Oil Prices Surge 10%

Posted on | by Leon Hinde | Leave a Comment on Oil Prices Surge 10%

Crude Oil prices surged as much as 10%, almost reaching the $50.00 mark, as the Organization of Petroleum Exporting Countries (OPEC) agreed to curb oil production for the first time since 2008 in an effort to reduce oversupply and support prices.

The 14 nation cartel, led by Saudi Arabia, agreed to cut production to 32.5 million barrels per day, which pencils out to a 1.2 million barrel per day reduction from current levels. Saudi Arabia agreed to take the lion’s share of the cut; lowering their daily production by 486,000 barrels per day to get the deal done.

Russia, the world’s largest Non-OPEC producer, had long resisted cutting output but has tentatively agreed to join the effort by reducing production by 300,000 barrels per day. OPEC will meet with Non-OPEC producers on December 9th.

If history is an accurate gauge, the bullish market response to this deal may be short lived. OPEC members haven’t shown a strong track record of compliance to previous production agreements. As such, the recent price action in Crude Oil could reverse over the near term as more details are released.    

Chart - Woodside
Chart – Woodside
Chart - Oil Search
Chart – Oil Search
Chart - Santos
Chart – Santos
Chart - Origin
Chart – Origin

 

Aristocrat Leisure – FY16 Earnings

Posted on | by Leon Hinde | Leave a Comment on Aristocrat Leisure – FY16 Earnings

Aristocrat Leisure posted strong FY 2016 results with top-line net profits surging more than 67% to $398 million compared to a year ago. This result was well in front of the consensus forecast of $376 million and reflects strong growth in both the US and Australian markets.

However, as impressive as the headline numbers for the 2015 to 2016 time frame appear, some of the internal figures suggest the growth in share the price may not repeat in 2017. With dividend growth expected to increase from 20.5 cents per share in 2016, to 24.6 cents per share in 2017, the total dividend yield is expected at 1.7%.

With EBIT expected to rise from $605 million to $674 million, this small increase in expected dividends is making Aristocrat look expensive at current levels.

Chart - ALL
Chart – ALL

Australian Housing Data

Posted on | by Leon Hinde | Leave a Comment on Australian Housing Data

The Housing Industry Association’s (HIA) monthly survey of Australia’s largest home builders indicates that new home sales dropped to a two year low during October. HIA announced that new home sales fell 8.5% for the month on the lowest volume since July of 2014.

Further details showed that sales on both sides of the market saw sizeable declines with detached house sales down 8.2%, while multi-unit sales fell by 9.2%.

This sharp decline in new homes sales will likely temper recent calls for the RBA to maintain a neutral interest rate bias.

Scentre Group – Algo Engine Buy Signal

Posted on | by Leon Hinde | Leave a Comment on Scentre Group – Algo Engine Buy Signal

We’ve been tracking SCG and looking for the right entry point. With US bond yields running into resistance, we now feel money flow will continue to build in SCG, creating support and eventual price extension from the current $4.20 price point.

5.5% forward yield with 3% underlying EPS growth into FY17, makes SCG worth looking at, especially following our recent algo engine buy signal.

As the share price moves higher, at around $4.40, we look to sell the $4.50 covered calls with an April expiry. The April expiration date will allow us to collect the upcoming February dividend, as well. This strategy will boost the 6 month cash flow to over 5%, or 10%+ on an annualised basis. Plus allowing for capital growth of 7%.

 

Chart - SCG
Chart – SCG

Amcor – Price Target Update

Posted on | by Leon Hinde | Leave a Comment on Amcor – Price Target Update

The recent rally from $13.60 to $15.00 may be the best upside performance we see in Amcor for a while. Some analysts are downgrading Amcor from “outperform” to “neutral” as the company’s defensive revenue stream isn’t likely to expand as higher global interest rates affect their expense line and cost of capital calculation. This includes the impact of the USD appreciation against the EURO lowering EPS by about 5%.

With its large US and European asset base, Amcor has been able to maintain lower borrowing costs. However, with Weighted Average Capital Costs, (WACC), increasing from 6.6% to 7.1% in FY 17, bottom line profit growth may not be able to keep pace with rising interest rate. 

We see the price impact reflected in the lower high and lower low technical structure in the Amcor chart.  Whilst we don’t expect aggressive upside share price targets, we still feel owning AMC and selling covered calls to generate 10% annual cash flow from the dividend and call option premium makes sense.

The trading range is now $14 to $15.50 and investors should consider locking in gains at the top of the range, (or delivering the stock under the call option at $15.50 strike) and looking to buy the stock back on any pullbacks to $14.00.

Chart - AMC
Chart – AMC

 

Key Australian Data Points

Posted on | by Leon Hinde | Leave a Comment on Key Australian Data Points

After several weeks of following US and European economic reports, Australian investors will get the chance to see how the domestic economy is performing into the end of the year.

This week’s key data points include Building Approvals and New Home Sales on Wednesday, then the quarterly CAPEX reading on Thursday, followed by the Monthly Retails Sales data on Friday.

The Building and New Home sales data have been steady over the last six months and have not offered any surprises which the RBA have had to respond. This week’s data is expected to show that building approvals have bounced back from last month’s 8.7% decline and the sales of new homes is in the 3% range.

The CAPEX and Retail Sales data are a different story. These two data points have been diverging over the last 12 months. Friday’s retail sales report is called .3% higher, which would be the third consecutive monthly increase. On the other hand, the quarterly CAPEX data is expected to show a 2.8% decline reflect the third consecutive quarter of weaker Capital Outlays and the 7th quarter of the last 8 quarters.

From an interest rate policy perspective, the CAPEX data has the greatest potential to move the market.

 

 

 

BHP & RIO – Iron Ore Price Update

Posted on | by Leon Hinde | Leave a Comment on BHP & RIO – Iron Ore Price Update

Iron Ore prices continued its two month rally last Friday and trading close to the $80.00 per ton level for the first time in over two years. According to spot metals pricing, the benchmark 62% fine rose another 3.5% to 79.60 on Friday, extending its four-day rally to an impressive 13.2%.

The benchmark price has now gained over 82% so far in 2016, and has risen 108% from the all-time low of $38.30 per ton posted on December 11, 2015. The rally corresponds to the news that Chinese policymakers had managed to remove 88 million tons of steelmaking capacity across the country since the beginning of the year.

This has help trigger gains in steel prices, along with Iron Ore.

BHP and RIO have performed well, we look to keep exposure to these names and add to the cash flow through selling covered call options.

Chart - RIO
Chart – RIO
Chart - BHP
Chart – BHP