Coles spinoff should turbocharge Australian market, as Wesfarmers returns to its entrepreneurial roots

Coles Wesfarmers Australian market ASX
WEEKLY MARKET REPORT

Australian share investors should be rejoicing over the Wesfarmers plan to demerge its Coles supermarket business and return to its entrepreneurial roots.

Whatever your thoughts on the merits or otherwise of the two large companies that will emerge from the changes, the fact is that this sort of big corporate action is just the tonic the Australian share market needs to keep local investors interested and to spice up our stodgy international image.

There is some sound logic behind the Wesfarmers plan too, given that Coles had simply become too much of a “capital hog’’, soaking up all of the available capital in the conglomerate and not allowing the other business units to develop at a more appropriate pace.

One plus one can be more than two

Listed on its own, Coles should be a solid if unspectacular business, throwing off strong dividends and continuing the eternal shopping duopoly battle with Woolworths – one that it was winning in terms of sales growth for 27 consecutive quarters until Woolworths changed strategy and began to cut prices a couple of years ago.

There will always be other competitive risks of course, among them Aldi, Costco and Amazon, but Coles should emerge as a Telstra-style business which will sit solidly in the ASX30 and attract lots of investors.

Wesfarmers free to buy and sell other businesses

Freed of Coles, Wesfarmers should be able to return to its entrepreneurial roots and will be much more nimble in being able to seize opportunities and allocate capital.

Wesfarmers still has plenty of problems of its own – predominantly the apparent failure of the UK Bunnings rollout to gain traction, the continuing lacklustre performance of Target and the cyclical nature of its resources businesses.

However, it is tantalising to imagine the possibilities of Wesfarmers repeating its absolute transformation of Kmart, which it turned into a huge retailing success returning around 30 per cent on invested capital.

Similarly Bunnings is a fabulous success story – at least here in Australia – and under Wesfarmers chief Rob Scott and his team the company should be able to discard or deal with its problem assets and still have substantial firepower to take over struggling businesses and turn them into the next Kmart or Bunnings.

This is where the real fizz lies for Australian investors, with the potential for Wesfarmers to return to its acquisitive and entrepreneurial best and begin to buy up and discard businesses both listed and unlisted.

The Australian market often risks being seen as too sleepy, particularly to offshore investors, with its four banks and a host of duopolies, so the potential re-emergence of a hungry Wesfarmers on the prowl for opportunities is just the tonic we need.

Small cap stocks this week

This week was somewhat volatile, with the ASX 200 falling from its lofty 6,000+ peak and dragging several stocks around for a ride.

However, there were several strong standouts from the ASX crop. Most of the notable gainers were technology companies and biotech developers.

Mustang Resources (ASX: MUS)

Mustang helped to restore investor confidence in its ability to commercialise a viable resource following its less than desirable effort with rubies towards the latter part of last year.

This week, Mustang reported that it had unearthed huge thick, high-grade graphite and vanadium at its Caula project in Mozambique. Diamond drilling intersected up to 125m of mineralisation with grades ranging up to 24.2% total graphitic carbon (TGC) and 1.02% vanadium.

The embattled explorer said that its Caula project is going from “strength to strength” and cited very high graphite grades, substantial widths and a very significant proportion of large and jumbo flake sizes.

A completion date sometime in 2019 has been forecast although it remains early days for Mustang’s graphite ambitions.

Nuheara (ASX: NUH)

Nuheara surprised investors and closed out the week with its shares trading 50% higher.

The reason for the sharp rise was mainly due to the news that its smart personal hearing devices, dubbed IQBuds and IQBuds Boost, will soon be offered en masse to Australian residents, courtesy of the government’s Hearing Services Program (HSP).

Its proprietary devices are to be added to Australia’s national support scheme which spends over A$500 million each year supporting patients with hearing loss.

The government-backed validation means Nuheara could be set for strong uninterrupted sales for years to come, assuming they hold up to users’ expectations and serve as useful and reliable tools for patients.

Smartpay (ASX: SMP)

Working smarter, not just harder – Smartpay snagged a deal of a lifetime this week by signing a cornerstone agreement with Alipay, China’s largest payments provider with around 520 million active users and clearing around $1.7 trillion per year in transactions.

Smartpay is looking to cut itself a slice of the growing payments pie that has China as its wholesome centre.

The deal brings together the largest online payments provider in China and the largest independently-owned EFTPOS provider in Australia — a deal that could serve as a watershed moment, opening the door for other similar agreements amongst smaller players in the near future.

Sky and Space Global (ASX: SAS)

It’s been a busy week for Sky and Space Global.

The space-bound nanosatellites maker secured an additional A$10 million as part of a capital raising and supplemented its strong market momentum by tweaking a previous agreement with Globalsat Group to build a simulated service environment to test how their two respective technologies operate in practice.

Sky and Space is providing state-of-the-art nanosatellite communications technology, to be combined with Globalsat M2M and IoT services in the region.

The result is expected to be a network of 200 nanosatellites called the Equatorial constellation able to offer communications network coverage to even the world’s remotest areas.

Immutep (ASX: IMM)

Immutep announced big news this week. The small-cap biotech has signed a deal with Merck & Co, one of the largest pharmaceutical companies in the world, to conduct joint clinical trials of their respective drug candidates and treatments.

Immutep also announced a successful capital raising of A$6.85 million, which saw former Chairman Lucy Turnbull, raise her stake in the company. Two more significant investors joined Immutep’s share register this week, in the form of Platinum Asset Management and Australian Ethical Investments, both of whom became Immutep shareholders for the first time.

Following its placement to institutional shareholders, Immutep has also initiated a share purchase plan offer for all its eligible shareholders based in Australia and New Zealand.

Tawana Resources (ASX: TAW)

This week, Tawana officially became a lithium producer as its lithium concentrate production begun in earnest at its 50% owned Bald Hill lithium-tantalum mine in Western Australia.

In terms of potential capacity, Tawana hopes to achieve a rate of 1.2 million tonnes per annum during the next few months.

With the first batches of lithium now extracted and evaluation, Tawana is not resting on its laurels. The company said it is solely focused on how to achieve “steady state production” from its stage 1 DMS circuit and how to optimise existing lithium yields.

Adherium (ASX: ADR)

As a medical device manufacturer Adherium is moving towards a growing market. The company has developed a novel way of administering drugs to patients without the need for costly administrative processes and regardless of patients’ forgetfulness.

Adherium’s Smartinhalers are modernised versions of traditional asthma inhalers that offer several layers of functionality that are able to improve patient outcomes.

The customer features offered by Adherium have the potential to influence the rate of medication use and track the entire medication schedule for physicians to analyse and incorporate into the patient’s overall treatment plan.

Smartinhalers can track how often medication is taken, can provide audible reminders to patients, are able to communicate with other devices via Bluetooth and come touch-enabled as standard.

This week five Adherium directors bought shares on the market showing their faith in the company’s future.

Altura Mining (ASX: AJM)

Altura announced a 41-hole infill drilling campaign had been carried out at the Southern Ridge prospect, with a view of increasing the project’s ore reserves and resources.

Currently, the Altura project covers about 394 hectares. Initial assays from the Southern Ridge program returned an intersection up to 59m thick grading 1.34% lithium.

Altura also plans to finalise a second definitive feasibility study evaluating the possibility of doubling the processing capacity to around 440,000tpa.

From the initial feasibility study, about 215,000tpa of spodumene concentrate is estimated to be produced for a life of mine net revenue of A$1.56 billion.

The week ahead

Once again central banks will be closely watched with an official interest rate rise expected from the US Federal Open Market Committee (FOMC) when it meets on Tuesday and Wednesday.

That would lift US official interest rates for the first time this year after also raising them three times last year.

Our own Reserve Bank minutes will be out on Tuesday and they are much more likely to reveal a continuation of the “steady as she goes’’ approach that has seen rates stuck at 1.5 per cent since August 2016.

The most vital Australian statistic for the week will be Thursday’s February employment report which might continue the record breaking run of 16 consecutive months of job gains and will also reveal if unemployment is falling.

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