Market Update & Important Indicators
Financial and technology shares rallied Monday, putting the S&P 500 and Dow Jones Industrial Average on track to notch their third straight day of gains. Major stock indexes have recouped a big chunk of their February losses, as corporate earnings suggest that U.S. firms remain on strong footing. A record 78% of S&P 500 companies have beaten analysts' revenue estimates so far for the fourth quarter of 2017, and overall earnings growth is nearly 15%, which would make it the best quarter since 2011, according to FactSet. The Dow industrials rose 1.6%. The S&P 500 added 1.2%, and the Nasdaq Composite advanced 0.9%. Technology stocks, among the best-performing sectors in the S&P 500 this year, led gains in the broad index Monday. Financial shares rallied, with Class B shares of Berkshire Hathaway – which posted a nearly $45 billion annual profit, thanks in part to the new tax legislation – jumping 3.6%. Some investors remain concerned about the recent pickup in bond yields, which put pressure on stocks at the start of the month. With interest rates remaining in focus, many investors said they would be watching closely for U.S. Federal Reserve Chairman Jerome Powell's policy update to Congress on Tuesday, his first appearance on Capitol Hill since he was sworn in as the new Fed chief earlier this month. The U.S. gold price traded higher overnight, gaining 0.4% to close at 1332.90 US$/oz.
European shares closed higher, with the Stoxx Europe 600 index ending 0.5% higher at 383.06, helped by comments from European Central Bank President Mario Draghi, who said ample monetary stimulus is still needed. U.K. stocks outperformed, helped by the pound turning lower later in the day against both the dollar and the euro, with the FTSE 100 ending 0.6% higher. Other European indexes performed well, with Germany's DAX closing 0.35% higher and France's CAC 40 up 0.5%.
Asia-Pacific stock indexes were higher across the board Monday, lifting indexes in Singapore back into positive territory for February. Japan's Nikkei Stock Average finished up 1.2% despite a stronger yen, while Hong Kong's Hang Seng rose 0.7%. The Shanghai Composite Index added 1.2%, on track for a sixth straight session of gains. The day's biggest advance was in Shenzhen, which had experienced some of the biggest declines during the recent global markets swoon. Indexes in the southern Chinese city, where many smaller companies are listed, logged gains of 2.2% to 3.6%.
Australian stocks logged their first 4-day winning streak since early January as the market notched fresh 3-week highs today and moved back into positive territory for February. As regional gains continued and finishing at session highs, the S&P/ASX 200 rose 0.7% to 6042.2. Financials drove the local advance, with the big banks all up more than 1% after recent underperformance. On the earnings front, BlueScope popped 2.3% on solid 1H numbers but QBE Insurance sunk 3.3% after recording an annual loss. Wesfarmers also took some edge off the ASX 200's gains, falling 2.8% as it traded ex-dividend.
The London Metal Exchange’s 3-month copper contract traded higher overnight, adding 0.2% to close at $7,110/t. The other base metals again finished mixed. Tin prices lost 0.3% to 21,726/t, whilst Zinc prices closed 0.6% stronger at 3,573/t. Aluminium prices pulled back 0.1% to close at 2,166/t. Lead prices jumped 1.9% to 2,585/t, whilst Nickel prices rebounded 1.1% to finish at 13,880/t.
In this issue
Ausdrill (ASL) | Delivering | HOLD
Market Cap $1,032m | Current Price $2.86 | Valuation $2.75
ASL’s 1H18 results were solid, with earnings ahead of expectations and a robust balance sheet enabling targeting an exceptional pipeline in Africa. Normalised EBITDA was $82m (we were thinking $78.5m), gearing dropped below 20%, and the Company has cash and available facilities in excess of $400m. Based on 1H18 numbers and commentary, we up our FY18 normalised NPAT forecast to $51.5m (prior $43.9m) and increase our longer term numbers. Our blended valuation climbs to $2.75 (prior $2.28). The current share price reflects a strong business with excellent prospects and we maintain a hold call.
Global Construction (GCS) | All cashed up | BUY
Market Cap $173m | Current Price $0.82 | Valuation $1.00
GCS continued to pile on the cash, finishing the 1H with $42m net cash on the balance sheet. Whilst the 1H18 result was below our expectation, due mainly to lower than expected returns form the commercial and resources segments, we were positively surprised by the $16.6m operating cash inflow. GCS has substantially changed its business structure over the last 18 months, diversifying onto the East Coast and changing its product offering to be less capital intensive. The result is a more appealing business for investors in our view. We believe GCS has a strong pipeline of opportunity in the near-term and expect a stronger 2H. BUY maintained on a $1.00 valuation (prior $1.05).
GR Engineering (GNG) | Moving forward | BUY
Market Cap $221m | Current Price $1.44 | Valuation $1.60
GNG’s 1H18 underlying EBITDA of $12.5m on $177.2m revenue was slightly ahead of our forecasts, although the Company has peeled back 2H expectations reducing revenue guidance to $270-300m (previously $300-330m). We would expect stronger margins in the 2H as more profit may be recognised at the back end of the soon to be concluded Mt Morgan and Dalgaranga projects. We believe investors can begin to look beyond customer disputes with EGS and WLF and focus on long-term growth prospects in an improving resources sector. Therefore, we maintain our BUY call on a $1.60 valuation.
Swick Mining Services (SWK) | Margins ticking up | BUY
Market Cap $51m | Current Price $0.22 | Valuation $0.40
SWK’s 1H18 results were in-line with our forecasts and importantly showed margin improvement from FY17 lows. Guidance for full-year FY18 EBITDA for the drilling business of $17.5-19.5m on $135-145m revenue implies further margin expansion on the back of multiple exited underperforming contracts. Focus on working with clients who show a willingness to work with SWK on reaching agreeable terms of contract renewals should provide the potential for SWK to generate more appropriate returns on capital. We maintain our view that SWK’s current EV is largely supported by its core drilling business, with investors essentially buying an option on Orexplore at current prices. Buy maintained on a $0.40 valuation.
Recent Contacts & Presentations
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), PharmAust Ltd (PAA), Alice Queen Ltd (AQX), Jervois Mining Ltd (JRV)