Global markets were higher overnight (S&P 500 +0.4%) as investors focused on signs of economic recovery amid further tension with China, lacklustre virus drug-test results and the threat of further civil unrest in America. Investors are mostly looking past the violent protests across major US cities.
Gilead Sciences fell after its drug remdesivir showed only a limited benefit in a large trial. Stocks had dipped earlier following reports that Chinese officials had told agricultural companies to pause purchases of some US farm goods including soybeans, threatening a hard-won trade deal.
Key events this week include US nonfarm payrolls along with ECB and RBA interest rate decisions. Aside from covid-19 related news, tensions between the US and China are becoming more animated as election polling in the US is tightening.
Coca-Cola Amatil (CCL:ASX)
Shares in CCL have been under pressure due to covid-19 and slipped after delivering a disappointing trading update. For the March and April CCL revenue declined -33% from the same corresponding period last year. Due to a number of reasons including tighter lockdown restrictions whilst simultaneously cycling the traditionally peak Easter and Ramadan trading periods, retailers reduced their inventory levels after a volatile March and cancelled promotional activities. For the first 3 weeks of May sales started to recover slightly, however most of the decline was attributed to a decline in higher margin ‘on the go’ category, which is expected to create greater earning pressure than initially anticipated – despite measures to lower costs for the 2020 financial year.
Fortunately for CCL they were in a sound financial situation heading into the pandemic with a relatively low amount of debt, able to weather the temporary shock relatively well, and we would expect a recovery to near-normal levels by the second half of 202. Given their significant cost out programme completed last year, and under normal conditions CCL are likely to not see significant declines in their Australian businesses going forward. We believe CCL’s 2021 dividend (~4.8%) could by quite attractive in an extremely low interest rate environment at current valuation – with CCL shares around 10-year lows. We view CCL as a relatively stable income stock with covid-19 creating a temporary shock, and minor impact on earnings looking forwards given the nature of CCL’s product. We upgrade CCL to a BUY.
Australia & New Zealand Market Movers
The Australian market (ASX 200 Index) fell on Friday, and made back some of those losses on Monday.
The Australian banks have started to consolidate after a massive surge over the last week or so, as investors came to the view that banks had coped better than expected with the crisis and economic data has been marginally better than expected so far.
Gains on Monday were driven by a strong performance from the major mining stocks (BHP, Rio Tinto, and Fortescue) as bulk, base and precious metals all firmed, with iron ore pushing through $US100 a tonne.
The energy sector also rose as the price of oil shot higher, with strong OPEC+ production cut compliance, further falls in US rig counts and a recovery in demand giving investors confidence the market was rebalancing.
The latest victim in the real estate trust space – Vicinity Centres, launched a $1.4 billion capital raising in order to prop up its balance sheet, which has been battered by falling asset values and rental income during the COVID-19 pandemic. Property trust Dexus downgraded its full-year distribution guidance, forecasting it would be unchanged on the year earlier – although it appears the market was expecting worse with its share rallying on the day.
Costa Group provided an update at its AGM which was more conservative than its April “coronavirus” update when the company stated that the start to the year was ahead of budget for Q1. Nevertheless, the company stated that “on balance the Company’s performance year to date has been pleasing considering some early headwinds.”
The New Zealand market (NZX 50 Index +0.2%) was a touch higher on Friday (the market was closed on Monday for a public holiday). Pushpay led the market higher, rising 8% to a new all-time high. New Zealand's stock market outperformed its peers as moderately positive updates from Vista Group International and Infratil helped support investor sentiment.
Vista rose as the cinema software company yesterday told shareholders it is starting to see a few green shoots of the business reviving. When planning a recent $65 million capital raising, the company assumed cinemas globally would remain closed for the rest of 2020 followed by a slow reopening through 2021.Infratil was more or less flat as it signalled a 30% earnings improvement from its CDC Data Centres investment in the current financial year. It also maintained its dividend in the period.
Gentrack was little changed as the utility-software company today reported a 7% half-year revenue decline due to losing some UK energy-utility customers. It told investors earnings would improve in the second half.
3 Things Markets Will be Watching this Week
- Tensions between the US and China are becoming more animated as election polling in the US is tightening.
- Covid-19 and lockdown related newsflow remains key.
- US nonfarm payrolls along with ECB and RBA interest rate decision.
Have a Great Day,