The Not So DAILY BULLETIN 28 September 2021 No.426

The Not So DAILY BULLETIN 28 September 2021  No.426

Top Stories  

Tuesday saw the ASX 200 fall 109 points to finish at 7276; however, this is 21 points lower than the last Not So, so the market seems to be trading in a range. 

We have been indicating that we were likely to see more volatility in the market, and we have seen three one per cent drops this month. There have only been six for the year. 

While the market was overreacting to the Chinese Evergrande issue last week, it seems to be looking for headwinds rather than the tailwinds we’ve enjoyed in the past 18 months. 

There were a few reasons for today’s move.

1. Iron ore had rallied over the last couple of days from $93 to $119 (up 7% last night), but Singapore future dropped the price 7% due to 80 Chinese steel mills being closed for maintenance.
2. Strong oil price is putting energy pressure on significant consumers.
3. Some researchers are reducing Chinese GDP forecasts.
4. US Bond rates have climbed 0.2% to 1.50% in recent days. The last time Bonds rose quickly in Feb/Mar 21, high PE stocks reduced (technology & healthcare).
5. US Senate GOP blocking debt ceiling legislation. 
6. September is breaking the 11 months in a row of positive markets. Down about 3.5% for the month. There have been some bright patches, Woodside, up 23%, Macquarie Group up 8.5% this month. 

We are still Optimistic, but volatility is likely to persist.   

Morgan Stanley (MS) – Peak earnings. 
Overall market profits or earnings continue to fall – MS look at what this has meant for positioning in the past. Defensive factors perform well, but so does momentum stocks. On the sector side, Consumer Staples, Healthcare and Real Estate outperform, while Materials lag.

Last month, MS noted that earnings headwinds were emerging despite a solid results season – with iron ore price collapsing, lockdown-related disruptions for domestic industrials, and incremental headwinds for the Banks.

They asked, Have Earnings Peaked?

A month later, the answer to this question is clearly “yes”. Earnings revisions remain negative, and EPS levels are falling, both across forward years and on a 12MF basis. In growth terms, weakness is most apparent in FY22, which has fallen from 20.7% to 18.4%, but MS top-down models suggest a growth rate of 12% may be more appropriate. This means further profit downgrades are likely.  

Transurban Rights issue – existing shareholders only
Transurban Group (TCL) has announced a renounceable entitlement offer to raise approximately $4.0 billion in additional shareholder capital. The proceeds of the offer will be predominantly directed towards the acquisition of the remaining 49% equity stake in the WestConnex project from the NSW Government. This project covers 70 kms in road network connecting Sydney’s western suburbs with Sydney Airport, the CBD and Port Botany.

Major terms of offer announced by TCL are as follows:
– The offer will be renounceable, thereby allowing eligible shareholders the option to sell their entitlements should they decide not to take up the entitlement.  
– Eligible retail shareholders will be able to subscribe for 1 new Transurban securities for every 9 securities held on the 23rd September 2021.  
– The price of shares under the entitlement offer is $13.00. This is an 8.1% discount to the current market price of $14.14.  
– A Retail Shortfall Bookbuild will take place whereby eligible shareholders will receive proceeds for any entitlements not taken up or sold on the secondary market.

Shareholders have the following 4 options in relation to the offer:
1. Take up some or all entitlements via the standard retail offer, closing 8th October.
2. Sell entitlements on the ASX prior to the close of business 1st October. (code TCLR)
3. Do nothing and receive any proceeds created from the sale of entitlements in the retail shortfall book build.

Investment Considerations
The fundamentals of TCL remain sound, and the company has an impressive track record of value creation via developments of a similar nature to the WestConnex project. Current broker recommendations are 2 BUY 4 HOLD 0 SELL.

If not taking up the rights, waiting for option 4 where the rights will be sold and the money paid to shareholders with no brokerage. 
Any participation in the Entitlement Offer should be subject to an assessment of individual circumstances and tax positions, as well as advice and transaction costs.  

Chinese property
The Evergrande property default has receded from the headlines of the Australian media. There are still ongoing issues but not the scale that the media were running last week when comparing this to a Lehman’s moment and the start of a new Global Financial Crisis (GFC).

Updated view from AMP’s Shane Oliver
There are basically four reasons why a restructure of Evergrande is likely:
– The Government can’t allow a collapse in property prices as it would destroy much of the wealth of Chinese households.
– A collapse in the economy and property sector on the back of the pandemic could trigger a surge in social unrest.
– A collapse in property construction would be contrary to the Government’s desire to make housing more affordable.
– And the Chinese Government saw the damage allowing Lehman to go bust caused and will have learnt from that.
– The “resolution” of a Renminbi debt payment due on 23rd September and the relative calm in China’s own debt markets are possibly signs that the Chinese authorities are working towards a restructuring. While a default on its $20bn in US dollar debt would be big, it’s not out of line with corporate bond defaults in recent years and well below Lehman’s $140bn default.

If Evergrande does collapse, it’s likely to have a knock-on effect which could slow Chinese growth, but that’s a BIG IF and it assumes the Chinese government doesn’t have the ability to provide assistance through changing rules or financial injections.

There are some researchers who have started down grading China’s GDP. 
Financial Planning News
Insurance changes
New Income Protection policies are changing from October 1. APRA has legislated changes due to financial losses the industry has occurred in recent years. APRA has said the policies must be profitable for insurers to offer them. Therefore there is a raft of changes being made to new policies as the benefits offered weren’t viable. We are also seeing premium increases to existing policies.     

Employer Super Guarantee Contributions  (SGC)  
From 1/7/21. The SGC compulsory super payment is increasing from 9.5% to 10%.

Minimum Pension payment kept at half normal for FY22
The Federal Govt has extended the temporary halving of minimum pension payment to 30/6/22. Minimum pension payments from Account-Based Pensions were expected to return to normal from 1/7/21, but the PM announced the extension due to ongoing COVID issues. 

Super Concessional Contributions  
The maximum contribution is increasing from $25,000 to $27,500 from 1/7/21. This includes the employer SGC, salary sacrifice or personal tax-deductible contributions. 

Super Non-Concessional Contributions 
The maximum contribution is increasing from $100,000 to $110,000 from 1/7/21. These are only contributions made where you aren’t receiving a tax benefit.   

Other Stories   
– Aust vaccinated 27,109,766 (25,445,232)  7 day average 285.2k – highest (297.5k). The highest daily total vaccines is 389,182 (16 Sep). 76.7% (over age 16) have had one shot, 52.6% (over age 16) have had two shots. The figures in brackets are from the last Not So update. 
– Australian retail sales decreased 1.7% for the month. This is the 3rd negative month in a row (lockdowns).
– Origin Energy’s value in UK energy provider trebles to $1bn.  ORG is only worth $7-$8bn. 
– The US political circus continues with Senate Republicans (GOP) blocking a bill to raise the debt ceiling. This could cause some concerns as the US Government could shut down by year-end if this isn’t dealt with.  

Broker Target Price changes 
Goldman Sachs

Ord Minnett/JP Morgan 
Origin Energy (ORG) increased from $4.60 to $4.65


Morgan Stanley

Sonic Health (SHL) increased from $40.50 (lowest broker) to $41.50
Bell Potter/Citigroup
Brambles (BXB) decreased from $13.58 to $13.35  

Today’s Sector Movements
Best –   Energy +4.3% 
Worst –  Helathcare -3.6%   

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 89.62% to 89.9%. The CORE fell below 90% for one day, but then rose again. After 3 days it has again fallen below 90%. History has shown this is a reasonable entry point from a buying perspective. The market can fall further in the short term but when the index falls below 90%, it’s provided good value over the last 12 years.   

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 34.83% to 34.81%
FY22 decreased from 6.23% to 5.9% 

Most expensive – CBA 112.8%   
Least expensive – BHP 68.5%     

The CORE Watchlist is still mixed with 4 (4) stocks trading above 100% while 8 (8) are trading below 85% (AMP BHP BXB CWN LLC NEC ORI RIO). (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). 15 out of the 30 CORE stocks are trading below the lowest broker target price. Value to be found. 

AMC current price $16.29    Broker range $17.50 to $20
AMP current price $1.03       Broker range $1.15 to $1.35
ANZ current price $27.62     Broker range $28 to $34.50
BHP current price $36.87     Broker range $45.90 to $60
CWN current price $9.47      Broker range $10.35 to $15
GMG current price $21.55    Broker range $24 to $26
JBH current price $44.34     Broker range $46 to $55
LLC current price $10.79     Broker range $11.40 to $16.52
NAB current price $27.49    Broker range 27.50 to $31
NEC current price $2.67      Broker range $2.80 to $3.50
NXT current price $12.46     Broker range $14 to $15.50
ORI current price $11.69      Broker range $13 to $15.70
RIO current price $97.47     Broker range $117 to $153 
TLS current price $3.93       Broker range $4 to $4.50 
WBC current price $25.31   Broker range $26.50 to $30
ORG removed  

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 is indicating the Banks are fully priced. 

The Banking Index decreased from 97.7% to 97.7%. 

The table below shows the forecast dividends.

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 2.17% 140.8 5.10% 146.2 5.29% 153.3 5.55%
CBA 298.0 2.87% 350.0 3.37% 397.2 3.82% 418.2 4.02%
NAB 60.0 2.18% 123.2 4.48% 132.0 4.80% 137.2 4.99%
WBC 31.0 1.22% 117.0 4.62% 123.7 4.89% 134.3 5.31%
MQG  430.0 2.37% 470.0 2.60% 554.2 3.06% 577.4 3.19%  

And referring to nice dividends. Below is the expectation from brokers regarding BHP & RIO.   
FY21 cps % FY22 cps % FY23 cps %
BHP 371.67 10.08% 476.17 12.91% 339.00 9.19%
RIO 1628.33 16.71% 1199.83 12.31% 936.33 9.61%

Please note RIO is Calendar Year (CY). Cents per share (CPS) 

Plus franking.   

Other Indicators 
US VIX Index decreased from 24.36 to 18.76.  The index dropped back to pre Evergrande levels, suggesting market isn’t worried about knock-on effects.  Normal range of 10-17.
Iron Ore increased from $93.03 to $119.31. The price has rebounded over the last 3 days. $93.03 was the recent low.  Brokers expecting an average in 2022 of $129 fallen from $138.5.  ALL-TIME HIGH of $237.57. 
Copper increased from $4.22 to $4.29. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1781 to $1751. Record high $2063.  
AUD/USD increased from 72.52 to 72.68. It may go lower if China is slowing and iron ore reduces?   
USD/CNY decreased from $6.47 to $6.46. Strongest in 3 years at $6.37. 
Asian markets – MIXED    
US 10 year Bonds increased from 1.31% to 1.51%. Bond yields starting to rise again. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond increased from 1.87% to 2%. The highest level 2.47% for 18 months.  
German Bonds increased from -0.31% to -0.22% Hit a low of -0.9%. Highest for some time -0.11%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds increased from 0.028% to 0.057%   
Aussie Bonds 10 year Bonds increased from 1.26% to 1.48%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.023% 2 year 0.031% 4 year 0.59% 5 year 0.79%. 15 year Bonds 1.9%. Global interest rates have jumped sharply in the last couple of days. 
Oil prices increased from $71.60 to $76.14. Higher point in a while.    
Tungsten remained at $303mtu. EQR updated their resource with much higher grades.   

This week & next week 
Last “Not So” opened in 7 Aust states (excl NT) & US 2 states (California South Carolina)

This week – Completing review meetings 

Next week – Doing the same.
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125 End St Deniliquin NSW 2710
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