Market Update & Important Indicators:
U.S. stocks rebounded Monday, led by a rally in financial shares. Major U.S. stock indexes had their biggest weekly declines since Brexit after Federal Reserve Chairwoman Janet Yellen said Friday that the case for a rate rise had improved. The prospect of higher rates tends to strengthen the dollar and weaken stock markets, which have been boosted by years of loose monetary policy. But some said a small increase wouldn't be enough to shake the long-running rally. Ms. Yellen's statement was later reinforced by Fed Vice Chairman Stanley Fischer, who suggested that the U.S. central bank could act as soon as next month. Financial shares in the S&P 500 rose 1%. Higher interest rates tend to widen the difference between what banks charge on loans and pay on deposits, which should boost earnings. The sector has lagged behind the broader index this year as investors curbed their expectations for rising rates. Financials are up roughly 2% so far this year, compared with the S&P 500's gain of nearly 7%. Consumer spending rose for the fourth straight month in July, the Commerce Department said Monday. Meanwhile, the personal-consumption expenditures price index, the Fed's preferred inflation measure, was flat in July from the prior month. In European markets, the Stoxx Europe 600 inched down 0.2%. The auto sector led losses, while markets in the U.K. were closed for a holiday.
A rally in the U.S. dollar weakened the Japanese yen, sending the Nikkei sharply higher on Monday amid broad equities weakness elsewhere in Asia. The Nikkei Stock Average ended up 2.3%, as the dollar gained after Federal Reserve Chairwoman Janet Yellen signalled growing conviction that the central bank will raise short-term interest rates in the weeks or months ahead. A weaker yen helps Japanese exports. In Asian trade, the U.S. dollar was broadly higher against most local currencies. The yen was last down 0.5% against the dollar. Elsewhere in Asia, stocks were under pressure as Ms. Yellen's comments affirmed expectations for higher U.S. rates this year, which could trigger fund flows into U.S. dollar assets. Hong Kong's Hang Seng Index was last down 0.4%, while Singapore's Straits Times Index was off 0.6%. In South Korea, the Kospi was down 0.3%.
Australian shares suffered their sharpest fall in more than three weeks, knocked by a stronger U.S. dollar and heightened expectations U.S. interest rates are poised to rise. The decline echoed weakness across much of the region in the wake of last week's Jackson Hole summit of global central bankers and remarks by Federal Reserve Chairwoman Janet Yellen that the case for an increase in short-term interest rates had strengthened in recent months. Ms. Yellen's speech, and subsequent comments from Fed Vice Chairman Stanley Fischer suggesting an increase could come as early as next month, buoyed the dollar against the Aussie and other currencies. Broad selling pulled the S&P/ASX 200 down 46.3 points, or 0.8%, to 5469.2—the lowest closing level since Aug. 3. The energy subindex led falls by each industry sector aside from the basket of telecommunications services stocks
The London Metal Exchange was closed Monday for a national holiday in the U.K. Copper prices in New York closed at a fresh 10-week low on Monday, as a stronger U.S. dollar and lower oil prices put pressure on the industrial metal.
In this Issue:
TFS Corporation (TFC) | Set for cash generation | BUY
Market Cap $619m | Current Price $1.60 | Valuation $3.30
Having met targets in FY16, TFC’s strong operational momentum has set the Company up for at least 25% growth in adjusted cash EBITDA in FY17 (to $78m+). Demand for plantation investment product is mirroring deepening end markets for wood and oil, with TFC’s vertically integrated business able to extract value along the supply chain. Attractive product pricing and returns are driving TFC’s focus on increasing plantation ownership in order to extract maximum value for shareholders. With >80% of 2016’s harvest on balance sheet we believe improved operating cash flow will be a feature of the FY17 numbers, providing a taste of the potential upside when harvest sizes ramp up significantly next decade. We maintain a valuation of $3.30 and a buy call.
Austal (ASB) | Not WIP’d | BUY
Market Cap $460m | Current Price $1.32 | Valuation $1.55
ASB reported underlying FY16 EBIT of $35.1m in line with expectations, and reiterated FY17 guidance for EBIT of $45-55m. Our unchanged forecast falls in the middle of the range and is achievable. Following the large WIP write-down in FY16 there is more certainty around US margins (5-7%), and we note at least another $14m in costs that we consider one-offs not captured in the underlying FY16 result. The balance sheet is in good shape and we remain attracted to an impressive opportunity pipeline. Buy maintained on a $1.55 blended valuation (prior $1.50).
Recent Contacts & Presentations:
Pantoro Limited (PNR), Boss Resources Ltd (BOE), Metro Mining Ltd (MMI), Metal Bank Ltd (MBK), Actinogen Medical (ACW), St. George Mining Ltd (SGQ), Resapp Health Ltd (RAP), Orecorp Limited (ORR), Dimerix Limited (DXB), Genesis Minerals Ltd (GMD), Dakota Minerals Ltd (DKO), Breaker Resources NL (BRB), Bard1 Life Sciences Ltd (BD1), Alto Metals Ltd (AME), Birimian Limited (BGS), Antipa Minerals Ltd (AZY), Vault Intelligence Ltd (VLT), Noxopharm Ltd (NOX), Gage Roads Brewing Co. (GRB), West African Resources (WAF), Cedar Woods Properties Ltd (CWP), Sino Gas & Energy Holdings Ltd (SEH), Salt Lake Potash Ltd (SO4), Kalina Power Ltd (KPO)
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