Okay, excellent. You had another thought David?

David Novac: Yes, just one more on Aconex, because it’s got 189 million shares on issue, so it can move around quite a bit, for liquidity reasons.

Leanne Jones: Okay, sure, so something to be mindful of, that’s good. Let’s move on and just check in on the worst performers in the session there. You’ve got Cochlear, it’s down about 2.3%, JB Hi-Fi of course, after it’s result yesterday. Treasury Wines down 2.9%, a rise in Sky Network TV as well, but Treasury Wines is an interesting one.

Their first half profits, more than doubling on the back of strong data, from China and the US, they seem to be on track, pretty positive outlook for the company, so why do you think they’re under so much pressure today?

Scott Phillips: Tough crowd investors, I’ll tell you what. If you’re Treasury Wine Estates, you’re going guys, look at this great, fantastic result. And the market says no thanks, and knocks the shares off 3%. This is a story of expectations versus reality, and it’s simply a case of, the market was expecting, last year result was excellent, investors were expecting more of the same this time, and this is simply a matter of investors getting a little bit ahead of themselves.

There’s only so much a winemaker can do, there’s only so much wine you can sell at whatever price. Treasury is a fantastic story. Coming out the back of the South Corp and the Fosters group, it was the ugly duckling for a very, very long time. It’s really got itself together now. The business is doing very, very well. Selling high-priced, premium wines through Asia and the US in particular. Asia remains very much its bright spot. The CEO going to go live in America for the next three, to four months to try and revitalize the American business. That’s only growing about 3%, so if there is reason to be concerned, it’s that its US portfolio, its US sales and marketing effort is not quite delivering what the company would have otherwise wanted.

You want it to fire on all cylinders of course, I’m not a massive fan of him going across to the US, Asia is going to the future, Asia is where the opportunity remains. Of course if North America can get going, it’s the biggest consumer market in the world, so if you do well there, you’re going to do very, very well.

But, selling high-priced, premium Australian wines into China in particular, but Asia more generally, is going to remain the main story in the Treasury Wine Estates story for the next little while. It’s not a buy for us at the moment, I like the company, share price, the 3% today tells you that the investors are getting a little bit ahead of themselves, expecting too much. But I like the company. I think at the right price, it’s one that does have a long term future in Asia.

Leanne Jones: Okay, excellent. It seems to be the case with Cochlear as well, because I think there’s a huge amount of business in Cochlear, I think from around the beginning of December there was a big, big rally in share price, no one seemed to be all that concerned about holding that stock prior to this result. Profits were up 19%, so maybe just a bit of profit taking off the back of a strong move ahead of the result.

Anything that stood out there, Cochlear or Treasury Wine Estates?

David Novac: Well both Cochlear and Treasury Wine Estate, from what I can see on the charts, and looking at the fundamentals, they’re all great businesses, but very highly priced for growth. So, any disappointment, and watch out below.

I would not be buying Treasury Wine Estates up here, with the multiples it’s trading on. It is pricing in that growth that Scott was talking about in China and the US. I’d like to see the numbers first, but it’s just showing me here at the moment that there could be a sharp pull back.

The shares have rallied 200% in the last 2 years. They had a fantastic result last year. Let’s see if they can build on that, but there’s a lot of expectation built in both share prices.

Leanne Jones: Cochlear, a thought from you at all Scott.

Scott Phillips: Again, David made the point, high quality businesses, priced for, if not perfection, priced for a lot. I think the Cochlear result was quite good frankly. 10% unit growth in terms of the cochlear implant units, 16% if you exclude the Chinese contract that it won this time last year.

So, if you can grow your core market, particularly in a medical device area, at 16% a year, it’s not like you can create demand for more jars of vegemite, or peanut butter, or some more toilet rolls, this is genuinely, you either need an implant or you don’t.

So they’ve taken market share, they’ve worked in the developing world to really get significant growth for this business. It’s a really, really impressive result quite frankly, to sell 6 more units than you did last year, just a really, really strong result.

Good products, doing good jobs with the new sound processors as well. I expect Cochlear to do very, very well for a long time to come. It’s got about 5% share of what it considers its addressable market. So, it’s not going to be able to grow twenty fold from here, but if it can grow two, three, four times from here and get to 10, 15, 20% of the addressable market, which it really should be able to.

This is a market that’s not currently having any implants provided to it as technology improves. Another thing is that Cochlear is going to have those clients for four, five, six, seven decades. If you get an implant when you’re 15, 17, 25, 35, and you live to probably 85, 90, 100, you’re going to be in the market. You won’t necessarily have your implant replaced but you’ll have multiple sound processors, the things that actually process and develop the sound, they’ll be able to be replaced every X number of years over the rest of your life, is a very large growing market with lots of repeat purchase.

And by the way, great technology, helping a lot of people hear, quite fundamentally, so let’s not lose the human benefit of that. One of the best companies on the ASX in my view. Not priced cheaply, but I have to say, if you’re looking multiple years out, 5, 10 years out, I think Cochlear are one of the best on the ASX.

Leanne Jones: Okay, excellent. Very good quality there, as you say sticking by their full guidance as well, but it is under some pressure. Now we mention there a rise in JD Hi-Fi, also under some pressure, there are some broker moves on those today after their results yesterday. But we will check in on those later in the program.

We’re going to take a break. Chris Weston from IG will be joining us for a closer look at today’s China data, stay with us.

Video 2

Leanne Jones: -there from KOSEC Kodari Securities. Now we are still taking your calls, 1300 30 34 35 is the number. And we have Tulsi on the line from Sydney. Tulsi, a warm welcome to you, what’s your question for the panel, David and Scott, today?

Tulsi: Hello, good afternoon, I would just like to ask a question regarding South32. I have South32 at the moment, and am looking to buy SeaLink according to the results, so, can you please give me your opinion, thank you.

Leanne Jones: Alright Tulsi, thank you for the question there. Of course, SeaLink reporting today. We spoke with CEO Jeff Ellison earlier. The shares are off about 4.5%. It was a record performance though for the half, and pretty successful strategy I guess in place, to continue growing the business.

Scott Phillips: Astonishing result from SeaLink. They’ve done such a great job since listing. These are the sorts of businesses that are made to make me look silly. I always worry about the capital intensity of the business, whether or not it could contain and grow its tourism related businesses, particularly in Sydney and also in South Australia.

It’s done a spectacular job of both, and made every post a winner. Another set of strong results, and again, a little like some of the companies we’ve already talked about today, this was one that was kind of priced for perfection. Hard to blame the company for that, all they’re doing is just getting it done, and getting it done really, really strongly. But a PE of over 18, 19 times, the market saying, look guys, this is a good result, but not quite good enough to justify the previous price. So, if you held yesterday, or you bought yesterday, you’re feeling a bit poorer today, but this is a company that just keeps on delivering.

This is about $1.33 four years ago, now $4.43, just a great performer. Business is getting it done, shareholders are being rewarded.

Leanne Jones: Of course, inbound tourism I think so key to a company like this. Chinese tourism I think underpinning the growth of the company and the industry as well. Do you have a thought on SeaLink David?

David Novac: I haven’t looked at this business for a while, but just looking on paper, you can see it’s had a pretty good run up here, back to those previous highs, so it’s had a bit of a correction here. I really like this business, and it’s in the right sector, being in tourism, and particularly in the area that Captain Cook Cruises etc.

Tourism has been growing, so I do like the numbers here. If the stock got back down to those previous lows, around $3.90, I reckon it would be a screaming buy myself.

Leanne Jones: Okay, excellent. $4.42 right now for SeaLink, that’s ticket code SLK, for viewers that are not quite sure on that one. Now, Tulsi also had a question on South32, on the flipside, it’s up about 4.7%, we were talking about it a little earlier, one of the best performers, $2.68, I guess it is riding the move high in commodities.

Scott Phillips: It really, really is. This is a commodity story. Look, all the companies in these spaces are riding commodities prices one way or the other. The execution is really important, so you can’t do much about the price. All you can do is manage your cost, manage your operations, manage your business as well as you possibly can, and let the price do what it does, capitalise when it’s up, and try and minimise the damage when it’s down. That’s literally what mining companies have to do.

I like South32 as a diversified miner. I’m not a big fan of miners across the board, as your viewers would well know Leanne. But if you’re going to have a resources play, and you want a diversified resources play, I’d use the phrase I’d used before, put the band back together, I’d grab BHP Billiton, I’d grab South32, put them back together in a portfolio.

If you want resources exposure, and you want diversified resources, I like BHP Billiton as it was in the old business, I like those two businesses separately today. It’s not going to be the most exciting combination, it’s not going to be the highest highs and the lowest lows. But you’re going to get a decent amount of exposure across a broad range of commodities. Run by two very high quality management teams.

You’ll go a long way to try and find a better, diversified base metals play than South32.

Leanne Jones: Alright excellent. Well very, very good run up that we can see in the chart there. What’s your thought on it David?

David Novac: This has just been on a tear with the base metal price. You’ve got to have a view of base metals of course, for South32. But this is up by more than 250% in the last 12 months. I would be waiting for the result before I’d be jumping into this stock.

It’s had a massive run up here, and as long as base metal prices remain elevated it will do well, but let’s wait for the result before jumping in. This week I think the result is.

Leanne Jones: Yes, okay. $2.68 for South32, up 4.7% right now. We’re actually getting an email coming in just speaking of those resources stocks. Greg is asking for the panel’s view on MGX. That is Mount Gibson, and GRR, I think that is Grange Resources, GRR, yes?

David Novac: Two of my favourite stocks.

Leanne Jones: Okay, well he was just sort of commenting that the two seem to be following the likes of Rio, Fortescue, BHP, is now a time to get along with these two?

David Novac: I wouldn’t say time to get along. I got along about 8 or 9 months ago. Mount Gibson, when it was about 18c, 18.5c. Today it’s at 46c. The reason I got into this stock, it was when the iron ore price was much lower, although it wasn’t because of that. It was because Mount Gibson was trading at a 35% discount to cash. Which was around $350 million at the time.

So, I thought what’s a better investment than buying cash at a discount? The board, the management, I felt, did a poor job of capital management, they could have done a share buyback, I questioned them a number of times about preserving capital, I couldn’t see why you wouldn’t preserve capital at 35% discount to your share price, just did not make sense whatsoever.

Now they’ve got $437 million, because they got that insurance claim on that sea wall disaster on Koolan Island, which is one of the highest-grade iron ore deposits the company has got. And even in the world actually.

Now they’re looking at recommencing that, but it’s going to cost about 80-90 million to recommence, so I can see that with the iron ore price, well who knows where it’s going to be, but they will more than likely recommence.

They’ve got an Iron Hill project which is in central West Australia. Very high cost, low grade ore. It’s not shooting the lights out. With the iron ore price being higher they made $10 million last quarter which is not too bad. But now the company, for the first time since I bought the stock, in more than a year, although it’s been more than a couple years that it’s been trading at a discount to cash, that it’s actually above the cash value which is 41c.

So, they report tomorrow, let’s see what the report’s like. But if they recommence that Koolan Island, that production there, and the iron ore price remains elevated, that’s a big caveat, then there’s more upside to Mount Gibson, but you can’t get excited with the mid-West operation.

Grange is another one. An unbelievable one that I looked at. They had $130 million in cash, I bought the stock at 11c, mentioned it on the show several times in the last 8 or 9 months, the stocks now at, I haven’t seen it today, 26c.

Since December actually. I mentioned it as a screaming buy in November, December when it was about 11.5c, 12c. So it’s more than doubled. When they came out with the quarterly result for December, it showed clearly that their cash balance was now $150 million with receivables of $45 million.

So, that’s nearly $200 million. The market cap is north of just $200 million now. But I expect their earnings to be very good. They’re a magnetite producer out of Tasmania. 2.5 million tons. Very high grade pallets. Plus they have the Southdown project in Western Australia, which is a 30 year supply of iron ore. And that’s on the back burner right now, they’re looking for a joint-venture partner.

But the company’s cashed up. I expect they’ll have a great profit of 35-40 million. So, they’re still trading at a fairly low multiple, I would not be a seller of that stock either.

Leanne Jones: Alright, fantastic.

David Novac: Of course, you can take profits. Obviously if you bought Mt Gibson, I’d be taking some money, which I’ve done, actually today. So I’ve just taken some profits.

Leanne Jones: Okay, and then waiting on the result as you say.

David Novac: And I’m holding the rest, and I’m in for a free ride.

Leanne Jones: Okay, well Mount Gibson’s up over 10% there today, and Grange also up just over 8%. We do need to take a quick break though on that note. When we return, we’ll take a look at the broader macro issues. Chris Stone’s David Stokowski will be joining us, so we’ll also check in on all the Asian market action with Bloomberg after this break.

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