Wall Street Slips | Scales Update

14 December 2020

Global markets were mixed overnight (S&P 500 index -0.8%) as US stocks slipped from an all-time high on concern over dimming prospects for fresh stimulus amid resurgent coronavirus cases.

Wall Street erased early gains after Senate Majority Leader Mitch McConnell said Democrats “poured cold water” on his offer to set aside some issues in an aid bill and rebuffed Treasury Secretary Steven Mnuchin’s $916bn proposal.

Elsewhere, the pound trimmed gains ahead of key Brexit talks. Boris Johnson said no British prime minister could accept the European Union’s demands as he prepared to head to Brussels for a showdown with the European Commission’s Ursula von der Leyen on Wednesday. At the same time, UK health authorities have advised people with a "significant history of allergic reactions" should not be given the Pfizer/BioNTech coronavirus vaccine after two health care workers experienced symptoms after receiving a shot the day before.

Scales Corp (SCL:NZX)

Scales reaffirmed its 2020 earnings guidance at the lower end of NZ$30-36m signaling a normalisation of apple market conditions combined with labour cost pressures as a result of seasonal shortages. As expected, the earnings mix will differ from previous years, with likely a stronger performance in Pet Food offsetting difficulties in Horticulture from lockdown implications on apple prices, particularly in China earlier in the year. The company will pay a dividend of no less than 19 cents per share (4% dividend yield).

SCL’s management typically guides conservatively and we view guidance as conservative albeit justified given the margin of error in providing guidance ahead of the key harvest period and the elevated seasonal labour risks. SCL's Mr Apple business has large seasonal labour requirements. Whilst the recent government announcement to allow a further 2,000 RSE workers into the country, alongside the 6,000 already in place, goes someway to alleviate labour shortage risks, there remains a significant shortfall which will need to be filled by domestic residents.

The standout performer in 2020 has been the Food Ingredients division, namely the pet food businesses, with travel bans and lockdown policies driving higher pet ownership. We are also watching the elevated level of the NZ dollar, which could hurt Scales as an exporter, but overall we remain BUY rated.


Australia & New Zealand Market Movers

The Australian market was in the green on Wednesday (ASX 200 index +0.6%) as Australian consumer confidence reached a ten-year high in December. CSL was up 2% after the AstraZeneca COVID-19 vaccine CSL will manufacture was found to be "safe and efficacious" in a Lancet paper.

At an aviation summit, Virgin Australia CEO said: “It will never have been cheaper to travel in this country”. She said Virgin Australia will target domestic market share of 33%-34% to justify the airline’s investments and “we fully intend to hang on to roughly a third of the market. It’s going to be very competitive”.

Fortescue chief executive Elizabeth Gaines suggested that Chinese iron ore stockpiles will continue sliding and that the extraordinary rally in prices for Australia's most important export commodity has further to run.

The New Zealand market rallied yesterday (NZX 50 index +1.3%) as the NZX hit a new record as Infratil shares surged following revelations overnight that a major Australian pension fund was bidding to buy the firm. The Infratil board rejected the offer saying it undervalued the company, but reports suggest the Aussie pension fund may circle back with another bid. Infratil ended the day up +19%, while Tilt Renewables (majority owned by Infratil) was up another +17%.

Genesis Energy has committed to cut its greenhouse gas emissions to target 1.5 degrees of global warming it will ramp up replacement of baseload thermal generation with renewable energy, although stopped short of aiming for 100 percent renewable energy.

Cancer diagnostics firm Pacific Edge rose another +10% to 98 cents as it continued its weeklong rally. Kiwifruit business Seeka has lifted its 2020 profit guidance from NZ$9-12m to NZ$15-17m, attributed to improved trading, cost savings and gain on sale from Aussie orchard sale & leaseback.

3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​COVID related news flow, including vaccines are likely to dominate headlines for another week.
  2. US inflation data is released on Thursday.
  3. US fiscal stimulus package talk also continue to drag on.


US stocks slipped from an all-time high on concern over dimming prospects for fresh stimulus amid resurgent coronavirus cases.

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