ASX Close: Disappointing day and outlook poor

Tuesday 19th January 2010

The ASX finished down today with financials giving back some of their recent gains. The energy sector performed strongly and a standout stock for the day was Computershare.

The ASX 200 finished 1% lower at 4861.2 after trading as high as 4930 this morning. The market opened the session slightly higher but by mid-morning, the financials had begun to lead the sell-off.

The broader market outperformed by more than expected yesterday so this maybe why we're seeing it underperform today. There wasn't a lot in the way of leads due to the Martin Luther King holiday in the US with very thin trading volumes continuing to exaggerate trading action.

The financial sector detracted the bulk of the points with Commonwealth Bank of Australia falling the most, down 2.4%. It was quite surprising to see CBA down so much given its profit upgrade on Friday was seen as a positive for the sector. Many had thought this might have been the catalyst for a rally in the sector but it doesn't look this way at the moment.

Looking ahead, it's going to be tough for the market to make new highs ahead of the local reporting season in February. So far, what we've seen from the US in terms of Q4 reports has been very mixed at best, with no clear direction at all.

Rather than buying now ahead of all this uncertainty, we may see investors happily sitting on the sidelines. It was a fairly disappointing day's trade for the ASX 200. The industrial sector was the biggest decliner, losing 1.7% as the likes of Macquarie Airports, Macquarie Infrastructure Group, CSR and Brambles were all down between 2.4% and 3.4%.

Despite higher crude oil prices overnight, the energy sector lost 1.5% with the biggest detractors being WorleyParsons, Oil Search and Origin Energy, all down between 1.8% and 3.2%.

Interestingly, Karoon Gas had a positive day, rising 4.3% after management said it will retest the Poseidon 2 well from early next week after "analysis of the first test attempt indicates that it is highly likely that no connection between the well bore and the reservoir was achieved," despite preliminary analysis of a 60 metre core sample suggesting "the reservoir should flow gas."

While initial inconclusive test result last week saw Karoon dive 24% from around $10.50, it appears some investors are willing to give Karoon the benefit of doubt over the potential company-shaping field. In a note from Merrill Lynch, they suggest well estimate could swing Karoon's valuation within a $4.50 to $16.00 price range.

Elsewhere, in a note from Merrill Lynch, AGL Energy could seek to raise up to $2.5 billion in equity in 2010 to fund the acquisition of NSW energy retailers in the upcoming privatisation process, noting that both AGL Energy and Origin Energy could conceivably buy two of the three retailers, Integral and Country, without competition concerns. The broker retains its ‘neutral' rating and $15.00 target on AGL Energy, noting the stock's low return on equity of around 7% is well below European peers at around 20%, but says low purchase price for NSW power is the key upside risk.

The financial sector couldn't match yesterday outperformance, finishing down 1.1%. The group was led lower by CBA, weaker by 2.4% despite its profit upgrade on Friday. Westpac and National Australia Bank lost 1.2% and 0.2% respectively while ANZ managed a gain of 0.1%.

The materials sector came under some late session selling, finishing down 0.5% with Amcor and Fortescue Metals Group the two biggest decliners, down 2.7% and 2.3% respectively. Elsewhere, heavyweights BHP Billiton, Rio Tinto and Newcrest Mining were all lower by between 0.3% and 0.5%.

In a note from UBS, they suggested BHP Billiton could look to reintroduce its share buyback programme at its interim result next month. UBS said since suspending its buyback program in December 2007 with US$4.2 billion outstanding due to the offer for Rio Tinto, BHP has only been able to return cash to shareholders via its regular dividend payment. However, the broker believes that BHP may announce a resumption of capital returns at its interim result on Feb. 10, 2010 given the deferral of the iron ore JV balance payment to Rio Tinto to the second half of CY2010 and better prices and outlook for commodities. The broker believes it's more likely that BHP Billiton would focus any buyback program on the London Plc market given the widening spread. Assuming the remaining US$4.2 billion program is reintroduced in the Plc market, sees EPS accretion of 0.1% in FY10, 0.9% in FY11 and 1.3% in FY12.

In stock specific news, Computershare rose 8.2% for the session after this morning announcing that first half 2010 management EPS will be 20% higher than in either the first or second halves of the 2009 financial year.

Management warned the second half may not be as strong as the first, given the first half was supported by "a number of significant transactions" that took place over the period that may not repeat in the second half.

In a report from Credit Suisse they said previous guidance called for flat year-on-year growth so this 20% upgrade--which would translate into 10% year-on-year full-year growth if the second half is indeed flat year-on-year--surpasses investor expectations for the group, adding that consensus estimates called for 5% growth for the full year. The broker added IPO activity is picking up, which should contribute to growth in the second half, meaning Computershare has the potential to continue to outperform.

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.

Comments from our readers

No comments yet