Devon Funds Morning Note - 30 April 2024

Tuesday 30th April 2024

Global

The US indices were higher on Monday, with the Dow Jones and Nasdaq both adding a further 0.4% at the close while the S&P500 gained 0.3%. Alphabet declined nearly 3% giving back some of its gains following last week’s result, while Microsoft also eased. It was Tesla’s turn to take centre stage, soaring 15% after clearing a key hurdle for full self-driving in China after Elon Musk’s surprise visit. Apple meanwhile jumped nearly 3% on a broker upgrade. Markets overall traded quietly as investors await another deluge of earnings this week, and the Fed meeting which gets underway on Tuesday.

It has been a choppy month for the US indices, with the S&P500 and Nasdaq both down around 2% as April draws to a close. Markets though appear to be finishing with the month with positive momentum over the past week, driven by a strong earnings season, which was also a feature of the barnstorming first quarter. Expectations around the proximity and quantum of rate cuts have been a differentiating factor over the course of this month.

We will hear more on this matter from Jerome Powell this week, with it likely that the persistence of the last mile of inflation means officials will be in no rush to ease. There were some positive developments around a key driver of headline inflation overnight. Oil prices fell over 1% as the US Secretary of State made a renewed diplomatic push in the Middle East to secure a cease-fire in Gaza. It has been a long wait for interest rates to start heading down, but it seems investors will have to wait a little while longer. Good things can take time.

It has also been a long wait for the rollout of Tesla’s full self-driving software, but it seems this is taking a step closer to reality in China at least. Tesla said over the weekend that local Chinese authorities had removed restrictions (such as automated lane changing) on its cars after passing the country’s data security requirements. Tesla has also reportedly secured an agreement with Baidu that would provide access to the Chinese tech titan’s mapping and navigation technology. Such a deal is a requirement for intelligence driving systems to operate on public roads in China. This has raised expectations that Tesla’s Full Self-Driving software would soon be available in the country, the largest market globally for EV’s.

This is welcome news for Tesla, after losing market share in a highly competitive market. Trade frictions have also seen reports that Tesla’s have been banned from some government-rated properties in China on security concerns – the Biden administration earlier this year announced a probe into Chinese vehicles imported into the US on similar concerns due to their ability to potentially collect sensitive data. With sales growth in reverse, Tesla has had to cut prices globally, but the prospect of full self-driving may give the company the jump on local rivals such as BYD. Investors warmed to the news and the strong rebound meant that the stock’s year to date decline has been nearly halved to around 20%.

Another stock on the up was Domino’s Pizza. The shares jumped over 5% after reporting earnings ahead of expectations. Quarterly revenues of US$1.08 billion were in line with estimates, but the pizza chain reported higher margins and accelerating same-store sales growth in the US. An improved loyalty program drove sale as did the initiation of marketing on Uber eats. Domino’s has also started tipping customers. The company recently launched a new promotion call "You Tip, We Tip" that tips customers a US$3 coupon who tip their delivery drivers. Tip for tip – a new trend?

Financial stocks were lower. Philadelphia-based Republic First Bank has been closed by banking regulators, and a deal has been made for another small Pennsylvania firm, to take over the bank’s deposits. The announcement though barely caused a ripple compared with last year’s closures of Silicon Valley Bank and other troubled regionals.

Across the Atlantic the UK market was up 0.09%, but European indices were softer. Economic sentiment saw a slight decline in April (weighed by France) according to the European Commission, but remain above its long-term average. German inflation meanwhile ticked up to 2.4% in April, from 2.3% in March, driven by a rise in food prices.

A prominent riser in Europe was Phillips which jumped nearly 30% to a two-year high. The Dutch medical firm has agreed to a US$1.1 billion (~€933 billion) settlement in the U.S. for personal injury cases linked to the recall of some of its sleep apnoea devices.

The settlement was less than consensus market estimates of €2 - €4 billion. Millions of devices were recalled in 2021 over concerns that components carried potential cancer risks. Philips did not admit fault or liability as part of the settlement and said remediation of the devices was almost complete. The company reported a €998 million loss for the quarter, abut reiterated full-year sales growth guidance of 3% to 5%. While a settlement has been reached time will tell whether there is any lasting reputational damage and long-term headwinds from the issue.

The Asian indices rose, with the Nikkei up 0.8% and the CSI300 rallying 1.1%. Industrial profits in China climbed 4.3% year on year in the March quarter, which was an easing from the 10.2% year-on-year gain seen in the January and February period.

There was a bit of bustle around L’Occitane with reports that its Austrian billionaire shareholder is looking to take the skin-care company private – the move would end its 14-year run on the Hong Kong stock exchange. The offer of HK$34 a share is at a luxurious 60% premium to the 60-day undisturbed share price. L’Occitane was founded in 1976. Reinold Geiger became a minority shareholder in 1994, but evidently the company’s poor performance prompted him to start working there to protect his investment. He now controls 70% of the company.

New Zealand

The Kiwi market put in a strong session on Monday, with the NZX50 bouncing 0.9% to 11916. Fisher & Paykel Healthcare drove the gains, with a 1.3% surge. EBOS jumped 2.2% and Infratil leapt 3.1% to a new record high. Contact Energy rallied 1.7%, while Chorus rose 1.5% and Spark NZ leapt 1.3%. On the downside Mainfreight fell 1.7% and Mercury NZ gave up 2%. Auckland International Airport jumped 1.3%. The airport announced it is considering a retail offer of fixed rate bonds maturing in November 2030.

Fisher & Paykel’s gain was propelled by the read-across on the strong result from competitor ResMed (see yesterday’s note). Our biggest exporter is also getting a currency kick from a weaker NZ dollar against the US, as well as other currencies. On a separate note, trips across the Tasman are more expensive now – the NZD is at a 10-month low versus the A$.

This morning, Heartland Group has announced that it has received the necessary regulatory approvals from the Australian Prudential Regulation Authority and the RBNZ for the acquisition of Challenger Bank Limited across the Tasman. The acquisition is expected to complete today.

Serko is also out with an announcement. The travel management software provider has signed a new five-year contract with Booking.com. Management said the deal was a significant milestone for Serko’s growth ambitions in a tie up that has driven material revenue growth - registered companies now exceed 600,000 with completed room nights up 65% in the past financial year. Under the revised revenue share arrangement, the revenue share will continue at the same ratio for current volumes with a new tiered system for higher incremental volumes.

Serko updated that total income is estimated to be up 48% on FY23 and above the middle of the revised guidance range provided at half year results in November. Second half revenue was though lower than expected. Full year results are due at the end of May.

There was a reminder (if any were needed) about a key driver in cost-of-living pressures from Stats NZ yesterday. The cost of living for the average New Zealand household increased 6.2% in the 12 months to the March 2024 quarter. The number contrasts with current CPI inflation of 4.0%. The household living-costs price indexes (HLPIs) include interest payments, while the CPI includes the (arguably less relevant to most people) cost of building a new home. The 6.2% increase in the cost of living as measured by the HLPIs, follows a 7.0% increase in the 12 months to the December 2023 quarter, and down from 8.2% in the 12 months to the December 2022 quarter. There are though many mortgage holders yet to refix to higher rates.

Australia

The Aussie sharemarket rallied on Monday with the ASX200 jumping 0.8% to 7637. All sectors were in the green. Technology lifted 1.7%, property was 1.6% higher, while healthcare jumped 1.2%. ResMed jumped a further 3.3%, on its results and also on the narrative that weight-loss drugs aren’t having a material impact on the sleep apnea treatment firm’s earnings.

Financials were higher, including the big banks. Perpetual gained 3% after confirming it was in talks to sell its wealth and trust business to global PE firm KKR. Shares in Graincorp rose 2.7% on disclosure of an activist shareholder taking a 5% stake in the grain handler. Star Entertainment jumped 6.4% (but are still down +20% this year) after the chairman of the casino operator stepped down as the second inquiry into the group’s Sydney operations continues.

TPG rallied 5.3% after signed a network deal with bigger telco rival Optus. The agreement will extend TPG Telecom’s 4G and 5G mobile network to reach 98.4% of the population as it more than triples its regional mobile footprint. Under the network sharing agreement TPG’s network will increase from 755 to 2444 sites, with national coverage doubling from 400,000 to 1 million square kms. TPG is set to pay Optus A$1.17 billion over the deal’s 11-year term. Some mobile sites may be transferred to Optus and 755 will be decommissioned, which will see TPG recognise A$230 million to A$250 million of non-cash charges in FY24.

Investors were showing the love for Boss Energy which jumped 9.1% as the uranium company delivered its first quarterly report since beginning production at its Honeymoon project in South Australia.

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