Market Update 13/02/2012

After a sluggish start to the year, the Australian stockmarket is slowly starting to pick up speed as companies enter the “show and tell” reporting season.
Stanley Hong

After a sluggish start to the year, the Australian stockmarket is slowly starting to pick up speed as companies enter the “show and tell” reporting season. Running up until February 29th, it’s a time when most companies listed on the ASX are required to open up their books to investors and also give some guidance on the outlook ahead.

Already, mining giants BHP Billiton, Rio Tinto and Newcrest Mining have reported, and with mixed results, while Telstra has also rang up its numbers for investors.

BHP Billiton and Rio Tinto are the world’s largest and third-largest mining companies and their results are considered a barometer of the health of the sector. Both giants underwhelmed investors with their results, although with reasons enough for shareholders to remain reasonably confident.

For BHP, its first fall in profit since the global financial crisis was blamed on softer prices caused by the European debt crisis. The “Big Australian” reported a 5.5 per cent fall in profit to US$9.9 billion for the six months to December 2011, keeping its dividend steady and also indicating reduced capital spending due to caution over the outlook.

For Rio Tinto, core earnings rose 11 per cent to a record US$15.5 billion, driven by iron ore demand, but it was forced to write off US$8.9 billion due to its ailing aluminium assets. However, Rio increased its annual dividend by 34 per cent and announced higher capital spending due to its confidence in the outlook, particularly for iron ore.

Also in the miners, Newcrest Mining chief executive Greg Robinson said the gold price could reach US$2,500 per ounce after trumping analyst forecasts with a 50 per cent rise in first half profit.

Telstra shares dropped after Australia’s biggest telco reported a lower than expected first half net profit of $1.468 billion, below market’s expectations of a $1.5 billion profit. On the positive side though, Telstra gained a record 958,000 mobile customers and 436,000 wireless broadband customers during the December half.

For the week leading to February 10th, the benchmark S&P/ASX200 index dropped 5.8 points to 4,245.3.

Broker comment

“Trading has still been a little subdued, with about $4.4 billion going through the market per day compared with $4.8 billion per day at the same time a year ago. But we’re definitely seeing signs of a pickup because valuations are cheap and balance sheets are strong.

“Investors will probably take a few weeks to digest all the information from earnings season and we usually see things starting to pick up again later in February. The US is showing encouraging signs of a recovery and it’s our view that Europe will muddle through its debt issues, so we’re starting to see more money coming off the sidelines.”

In’s and out’s

Electricity storage systems company RedFlow appointed former Bow Energy and Flight Centre director Howard Stack to its board as non-executive chairman.

Meanwhile, the departure of Perpetual chief executive Chris Ryan due to strategic differences sparked speculation over the wealth manager’s upcoming results and its prospects as a takeover target.

Takeover play

Iron ore producer Atlas Iron is seen having “clear takeover appeal” due to the cost of expanding its operations to 40 million tonnes per annum. Acquirers could be rival larger companies or offshore bidders keen to break the dominance of major suppliers Rio Tinto, BHP and Vale in the global iron ore trade.

Stock to watch

Austin Exploration’s appointment of Richard Cottee as non-executive chairman has put the Australia/US shale oil and gas explorer on the radar of more investors. Although unsuccessful at Nexus Energy where he was ousted in a boardroom battle, Cottee still has a large following due to his earlier success at coal seam gas company Queensland Gas Company.

The week ahead

Banks are in focus in the week ending February 17th, with CBA, Westpac and ANZ all reporting earnings. Solid results are expected from Domino’s Pizza, Fortescue Metals and QR National, with weaker results from retailers JB Hi-Fi and Billabong.

On the economic front, labour force, housing and lending finance and motor vehicle sales data will all provide more clues on the direction of the Australian economy.

This week’s tip

“With the macroeconomic uncertainty and the Reserve Bank of Australia expected to cut interest rates further, investors should be looking at defensive, high-yielding stocks, quality large cap names with solid balance sheets and cash flows.”

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Anthony Fensom A former ASX employee, Anthony Fensom has spent nearly 15 years in the financial/media industries of Australia and Asia. Having been through the boom and bust, the resources boom and the GFC, he is a great believer in patient investing and in understanding market and economic cycles.

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