Kreston market update week ending Friday 27th August 2010

Kreston ANZ

Insights

News

Kreston Dormers

Kreston Dormers Financial Services Pty Ltd

The ASX 200 fell -2.2% on news confirming a slowing US recovery. The Australian company reporting season is almost complete with many companies expressing caution on the impact of overseas economic weakness. All sectors were down this week with Financials, Materials and Energy each falling over -2.0%.

We are at the bottom end of a 4,300 to 4,600 trading range in place since May this year. As stated last week, markets here and overseas are likely to remain volatile until the extent of the global economic slowdown becomes clearer and this is likely to take some months. Revised US June GDP numbers are released tonight which are likely to show weaker numbers than the previous estimate.

	Index	Change	%
All Ordinaries	4,377	-94	-2.1
S&P / ASX 200	4,342	-98	-2.2
Property Index	863	-6	-0.7
Utilities Index	4,211	-4	-0.1
Financials Index	4,173	-110	-2.6
Materials Index	11,532	-284	-2.4
Energy Index	14,649	-368	-2.5

Bank Term Deposit 6 month rates rose 0.05% for the second consecutive week.

Term	Rate %	Change in rate
3 months	5.60	-0.05
6 months	6.00	0.05
12 months	6.11	0.00
3 Years	6.80	0.00
5 years	6.95	0.00

Overseas markets were down for a 3rd consecutive week as concerns around the global recovery rose. The US S&P 500 was -2.6% weaker and extended its 3 week falls to -7%. The UK FTSE fell -1.1%. In Asia, Hong Kong's Hang Seng was down -2.2% and Japan's Nikkei shed -4.4%.

BHP, Woolworths, GPT, Toll, Origin, Sims and Hastie rounded out the reporting season.

Overseas, US housing data was weaker and focus is on tonight's revision to the US June GDP.

Due to the company reporting season we have not included a Feature Section this week.

Australian News

Minority governments are not an economic plus

The fallout from the hung election result was expected to weigh on markets this week but that did not eventuate. The 3 or 4 independents are holding out for their specific demands and are not being quick to give up their new found power.

From a longer term perspective, the result on balance is a negative for the economy as either blended party in power will be constrained in making meaningful economic change. Also, the need to 'buy off' independent and minor parties to get legislation through is likely to characterize the next government.

Slowing Capital expenditure but higher Construction

June quarter capital expenditure in the private sector fell -4.0% in real terms. The weaker than expected number is likely to result reduce GDP growth by up to -0.3%. The lower numbers were probably due to the expiry of capital spending tax allowances and the resources tax debate. Despite the fall, capital expenditure remains in good health.

Construction work (residential, commercial and government) for the June quarter rose 3.5% which was up on the 3.0% expected. This sector is an important part of economic growth and bodes well for the next quarter's growth. Western Australia, as expected, was very strong and the numbers are suggesting that private sector construction is starting to fill the gap as government work tails off after the stimulus package completes.

Overall, the Australian economy is not at present being significantly impacted by slowing economies in the Europe and US. However commodity prices are likely to weaken as the year progresses and China moves to a lower more sustainable growth rate. This will impact overall GDP growth but on the above data, capital expenditure and construction activity is likely to remain buoyant.

Overseas News

News was decidedly negative this week and concerns around a slowing US economy increased.

US GDP growth is slowing

Revised US June quarter GDP numbers are due out tonight and with the previous 2.4% growth rate to be revised down. Analysts expect a revised number to be as low as 1.4%.

Investors are revising down their estimates for 2011 growth in the US. Whilst the market is concerned that the US will enter a double dip recession, the majority of economists are expecting the US to continue growing albeit at a very sluggish pace. For example:

• Goldman Sachs estimate US GDP growth in 2011 at 1.5%,
• Jeremy Grantham (a well known US investor) puts the chance of a double dip at 30%.

Bear in mind that it is total global GDP that is the important. As discussed previously, developing countries are still growing robustly whereas it is the Eurozone and the US that are struggling. Our news tends to be US-centric and despite a stronger economy our share market tends to broadly follow US movements and will continue to do so.

US Home sales are down

A 27% slump in existing home sales and falls for new homes sales for July was the catalyst for Wednesday's falls. Home sales are still being affected by the finish of the home buyers tax credit (the US equivalent of our First Home Buyers Grant). Nevertheless, the numbers were very weak and suggest that home prices will remain under pressure.

The housing front news was not entirely negative as the mortgage delinquency rate for residential properties in the US fell to 9.85% in the June quarter, from 10.06% in the March quarter.

US Unemployment is high but employers are not firing

On a positive note, applications for jobless benefits dropped by 31,000 in the US for the week ending 21st August, which suggests employers are retaining employees. This will need to become a trend before the US 9.5% unemployment rate falls.

US Manufacturing is slowing

Durable goods orders increased a weaker than expected 0.3% in July and fell if aircraft orders are excluded. These numbers are notoriously volatile and in fact the previous June numbers were revised up. However the data is reflecting the slowing economy.

Europe sovereign debt remains a concern

Yields on German and U.S. benchmark securities sank as investors sought safe havens and yields on Greek and Irish debt, in particular, rose. On a positive note Eurozone factory orders rose 2.5% in June over May and 22.6% year on year.

Reports that a Spanish court had voided $US6.5 billion of VAT collected in the past year did not help markets in the US last night. This data is a bit obscure which does illustrate that markets in the current mood will run with negative data notwithstanding its importance (or lack thereof).

The Australian Reporting Season

The Australian reporting season substantially completed this week. While the results were generally solid, almost all companies cautioned over the near term as economies overseas slow.

Engineering Services

Worley Parsons (WOR) went against the trend of mining service companies and reported a -25.5% fall in NPAT to $291 million. The strong $AUD impacted the result by $41 million and the overall result was at the lower end of guidance. Worley's is heavily focused on the Energy sector and revenues in this sector were down 27% and particularly hard hit in the US. Project delays and deferrals were a major factor in the result. The company has strong management but is dependent on resource projects getting underway in both the US and Australia.

Property Sector

As discussed last week, the property sector is showing a stabilising trend with most companies reporting profits and conservative gearing. Caution is still the 'name of the game' when describing the short term future.

General Property Trust (GPT)

Net profit after tax for the half year to June 2010 grew 16.3% on the same period in 2009 to $145.2 million. Surprisingly the US Seniors Housing business result was up which added to stronger results in the retail and office sectors in Australia. 'Look through gearing', which includes debt in joint venture or substantially owned companies, was up slightly to a still conservative 32.7%.

The company is actively exiting from its offshore investments to concentrate on its Australian assets. Like most listed property companies, GPT is trading at a discount to its Net Tangible Assets although GPT's discount is only 11.6% compared to over 20% for many of the other companies.

Resources/Energy

BHP

As expected, BHP delivered a strong result as iron ore, copper and coking coal continued to rise through the year. Adjusted full year earnings rose a solid 12% to US$12.47 billion. Aluminium was soft and is reliant on a 'kick up' in global economic activity. CEO Marius Kloppers joined the chorus of caution on risks of a slowing global economy. Nevertheless BHP is confident enough to plan a considerable capital expenditure program as well as bid $40 billion for Canada's Potash Corporation.

Origin Energy (ORG)

Like last week's Woodside result, Origin's NPAT rise of 10% to $585 million (adjusted for one off items) was close to most analysts' expectations. Origin's 'defensive' retailing business was the standout division, rising 9% as volumes and prices increased.

Origin has a 'two tier' business. The 'defensive' or more predictable power retailing and generation businesses and the 'growth' oriented coal seam methane joint venture with Conoco Phillips. Management expects a strong 15% increase in underlying earning per share for 2011.

Sims Metal Management Ltd (SGM) Metal recycler Sims had a 210% rise in NPAT to $126.7 million for the year ended 30 June 2010 although revenues were down 13.7%. The 2009 profit was impacted by a $191 million write down of goodwill. The European and Australian operations were stronger, but was partly offset by a fall in earnings in the US.

Management guidance was typical for this reporting season "Due to continued uncertainty regarding economic conditions that could affect scrap flows and margins, Sims Metal Management will not provide more specific outlook for fiscal 2011 at this time."

Other companies

Woolworths (WOW)

NPAT was up 10% to $2.02 billion. Electronics, Hotels and Merchandise were below guidance which is reflecting falling consumer confidence as the effects of the stimulation package faded. However, the food group outperformed with a 10% NPAT result.

A $700 million buyback was announced which helped the share price rise on the day of the announcement.

Hastie (HST)

Building services company Hastie reported a -32% weaker NPAT of $1.7m as margins deteriorated.

Management stated that they are seeing their markets stabilising and work is contracted for 90% of 2011 revenues. The company expects earnings to grow by 10% but, like most companies, they are cautious on 2011 conditions due to softening overseas economies.

Hastie's is dependent on the commercial property market in Australia continuing to recover and a stabilisation of the Irish and UK economies.

Toll Holdings Limited (TOL)

Transport and logistics company, Toll Holdings Limited, has been suffering from flat domestic conditions. While media headlines trumpet the robust profits of large miners and banks, the small to medium business sector is still struggling through the recovery. Consequently Toll's domestic volumes and results have been soft. On the other hand, the Asia focused businesses had a very strong second half. Toll has been building an Asian transport hub in Singapore and plans to continue its strategy of buying bolt on companies with an emphasis on building its Asian operation. Toll had already flagged a softer result in previous announcements and the full year result was in line with lower expectations of $355 million pre tax profit down 8.6% on 2009.