In this briefing:
- China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
- Lynas Investor Briefing – Looks Like More Capex Ahead
- GrainCorp: Demerger Underpins the Share Price but a Second-Best Option
- APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms
- Aussie Equities Month in Review (March 2019)
1. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.
2. Lynas Investor Briefing – Looks Like More Capex Ahead
At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update.
3. GrainCorp: Demerger Underpins the Share Price but a Second-Best Option
Graincorp Ltd A (GNC AU) said on Thursday it plans to spin off its malting and craft brewing distribution business (MaltCo). The proposed demerger, which will complete at the end of the year, would result in two independent ASX-listed companies – MaltCo and GrainCorp’s Grains and Oils businesses (New GrainCorp).
In the absence of an LTAP binding proposal, the GrainCorp Board to their credit has proposed an alternative way to create shareholder value or at least minimise a share price fall. Unfortunately, the proposed demerger is unlikely to be superior to the LTAP proposal, in our view.
4. 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.
5. 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.
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