Tensions Ease | Sky City to BUY | BHP Result

17 February 2022

Global markets were higher overnight, with US markets (S&P 500 index +1.6%) recovering as fears of war between Russia and Ukraine subsided on fresh developments, and as investors increased their risk appetite heavily sold off shares bounced back strongly.  President Putin met with German Chancellor Scholz in Moscow and at a news conference Putin said “we want to resolve this issue now, right now or in the near future, through negotiations, peaceful means”.

Tech shares lead gains, the US tech Index NASDAQ rising +2.5%, while travel and reopening plays also performed strongly. Upstart reported its fourth quarter result after the bell, and in after hours trade surged +30% after its strong earnings and guidance beat across all sectors, and announcement to move into Business lending a US$644 billion sector.

The Energy sector which had benefited from the tension sold off, with WTI crude oil prices slipping -3.6%.

Economic data was overlooked by the market but for the record, US Producer Price Index (PPI) inflation data were much higher than expected, with the headline rate showing a broadly based increase of double the expected monthly rate at +1.0% month on month, taking annual inflation to +9.7% for the year – reiterating the urge for Fed interest rate hike rates.

European Markets (Stoxx 600 index +1.3%) traded higher with the healthcare sector leading gains, with most sectors and major bourses trading in the green.

On the data front, Eurozone GDP grew 0.3% in the fourth quarter for a 4.6% year-on-year increase. This marked an expected slowdown from the previous quarter as the reintroduction of social restrictions to contain the omicron Covid-19 variant weighed on activity.

Sky City Entertainment (SKC:NZX/SKC:ASX) 
SkyCity shares were up +2.8% after initially falling lower on Monday after reporting their 2022 half year result, which was heavily impacted by covid-19 restrictions in Auckland and Adelaide.  Group revenue fell 35.6% from last year down to $289.8m, resulting in a net loss of -$33.7m profit, Auckland property which accounts for 62% of Sky City’s group was closed for 107 days of the half. 

We upgrade Sky City to a BUY now that we see upside potential for the stock once covid-19 restrictions ease, supported by robust local demand once current restrictions ease, and Auckland returns to “green light” (which proved to be promising over its short stint). Also encouraging is Australia opening up borders to international travellers by the end of February benefiting their Adelaide property. The near-term for New Zealand would still be challenging – but with a view that there would be no more lockdowns and current restrictions should ease by the second half of 2022,  Sky City have adequate balance sheet strength to look through it, but cash burn appears to be a minimal risk from here on out.

We anticipate partial international tourism recovery in 2023 and no local restrictions as key catalyst which would drive upside for Sky City. We feel more comfortable with our BUY rating which is supported by local demand and attractive upside as a reopening play – albeit with NZ opening international boarders much later than other countries.

BHP Group (BHP:ASX) 
BHP shares initially rose after delivering a solid result for the first half 2022 financial year, as a slump in iron ore price later in the session weighed down. BHP announced a record a record US$1.50 per share dividend well ahead of expectations. The result was driven by higher sales prices across its major commodities and near record production, BHP reported a +27% increase in revenue from continuing operations to US$30.527 billion and a +57% jump in underlying profit to US$9,715m.

We remain BUY rated on BHP, as an attractive dividend stock, demand from China and with a high inflation environment both supportive of iron ore prices.

Australia & New Zealand Market Movers

The Australian market was up yesterday (ASX200 index +0.3%).

Gold and oil stocks lead the market higher benefiting from higher commodity prices as oil surged to fresh 7-year highs and investors flock to safe-haven gold amongst the current volatility., utilities and financials also performed well. 

Beach Energy lead the market higher up +8.4% after reporting higher half year profit buoyed by higher realised gas and ethane prices.

Bendigo and Adelaide banks jumped to 5-month highs after posting improved profitability. Westpac rose +4.8% leading the major banks after completing tis $3.5 billion share buy back. 

JB Hi Fi rose +5.4%, after announcing it would return $250m back to shareholders via off-market share buyback, with its half year results which did not provide any surprises given earlier updates.

The New Zealand market (NZX 50 index -1.8%) was down, joining the global sell-off, with most shares trading lower, growth and interest rate sensitive stocks continue to be beaten down.

Contact Energy was one of a handful of stocks to end the green edging up +0.1%, after delivering a sound half year result which didn’t contain too many surprises strong operating earnings (EBITDAF) of $322m in-line with recent update due to solid energy generation in the South Island, and guided to pay a full year dividend of 35 cents per share. 

Sky City shares fell -3.7%, posting a -$33.7m loss after being adversely affected by lockdowns, and could not provide guidance due to current restrictions but said debt covenants remain supportive with $258m of available liquidity.


3 Things Markets will be Watching this Week

  1. The Latest US Fed meeting minutes,  US housing and retail sales data.
  2. GDP data from Eurozone.
  3. Locally earnings season heads into full steam, with names reporting including Contact Energy, Sky City,  Boral, Jb Hi Fi, Telstra, Ansell, BHP Billiton, EBOS Limited,  Fletcher Buildings, Skellerup, Vicinity Centres, CSL Limited, Goodman Group (Australia), Fortescue Metals, Wesfarmers, Woodside Petroleum, Crown Resorts, QBE Insurance and Cochlear.
Global markets were higher overnight, with US markets (S&P 500 index +1.6%) recovering as fears of war between Russia and Ukraine subsided on fresh developments, and as investors increased their risk appetite heavily sold off shares bounced back strongly.

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