The Not So DAILY BULLETIN 22 April 2022 No.472

The Not So DAILY BULLETIN 22 April 2022  No.472

Top Stories  

Friday, April 22, the ASX fell sharply by 120 points or -1.6%, to finish at 7473. This brings the ASX back within the recent trading range of 7000 to 7500 as it tried to break higher over the last couple of days.

On Tuesday, we are likely to see the market lower again as the ASX future is lower after the DOW sold off nearly 1000 points and Iron ore fell in Singapore by 11%.

There is a range of reasons for the recent weakness: the Russian invasion, higher inflation, supply chain issues, increasing interest rates, higher commodity prices, labour shortages & Chinese COVID  lockdowns; however, companies seem to be weathering the storm. US reporting season has been reasonable so far, but investors are concerned about the rate of interest rate hikes by the US Federal Reserve. 

The Chinese COVID lockdowns are sending a short term signal that demand may be weaker. It will depend on how long the lockdowns are in place as China continues to target a ZERO COVID strategy. 

The US VIX index (fear index) has moved to 28, at the high end of the range.  In recent years a number higher than this has been a good entry point into the market (contrarian indicator). We will be watching closely. 

Optimism may be a little light on this week as negative headlines appear to be stronger. Australia has its quarterly inflation figure on Wednesday. If it’s bad, the market may sell-off.    

Investment Outlook 

Provincial Wealth’s – Investment Committee Chair – Brad Matthews provided his investment outlook.

Inflation expectations and interest rates adjusted particularly sharply over March. The movements on bond markets appeared to acknowledge the central bank’s commitment to managing inflation and ultimately “normalising” the interest rate structure.
Despite the magnitude of the bond yield increase, equity, property and infrastructure markets held up remarkably well last month, in contrast to a past tendency to sell-off in response to tighter monetary conditions. As suggested by the U.S. Federal Reserve Chairman, Jerome Powell, if economic fundamentals are strong, the increase in yields should not derail economic growth and company earnings. Share markets appear to have accepted this logic for now, which is reinforced by economic data that continues to show underlying strength.
However, outside of the change in interest settings, other risks to equity markets have also heightened over the past quarter. In particular, cost increases are likely to place pressure on the profit margins of many businesses; whilst the rising price of consumer staples (e.g. energy and food) will act to reduce consumer spending in other more discretionary areas.  These pressures were already in existence prior to the Russian invasion of Ukraine – however this military conflict has heightened their severity.
Given the bounce back in share prices over recent weeks, it is arguable as to how much of the increased risk of prohibitive cost pressures are factored into equity market valuations. As such, a more cautious approach to equity market exposures may need to be considered. More defensively positioned sectors are not necessarily the attractive risk minimising option they were a few months ago, as valuations have risen quickly. Global listed infrastructure, for example, has outperformed the broader global equity market by 12.3% over the past 3 months.
A geographic region that does stand out as offering potentially attractive valuations is Asia, and more specifically, China. One of the few economies not to be in a monetary tightening phase, Chinese authorities have indicated a willingness to do what is required to stimulate their economy to achieve growth targets. For various reasons, this policy commitment is not reflected in share market valuations or sentiment, with the Chinese equity market now trading 15% below the level recorded one year ago – compared with a positive 11% for the broader global equity market.

Another investment class now offering more attractive valuations is Australian fixed interest duration. Three-year government bond yields at 2.3% appear particularly compelling and somewhat detached from consensus economic forecasts and central bank guidance around the path of cash interest rate increase. It may be that the recent ceasing of the RBA bond purchase program, and the uplift in overseas yields, has resulted in local bond yields rising above what is justified by fundamentals. Hence, an opportunity to introduce more duration into fixed interest portfolios should be considered, given the size of the margin now on offer above variable cash interest rates.  

Stock valuations 

While equity markets are seeing increased volatility due to the Russian invasion, higher inflation, supply chain issues, increasing interest rates, higher commodity prices, labour shortages & Chinese lockdowns.

The Australian market has continued to be seen as a safe haven and has outperformed most of the other major markets in recent months. Overall, this has made us a little more cautious regarding investing in the recommendations, and we continue to take a drip in approach. 

While global indexes still look fully priced with Price to Earnings ratios (PE’s) well above long term averages, our Core Watchlist provides some insights that not all things look overpriced and value lies in some areas. 

Firstly, the CORE Watchlist is currently at 92% (which suggests the market has an 8% upside over the next 12 months. In March, it dipped below 90% when the ASX dropped to below 7000. Historically when the CORE is below 90%, it’s a good entry point. 

Based on the current research, the following stocks in the CORE Watchlist look reasonably priced.

1. Amcor (AMC) – industry – packaging. Target price $18.44, trading at 87% of target price (TP).  Profit growth FY22 11% & FY23 5%. PE 13.8 times. Gross yield 3.98%. Broker research 5 BUY 1 HOLD 0 SELL (5-1-0). Amcor passes any cost pressures on as it’s part of their contracts which should help them manage inflation. 

2. ANZ Bank (ANZ) – industry – banking. Target price $29.60, trading at 93.9% of target price (TP).  Profit growth FY22 -4% & FY23 9%. PE 12.7 times. Gross yield 6.65%. Broker research 4 BUY 2 HOLD 0 SELL. ANZ cheapest of the banks. Results are coming in early May

3. BHP  – industry – materials. Target price $53.33, trading at 90.9% of target price (TP).  Profit growth FY22 34% & FY23 -6%. PE 8.5 times. Gross yield 12.26%. Broker research 5 BUY 1 HOLD 0 SELL. World’s largest miners with huge cashflow. Energy assets being demerged to Woodside.    

4. Goodman Group (GMG) – industry – property trusts. Target price $26.88, trading at 87.9% of target price (TP).  Profit growth FY22 22% & FY23 14%. PE 25.9 times. Gross yield 1.27%. Broker research 3 BUY 2 HOLD 0 SELL. Global property development & manager of industrial warehouses. Continues to deliver 10% profit growth. Internet shopping has continued to grow the demand for warehouses. 

5. Macquarie Group (MQG) – industry – global investment bank. Target price $226.90, trading at 91.5% of target price (TP).  Profit growth FY22 37% & FY23 -7%. PE 19.8 times. Gross yield 3.46%. Broker research 4 BUY 0 HOLD 0 SELL. Global investment bank. Likely to receive a upkick from energy prices. MQG has a history of underpromising and over-delivering.  

6. Nine Entertainment (NEC) – industry – media entertainment Target price $3.54, trading at 79.8% of target price (TP).  Profit growth FY22 21% & FY23 8%. PE 14.3 times. Gross yield 5.47%. Broker research 4 BUY 1 HOLD 0 SELL. Exposure across all media forms. Election spending will help. 

7. Santos (STO) – industry – energy Target price $9.80, trading at 82.7% of target price (TP).  Profit growth FY22 83% & FY23 21%. PE 9.1 times. Gross yield 3.23%. Broker research 3 BUY 3 HOLD 0 SELL. Energy prices are likely to remain high. 

8. Wesfarmers (WES) – industry – retail Target price $54.88, trading at 89.8% of target price (TP).  Profit growth FY22 -9% & FY23 13%. PE 22.6 times. Gross yield 4.93%. Broker research 1 BUY 5 HOLD 0 SELL. High-quality business, suffering due to supply chains and cost inflation. Never looks cheap but a little unloved in recent months. Good quality management.   

BHP/Woodside demerger

BHP is expected to receive WPL shares at completion and determine a fully franked in specie dividend of the WPL shares to BHP shareholders, where BHP shareholders are expected to be entitled to one WPL share for every 5.5340 BHP shares they hold.

WPL shares will increase from a market cap of A$32.7bn (1.45% 200 Index weight) to approximately A$63.6bn (2.82%) based on the last close price of A$32.90 (April 8,2022). Based on WPL’s share price on April 6,2022, the implied BHP Petroleum value is US$23.4bn, which implies the in-specie dividend would be US$4.62 (A$6.2) with US$1.98 (A$2.65) franking credits per BHP share (US$10bn total franking credits)

Listing dates 
Thursday May19,2022- WPLgeneral meeting to vote on whether to approve the merger.
Wednesday May25,2022- First day (commencement of trading) BHP shares trade ex-dividend on ASX
Wednesday, June1,2022- Completion and in specie dividend payment date.
Thursday, June2,2022- New Woodside Petroleum shares start trading on ASX  

Provincial Wealth Management – New Licensee 

We have sent the agreements away; we will be limited to how much information we will have access to. We have been informed that this might mean a period without access. So far, so good.   

Other Stories 
– Australian Federal Election May 21. At the start, Sportsbet: Labor $1.30 Coalition $3.10. Today Labor $1.70 Coalition $2.10. Albanese out with COVID. 
– Russian coal exports down 17%.
– World Bank cuts 2022 GDP to 3.2% from 4.1% (growth was 5.7% in 2021.
UBS expects inflation Wednesday 1.6% for quarter and 4.5% for year. 
Citigroup expects inflation to be 1.8% quarter (headline) and 1.2% (underlying). Year headline 4.7% and Core 3.4%. RBA will pay attention to the CORE numbers.  

Broker Target Price changes 

Ord Minnett/JP Morgan 
Brambles (BXB) decreased from $12.25 to $11.95 
Rio Tinto (RIO) decreased from $118 to $116
Transurban (TCL) decreased from $15.40 (highest broker) to $15

BHP increased from $51.80 to $54.30
BXB increased from $10.05 to $11.07
RIO decreased from $117 to $114
TCL increased from $14.29 to $14.42 

Morgan Stanley
BXB increased from $9.50 (lowest broker) to $10.20  (still lowest broker)
Computershare (CPU) increased from $25 to $28.20 (highest broker)
CSL increased from $302 to $310
Santos (STO) increased from $10.40 to $11 (highest broker)

BHP decreased from $61 (highest broker) to $60 (still highest broker)
Lend Lease (LLC) decreased from $12.32 to $12.22
TCL decreased from $14.96 to $14.86
Woodside (WPL) decreased from $31.30 to $29.50

Bell Potter/Citigroup
BXB increased from $12.12 to $12.29
BHP increased from $48 to $56
RIO increased from $120 to $135 
STO increased from $8.05 (lowest broker) to $8.13 (still lowest broker)
STO increased from $8.90 to $9.90
WPL increased from $29 to $32.90   

Today’s ASX sector Movements
Best –  Energy +1%   
Worst –   REIT’s (Property Trusts) -0.5%  

Core Watchlist Index 
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 91.97% to 92.68%. 

Overall Earnings Per Share (EPS) 

FY22 increased from 17.14% to 18.01%. Commodity upgrades
FY23 increased from 7.40% to 8% Commodity upgrades  

Most expensive – CBA 108.7% 
Least expensive – Aristrocrat (ALL) cheapest at 69.2%  

The CORE Watchlist is still mixed with 7 (8) stocks trading above 100% while 6 (7) are trading below 85% (highest 17). ALL CSL NEC NXT SEK STO (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 12 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24.  Good value to be found.  

ALL current price $32.66     Broker range $46 to $49
AMC current price $16.04    Broker range $18.14 to $18.83
ANZ current price $27.78     Broker range $28.60 to $30.50
CSL current price $270.86   Broker range $295 to $335
GMG current price $23.62    Broker range $24.66 to $29.50
JBH current price $51.83     Broker range $54 to $62
MQG current price $207.60  Broker range $209 to $245
NXT current price $11.20     Broker range $13.50 to $15.00
RMD current price $32.30    Broker range $33.10 to $40.46
SEK current price $27.57     Broker range $32 to $35
SHL current price $36.41     Broker range $37.30 to $40
WES current price $49.30    Broker range $50 to $59

Removed LLC ORA   

Banking Index 

Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index increased from 100.9% to 101.1%.  

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.16% 142.0 5.11% 143.4 5.16% 153.4 5.52%
CBA 298.0 2.83% 350.0 3.32% 381.2 3.62% 410.4 3.89%
NAB 60.0 1.79% 127.0 3.79% 139.0 4.15% 149.6 4.47%
WBC 31.0 1.28% 118.0 4.87% 120.2 4.96% 130.8 5.40%
MQG  430.0 2.11% 470.0 2.31% 656.0 3.22% 636.8 3.13%

Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.   

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 6.89% 430.60 8.88% 348.00 7.18%
RIO 1444.00 12.71% 1292.50 11.38% 993.50 8.75%  
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)    

Other Indicators (movement since the last Not So)
US VIX Index increased from 24.26 to 28.21. In a rising interest rate environment, the new trading range is likely to be 17-28. 
Iron Ore decreased from $154.85 to $150.85 Brokers expect an average in 2022 to be $142 up from $138 last month.  ALL-TIME HIGH of $237.57. Dropped heavily in Singapore on Monday down 11%.  
Copper decreased from $4.73 to $4.58. However, it hit a NEW ALL-TIME HIGH earlier this month of $5.03 
Gold increased from $1976 to $1933. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD decreased from 74.39c to 72.38c. USD stronger on higher interest rates from the US Federal reserve.       
USD/CNY increased from $6.37 to $6.50. $6.31 lowest since 20014. USD stronger 
Asian markets – DOWN   
US 10 year Bonds increased from 2.80% to 2.97%. Higher inflation is pushing rates up. The recent high is 2.97% (3 year high). US 30 year Bond increased from 2.87% to 2.95% The highest level was 2.95%. US Federal Reserve is increasing rates and may increase by 0.5% at the next meeting, plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 2.44% to 2.64%  The gap between the 2 yr and 10 year was 0.36%. It has narrowed to 0.31%, but not inverse.  
German Bonds increased from 0.80% to 0.97%. The highest point in several years 0.8%.  Higher spending, higher inflation.  Only the 1 year Bond is now negative.
Japanese Bonds increased from 0.24% to 0.25%    0.25% highest in some time.   
Aussie Bonds 10 year Bonds increased from 3.08% to 3.12%. Lowest point 0.68%  Recent high is 3.12% 
Other Aussie Bonds 1 year 1.68%  2year 2.40% 4 year 2.84% 5 year 2.93% 15 year Bonds 3.31%.   Rates have risen again. Interesting to see the quarterly inflation number.
Oil prices increased from $100.15 to $101.75.  It reached $125. If sanctions are placed on Russian oil and gas, prices might move higher; however, some Russian oil will find back door ways of entering the market which will bring oil prices down.   
Tungsten – China increased from $335-$347 to $342-$353mtu. Europe & US increased from $345-$352 to $348-$359mtu  

This week & next week 
Last “Not So” opened in 5 Aust states (excl NT WA & ACT) US 5 states (California, Massachusetts South Carolina, Virginia & Connecticut) & UK. 

This week – April reviews/ Licensee issues. 

Next week April reviews/ Licensee issues

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