Market Update & Important Indicators
The Dow Jones Industrial Average and S&P 500 headed toward a second straight day of losses Wednesday and remained on track to snap their 10-month winning streaks, as investors continued to weigh the impact of higher interest rates on the nearly nine-year bull market. The Dow was recently down 0.8%, after earlier rising as much as 166 points. The S&P 500 fell 0.5%, and the Nasdaq Composite declined 0.2%. The blue-chip index and the S&P 500 are off more than 3% for the month, while the Nasdaq is down 1.3%. Although major indexes around the world have recovered much of their losses from a big selloff that sent the S&P 500 and Dow into correction territory on Feb. 8, this has been the worst month in at least a year for many stock benchmarks. After a record-setting January, a raft of misfired bets on market calm and interest-rate concerns have helped spark volatility. Some investors have said declines are a buying opportunity with global earnings and the economic backdrop looking stronger than they have in years. Others aren't so sure, though, fearing a pickup in inflation might encourage central banks to tighten monetary policy more quickly than anticipated. Stocks got a boost after the opening bell Wednesday as official data showed that U.S. economic growth had been revised down in the fourth quarter of last year, in line with what economists expected. The U.S. gold price was unchanged overnight, closing at 1317.80 US$/oz.
European shares close lower, with the Stoxx Europe 600 index ending down 0.7% at 379.63. U.K. stocks underperform, with the FTSE 100 index losing 0.7% due to weak results from broadcaster ITV PLC and sharp falls in mining stocks after a weak manufacturing survey out of China. Germany's DAX and France's CAC 40 both close down about 0.4%, while Italy's FTSE MIB falls 0.5%, and Spain's IBEX 35 loses 0.6%.
In Asia, equities were sandbagged by poorer-than-expected economic data, as China's official manufacturing survey of purchasing managers fell to a 19-month low and Japanese factory output and retail sales came in weak. Hong Kong's Hang Seng and the Shanghai Composite closed down 1.4% and 1% respectively, with Japan's Nikkei Stock Average falling 1.4%.
Broad regional weakness and an overnight pullback in commodities prices helped Australian stocks snap a 5-day winning streak and result in a 2nd-straight down month for the country's equities benchmark. But the 0.4% drop for the S&P/ASX 200, nearly matching January's decline, will be much smaller than the 5%-plus drop that some other indexes in the region will log by day's end. The index fell 0.7% today to 6016, with utilities and industrials among the few sectors in the green. Westpac led the major banks down, retreating 1.2%, while BHP Billiton dropped 2% on broad commodity-price weakness amid overnight gains for the greenback. As earnings season rolls on, Harvey Norman sank 12% following a weak F1H report while an earnings miss sent Ramsay Health Care sliding 5.8%.
The London Metal Exchange’s 3-month copper contract traded lower overnight, falling 1.2% to close at $6,931/t. The other base metals all finished lower. Tin prices fell 0.8% to 21,640/t, whilst Zinc prices pulled back 1.2% to close at 3,477/t. Aluminium prices slid 0.8% to close at 2,154/t. Lead prices lost 3.1% to 2,496/t, whilst Nickel prices fell 0.4% to finish at 13,744/t.
In this issue
Australia Gold Sector | The more you drill the more you find
Gold prices have risen by 10% in AUD terms and 7% in USD terms in FY18YTD. Funds flow has been predominantly into grass roots explorers evident in the surge of the ASX Small Resources (XSR) index which has risen by 36% FY18 YTD vs the ASX Gold Index (XGD) up just +14% FY18YTD. Equity valuations of the mid-tier producers continue to look stretched and we struggle to identify significant value. Emerging developers have recorded only incremental gains which presents an opportunity for investors looking for companies that screen cheaply with short timelines to production. Our key picks include Regis Resources (RRL) in the producers and Dacian Gold (DCN), Gascoyne Resources (GCY), Gold Road (GOR) and West African Resources (WAF) in the emerging developers. We also identify the next tier of potential development plays including Explaurum (EXU), Genesis Minerals (GMD) and Alice Queen Ltd (AQX) who look to make the transition into production. Catalyst Metals (CYL) is also attractive with a belt scale play in proximity to Kirkland Lake (KLA) Fosterville operations.
Austal (ASB) | US delivers | BUY
Market Cap $642m | Current Price $1.83 | Valuation $2.10
EBIT of $29m in 1H18 was as expected, and similar to the prior two halves. We expect a similar result in the current half. However, our focus is on FY19 and beyond. Revenue consistency and steady 6-8% shipbuilding margins in the US, combined with an expected uplift as commercial work drives greater workloads through the Australian and Philippines shipyards, should see strong growth next financial year. With medium term performance largely underpinned by a $3.4b order book and large longer-term opportunities, we remain positively disposed. Buy maintained on a $2.10 blended valuation.
Decmil (DCG) | On your marks | BUY
Market Cap $179m | Current Price $1.03 | Valuation $1.40
While DCG’s 1H18 revenue of $141m and EBITDA of $1.3m did little to excite, the outlook commentary made for good reading. Work in hand and a large pipeline supports a much stronger performance in 2H18 and FY19. A combination of growing revenue and cost control should prove positive for margin in coming periods. We maintain a buy call on the compelling macro environment and an unchanged valuation of $1.40.
Recent Contacts & Presentations
Ventnor Resources Ltd, Ausdrill Ltd (ASL), Alice Queen Ltd (AQX), PNX Metals Ltd (PNX), Alliance Resources Ltd (AGS), Myanmar Metals Ltd (MYL), Primary Gold Ltd (PGO), Sino Gas & Energy Holdings Ltd (SEH), Australis Oil & Gas Ltd (ATS), Explaurum Ltd (EXU), Whitebark Energy Ltd (WBE), Atrum Coal Ltd (ATU), Melbana Energy Ltd (MAY), Genesis Minerals Ltd (GMD), Proteomics International Laboratories Ltd (PIQ), Ramelius Resources Ltd (RMS), MOD Resources Ltd (MOD), Greenland Minerals & Energy Ltd (GGG), Walkabout Resources Ltd (WKT), Marindi Metals Ltd (MZN), Volt Power Group Ltd (VPR)
Please read Argonaut's Important Disclaimers & disclosures
Log in to the client area below to download the full Morning Note PDF