ASX reports its half-year earnings on the 15th of February.
The consensus expectations are for NPAT to increase by 4% to $220 million and the company to declare a interim dividend of $1.03.
This places ASX on a forward yield of 3.7% and we see upside potential in the stock.
Weaker than expected activity trends in June led to small earnings downgrades by most analysts.
We are now forecasting flat year over year revenue growth.
ASX is trading on 24x forward earnings which seems excessive considering the low growth outlook.
US earnings season will go into full swing next week with several DOW components and high-capitalization S&P 500 companies reporting Q1 earnings.
Thus far, the results have been mixed with IBM missing badly and forward guidance on the major US banks showing concerns for future revenue growth.
The chart below shows that the expectations of S&P earnings, relative to the current pricing of the S&P 500 index, are very much out of line.
If next week’s earnings reports don’t exceed expectations, we could see further downside range extension on the SP 500 index, which could pressure the XJO index lower.
We have been looking at the May 5800 XJO puts as a short-term portfolio hedging instrument for a move lower in the local market.
We have also been buying the BetaShare BBOZ inverse exchange traded fund. Shares in BBOZ gain value as the local market trades lower.
The ALGO engine generated a buy signal for shares of ASX at $49.00.
Many investors were able to write covered calls or exit long positions of ASX around the $52.50 level, last traded in early February.
We are cautious of the general market sentiment , but still like the longer-term growth prospects and a move back at least to the 30-day moving average near $51.10.
A tight stop-loss metric should be employed on long positions of ASX at, or near, the January 2nd low of $49.15.
Following the recent 1H17 earnings update, we will take a look at establishing fair value for the ASX.
1H17 NPAT of A$219m represented 3% underlying earnings growth. Moderate revenue growth occurred across most major ASX activities.
Here is the issue: the stock trades at 22x forward earnings on a 3.9% dividend yield. The earnings are stable but the stock is expensive. And whilst ASX delivered 3% revenue growth in 1H17, this is down on the 6% average level achieved over the last 3 years.
Our conclusion on fair value is; buy ASX on a pullback to $47 or a 4.5% dividend yield.
ASX Limited reported continued profit growth for H1 2017, up 3% to $219 million. Earnings per share was posted at $1.13 per share, which is 2.9% higher than a year ago.
The exchange operator declared a fully franked dividend of $1.02 per share, which pencils out to a 90% pay out ratio.
ASX also announced a 2.8% increase in operating revenue to $386.6 million, which is a 10.4 million increase from the previous reporting period.
Solid growth in Derivatives, OTC products and the sharp increase in ETF interest has underpinned the company’s forward guidance.
However, we see a potential “double top” pattern on the daily charts dating back to the August highs of $52.40 and would look for a pull back in the share price.
Shares in ASX have performed well since the Algo buy signal in early November. If we look out 12 months, ASX should deliver revenue in FY18 of $850m and EBIT of $600m. The business is growing at around 5% p/a and management are remaining disciplined on cost control.
From an earnings per shares basis, FY18 EPS will increase from $2.30 in FY17 to $2.45 in FY18, and DPS will increase from $2.10 in FY17 to $2.20 in FY18. This places ASX on a forward yield of 4.3%.
We think ASX shares are trading at the top end of the valuation range given the compressed yield and moderate EPS growth. The upside still remains the potential of a take-over bid as global exchanges look to consolidate.
Currently, ASX leading Financials are being dragged higher as the US equity rally continues into the lead up to their fourth quarter earnings results. We’re somewhat sceptical of the valuation support and yesterday started hedging our banking exposure in client portfolios. This was done through using in-the-money European-style calls over CBA and slightly in the money February calls over NAB, as two examples.
In the case of CBA, we stay exposed to the February dividend and franking credit but have hedged a price pullback of up to 5% between now and March.
In NAB, we’ve hedged to a similar extend but without the need to protect the dividend. NAB’s next payment period is not until May
The following group of stocks are in either established uptrends or, in recent months they’ve broken downtrends to begin building the early stages of a bullish “higher low” formation.
Many of these names have been mentioned previously in the blog and/or the monthly strategy video report. It’s worth loading these codes into your watch list and considering rebalancing your portfolio to include allocations towards some, or all of these names:
JHX, LLC, MQG, SHL, TWE, ANN, ANZ, ASX, CCL, CIM, COH, QUB, TAH, WOW & WPL.
With the lower growth names within the above basket, such as WOW & CCL, we compliment the position now with tight covered calls to enhance the yield to 10%+ per annum. With some of the other names, we give a little more breathing space as we expect 5 to 10% price appreciation before selling the call option overlay.
The following group of stocks offer above average earnings growth, structural uptrends and are currently trading back on support levels that warrant closer attention.
ASX, AMC, BXB, JHX RHC, SEK, SHL, SUN and TWE.
More detail on the Investor Signals portfolio allocations and derivative overlay strategy will be provided in the October ASX top 50 Video Market Report.
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