Market Update & Important Indicators
U.S. stocks rose after encouraging readings on the U.S. economy, including a solid March jobs report, added to the growing chorus that early-year fears were overblown. Stocks declined sharply at the start of 2016 on fears that the U.S. economy could be heading into a recession, but shares rebounded in recent weeks as data have increasingly shown economic resilience. In addition to the jobs report, which was in line with expectations, data showed U.S. manufacturing activity expanded in March for the first time since last summer. The Dow Jones Industrial Average rose 0.6% Friday. The S&P 500 added 0.6%, and the Nasdaq Composite gained 0.9%. It was the sixth weekly gain in seven weeks for both the Dow industrials and the S&P 500.
European stocks declined Friday, starting the second quarter on a dour note. The Stoxx Europe 600 closed 1.3% lower. An as-expected U.S. nonfarm payrolls report for March had little impact and failed to mitigate the effects of weak overnight Asian trading. Sentiment was dented after a Bank of Japan survey published on Friday showed business confidence falling to its lowest level in three years, despite aggressive easing measures by the country's central bank.
Stocks in Japan suffered their biggest drop in more than a month Friday amid worries about deteriorating sentiment among Japanese companies. But stocks in China recovered from earlier losses in the afternoon, a bright spot in Asia's mixed performance on Friday as investors weighed gauges of Chinese factory output that showed activity picked up in March.
Oil prices tumbled after comments from a Saudi royal family member cast more doubt on a deal for major global exporters to cap output. Light, sweet crude for May delivery settled Friday down 4%, its biggest daily percentage loss since Feb. 23. Brent, the global benchmark, fell 4.3%. Saudi Arabia's deputy crown prince, Mohammed bin Salman, said in an interview with Bloomberg that the kingdom will freeze its oil output only if Iran and other major producers agree to curb theirs. Analysts and brokers say this makes such a deal look much less likely, weakening one of the major sources of support for a rally that had pushed oil prices up 50% in about a month.
Copper prices ended lower in London Friday. The London Metal Exchange's three-month copper contract was down 0.5% at $4,824 a metric ton at the PM kerb close. Among the other base metals, aluminum closed up 1.05% at $1,536 a ton, zinc was up 3.03% at $1,872 a ton, nickel was down 2% at $8,320 a ton, lead was up 2.52% at $1,748 a ton and tin was down 0.3% at $16,700 a ton.
In this Issue
Austal (ASB) | Clear Strategy | BUY
Market Cap $534m | Current Price $1.535 | Valuation $1.90
The US Navy’s decision, announced yesterday, to fund another Littoral Combat Ship (LCS) takes the number of these US$350m+ vessels to be built by ASB as prime contractor to eleven. Three LCS have already been delivered, but this additional ship will keep ASB’s US shipyard in Alabama busy to 2021. This shipyard is also progressing its US$1.6b contract to construct ten Expeditionary Fast Transport (EPF) vessels for the same client.
We expect ASB to continue to replace work rolling off the order book in the US, but also believe that there is opportunity to improve the quality of earnings through margin improvement, building the proportion of recurring revenue streams, and adding scale. With reference to the latter, the proposed continuous Navy ship build programme in Australia* provides a great opportunity for ASB.
Concern over US margins, uncertainty over the US Navy’s forward shipbuild programme, and a transition in CEO hurt the share price in December and January. We felt the share price falls had been overdone (see Clear Strategy, 24th February 2016) and have not been surprised to see the shares climb strongly off their lows. Reasons to continue to like ASB include substantial US$ earnings, high quality clients, a solid order book, an attractive potential pipeline, and a strong balance sheet. With a blended valuation of $1.90, we believe there is more value upside.
* Key points under the “Capability Stream: Maritime and Anti-submarine Warfare” from the recently released Defence White Paper have relevance to ASB:
· The strategy to have a permanent naval shipbuilding industry in Australia centred on a long-term continuous build programme was confirmed
· The continuous ship build programmes will commence:
× In 2020 for Future Frigates
× In 2018 for Offshore Patrol Vessels
· Future Frigates:
× 9 Anti-submarine Warfare Frigates will replace the existing fleet of 8 AnzacClass frigates
× Cost estimate >$30b over next 20+ years
× The continuous build programme of Future Frigates will take place in South Australia
× Completion of the 3 Hobart Class Air Warfare Destroyers in the early 2020’s will free up resources for the Future Frigates
· Offshore Patrol Vessels:
× 12 Patrol vessels capable of more extended operations will replace the 13 existing ArmadaleClass patrol boats
× These larger patrol vessels will be 70-80m in length
× Cost estimate $3-4b over next 15 years
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