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11/08/2015 Argonaut Morning Note

    Home Stockbroking & Research Morning Notes 11/08/2015 Argonaut Morning Note
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    11/08/2015 Argonaut Morning Note

    By admin | Morning Notes | 0 comment | 10 August, 2015 | 0

    Market Update & Important Indicators

    Deal-making in the industrials sector fueled a rally in U.S. stocks, helping the Dow recover from steep losses last week. The Dow climbed 242 points, or 1.4%, to 17,615, while the S&P 500 gained 1.3% to 2,104. Berkshire Hathaway Inc. said it would buy Precision Castparts Corp. for about $32 billion, sending shares of the industrial company soaring 19%, making it the biggest gainer in the S&P 500. Meanwhile, disappointing economic data in China provided fuel for gains in stocks across the globe.

    The weak reports, including a deflation threat from declining factory prices, lifted expectations Beijing would increase spending and continue to prop up the market by buying shares. Federal Reserve Vice Chairman Stanley Fischer on Monday emphasized that U.S. inflation remains low and Fed officials must see inflation returning to more normal levels before the central bank raises interest rates.

    European stocks bounced back from early losses on Monday, boosted by a rally on Wall Street. Indexes in Europe had started the week in downbeat fashion as some disappointing trade and factory-price data from China over the weekend hurt shares in commodity-linked companies. But markets rallied into Monday's close as deal making in the industrial sectors boosted U.S. stocks, and oil and metals prices rebounded from recent losses. The Stoxx Europe 600 closed 0.7% higher.

    Stocks in China posted their biggest one-day gain in a month after weak economic data lifted expectations Beijing would boost spending and continue to prop up the market by buying shares. The Shanghai Composite Index finished up 4.9% at 3,928 Monday, while the smaller Shenzhen Composite was up 4.5% at 2,275. The gains come after poor trade data from the weekend fueled hopes of increased infrastructure spending and state-owned enterprise reform, and offer yet another signal that anticipation of Beijing's moves drives the market more than economic fundamentals.

    There were some solid gains in commodities overnight. Crude oil advanced strongly, with Brent up 3.7% to $50.41/bbl and WTI up 2.5% to $44.96/bbl. Gold also climbed above the $1,100 mark, adding 0.9% to $1,104/oz. Base metals were stronger across the board, with copper, nickel and zinc up 2.6%, 3.3% and 1.1% respectively.

    In This Issue

    Industrials views & previews | Changing gears in WA
    Perth Airport recently had its first fall in quarterly passenger numbers in 12 years. Net migration, unemployment and housing data in WA also plainly show the resources tailwind has fluttered out. Our industrial themes we highlighted at the beginning of the year therefore remain valid – look to those companies with limited resources exposure, US$ earnings, niche propositions and quality clients.

    We list our preferences in order of ascending risk (and reward) in the tables below. We also include one key pick from the mining services space on the back of FY16 visibility, a solid balance sheet and an attractive dividend yield.

    Fitting in with our investment themes

    Company Mining Exposure? International Opportunities US$ Earnings Quality Clients
    ASB None                       US, Middle East Majority US Navy, Aus Border Force
    GNG Yes UK, potential elsewhere Limited, current £ exposure Small & mid-tier miners
    TFC None US, Asia, Europe Yes Nestlé
    OEC  Limited US, potential elsewhere Yes, limited A$ Boeing, BHP, RIO
    OBJ None Asia, global potential Likely to all be ex-A$ Proctor & Gamble, GSK, Coty

    Company

    Comment
    ASB A solid US Navy order book and lessons learnt on LCS6 augur well for future build performance. ASB is well placed to benefit from a committed Australian defence shipbuild programme.
    GNG A strong balance sheet and an outstanding order book. With FY16 pretty much locked in, it's hard to ignore a dividend yield that should exceed 10%.
    TFC It will take time for TFC to reap the full benefits of its plantation investment and vertical integration strategy, but the long term earnings potential is significant.
    OEC An energised business with excellent growth options in aerospace (UAV engine supply to Boeing) and in electrical systems. FY16 shaping up to be an exciting year.
    OBJ Earlier stage, but hard to look past a solid working relationship and agreements with Proctor & Gamble. On the cusp of technology commercialisation.

    Metro Mining (MMI) | SPEC BUY
    MMI have signed a non-binding Memorandum of Understanding (MoU) with the Xinfa Group for approximately half of its planned annual bauxite production from the Bauxite Hills project in northern Queensland. The MOU is for 1.0-1.2Mtpa over a five year term, extendable by mutual agreement. Both parties will continue negotiations with an aim to complete a binding offtake agreement within four months. FOB pricing is to be determined and will be subject to market conditions and bauxite quality.

    Recent Contacts & Presentations

    Austal (ASB), Resolute (RSG), Pacifico (PMY), Kingsgate (KCN), Troy (TRY), Northern Star (NST), Sandfire (SFR), Regis (RRL), Saracen (SAR), Sino Gas & Energy (SEH), Dacian (DCN), Buru Energy (BRU), Carnarvon Petroleum (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), High Peak Royalties (HPR), Karoon Gas (KAR), Austex Oil (AOK), Central Petroleum (CTP), Senex Energy (SXY), Newmont, Coventry (CYY)

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