In this briefing:
- APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms
- Aussie Equities Month in Review (March 2019)
- Battery Technology- The Key To An Electric Vehicle Future
- More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
- Yield Grab Supports the USD, Japanification Fear Weakens EUR
1. APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms
On 5 April, Ap Eagers Ltd (APE AU) announced that it had lobbed an unsolicited all-scrip takeover for Automotive Holdings (AHG AU)/AHG. Under the proposal, AHG’s shareholders would receive 1 AP Eagers share for every 3.8 AHG share. In a 100% acquisition scenario, AP Eagers shareholders would own 75.5% of the merged AP Eagers-AHG.
Presumably, AP Eagers believes its proposal delivers fair value to both AP Eagers and AHG shareholders. While AP Eagers’ bid provides some relief for AHG shareholders, our analysis suggests that AP Eagers’ bid requires a bump to cross the finish line.
2. Aussie Equities Month in Review (March 2019)
- Australia underperformed the global benchmark due to Financials after their strong post-Royal-Commission-led rally. Trade protagonists China (24%) and the US (13.6%) lead the global rally this year buoyed by optimism of a truce and a more supportive policy backdrop. The bond market reaction to the change in US policy direction and a new TLTRO in Europe has been aggressive and has been the key support for risk appetite.
- The bond market rally has underpinned the strong performance of defensive sectors such as Communications Services, Property and Consumer Staples. However, Materials also outperformed by a wide margin as well (3.2%pts) on the back of stronger Iron ore, Copper and Oil prices. Thermal coal remains problematic due to tighter Chinese environmental policy. The commodity fell 11.2% in the month and is now 17% lower year-to-date.
- Downgrades have eased. The unrelenting run of downgrades between December and February now appears to have eased, with the upgrades: downgrades ratio almost twice the long-run average. Only IT, Healthcare and Communication Services saw larger than normal upgrades. However, downgrades were particularly scarce in Consumer Discretionary, Industrials and Energy. Valuations remain reasonably stretched, with IT, Industrials and Healthcare the most expensive sectors. Energy is cheap and Financials and Consumer Discretionary are around fair value.
- Weaker GDP and housing data show that the domestic economy is reasonably soft, but the labour force data remains key for the policy outlook, in our view. In turn, this will depend on the global economy and the current patch of weakness in China and the US mean that the prospect of lower official interest rates will be in play. Indeed, the market has one full interest rate cut priced in by year-end. The Australian bond market rallied strongly along with global peers, with the 10-year yield at 1.81% by month-end. In real terms it is 0%, which is its lowest level since the mid-1970’s.
- Company guidance remained little changed with weather-related downgrades by both BHP and RIO and COL providing some positive guidance from its merger with Ocado. In a repeat of last year, ECX aggressively cut its NPATA guidance only weeks after guiding single-digit growth. SGM downgraded both FY19 output and longer-term throughput from its Gwalia gold mine.
- Stay long Resources and Energy over Banks. In our last model portfolio update we moved from neutral in Banks to underweight and moved from slightly underweight Resources and Energy to overweight. This trade has worked well over the past month, particularly now there are signs that the slide in global growth may have run its course. Our infrastructure and mining capex-related exposures have also performed well and we expect this to continue.
3. Battery Technology- The Key To An Electric Vehicle Future
This Insight has been produced jointly by William Keating at Ingenuity and Mio Kato, CFA and Aqila Ali at LightStream Research.
The Insight is structured as follows:
- A. Key Conclusions
- B. Report Highlights
- C.History of Electric Vehicles
- E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
- F. Batteries Beyond Li-ion
- G. Supply Constraints for Key Raw Materials
- H. The Competitive Landscape
A. Key Conclusions
Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.
Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors.
Quite apart from the technology, the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework.
4. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.
Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.
5. Yield Grab Supports the USD, Japanification Fear Weakens EUR
FX markets are meandering with no clear trends, and it seems investors have little market conviction. This appears to be resulting in choppy price action influenced mainly by short term technicals rather than macroeconomic developments.
We have noted that in recent years the FX market has appeared to be less pre-emptive, and often responds surprisingly sharply after the event. As such we remain wary of a reversal of recent USD strength if, as it seems increasingly likely, a negotiated trade and Brexit deal might be found relatively soon.
If there is a trend, it is a mild downtrend in the EUR that has underperformed most other currencies over the last six months. It failed to rise much in January when most other currencies experienced a rebound against the USD, and it has continued to drift lower, in recent months, during a period of mixed to weaker price action in other currencies against the USD.
The market may be moving into a yield-seeking mode. Yield compression tends to shift capital to higher-yielding assets, resulting in a stronger performance for higher-yielding currencies even as their yield spreads narrow. The USD is now one of the higher-yielding currencies.
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