Weekly review: China leads the Australian market lower

Weekly review China Australia ASX buy now pay later October 2019
WEEKLY MARKET REPORT

Australia increasingly seems to be taking the lead from what happens in China rather than the United States.

Friday’s share market was a prime example with a positive lead from Wall Street after a string of good profit results and progress on China trade talks and Brexit, with this sentiment quickly overwhelmed by negative news out of China.

Against an expected 6.1% annual growth rate, the actual Chinese annual figure of 6% set a softer tone for the Australian market, which finished down for a second consecutive session, sliding 35 points, or 0.5%, to close at 6649.7 points.

Every single sector across the market was lower as traders also took note of Chinese retail sales which rose at 7.8% for the year as well as production (up 5.8%) and fixed asset investment (up 5.4% in the nine months to September) – both reasonable results.

However, it was the weaker economic growth numbers that really took a toll, with no shortage of speculation that the Chinese Government will now need to do more to stimulate its economy to keep the country’s impressive economic progress on track.

Friday’s fall trimmed the overall market gain for the week to just 0.7%, although the large falls early in October means the ASX 200 index is still down 0.6% for the month.

Buy now pay later companies enter a correction

One notable trend was continuing weakness in the “buy now pay later’’ sector which has been growing rapidly as it is embraced as a new form of credit that boosts retail sales and provides an opportunity to repay over time without an interest penalty – provided buyers are disciplined, which is a doubtful proposition.

The Reserve Bank has been casting a beady eye over the sector’s rapid growth and side-stepping of traditional credit regulations and has now suggested that some new rules might be needed for the industry, which has grown six-fold in just three years to represent $6 billion in sales.

News that the RBA “will be considering if there are any policy issues associated with the growth of buy now pay later services as part of its 2020 review of card payments regulation was about as popular as a dramatically lower speed limit on a freeway and really crunched shares in the sector.

Zip Money (ASX: Z1P) was down down 21.3% for the week while Afterpay Touch (ASX: APT) fell 15.5%.

Compared to record highs scaled earlier in the week, Afterpay was also down by more than 20%, which marked a correction for both stocks – although it is probably better classed as a minor breather compared to their rapid share price rises in the recent past.

IOOF has a rare positive day

It wasn’t all bad news with investment manager IOOF Holdings (ASX: IFL) gaining 3.6% to $7.30 after broker upgrades following its renegotiated deal to buy ANZ’s financial planning assets.

Seven West Media (ASX: SWM) shares were also up 1.3% to 38.5c after the Kerry Stokes led media company announced am all-scrip merger with regional media player, Prime Media Group (ASX: PRT).

As part of the agreement Seven West will sell its WA based radio business, Redwave, to Southern Cross Media (ASX: SXL) for $28 million.

Gold miners dragged down by St Barbara

Gold miners were generally lower with St Barbara (ASX: SBM) setting the tone with some disappointing news about its production for financial year 2020.

Problems at its Gwalia mine mean that forecast production has been cut to between 175,000 and 190,000 ounces compared to a previous forecast of 200,000 to 210,000oz.

Costs were higher as well with All-In Sustaining Costs (AISC) of between A$1,390 and A$1,450/oz versus compared to an earlier estimate of A$1,230 to A$1,290/oz.

As you might expect with higher costs and lower production, St Barbara shares fell 9% or 25c to $2.53.

While the share market may not have embraced the slight decline in Australia’s unemployment rate, at least the Australian dollar has taken some heart, lifting more than 1% since the announcement to US68.3c.

The stronger employment market has greatly reduced the chances of a Melbourne Cup day interest rate cut from the Reserve Bank, which is bullish for the Australian dollar but bearish for stocks in general, particularly those that serve as bond rate proxies such as infrastructure stocks.

Latitude IPO fails for second time

Latitude Financial Group’s second attempt to go public in under a year has failed.

Chief executive officer Ahmed Fahour, previously head of Australia Post, was brought in after the first failed attempt and was set to receive a $22.5 million bonus is he was able to get the company listed on the ASX.

The company was planned to list with a valuation of $3.2 billion, making it the largest in 2019.

However investors did not back the company’s valuation that saw the offer price start at $2.25 per share, giving Latitude a valuation of $4 billion.

When that failed to entice investors, the offer price was lowered to $2 then $1.78 per share. But even at a discount of 20% the market simply was not interested.

In general, 2019 has been a slow year companies listing on the ASX with only 40 initial public offerings succeeding so far.

Small cap stock action

Despite Friday’s correction, the Small Ords index closed the week up 0.28% at 2866.7 points.

XJO Small Ord ASX 200 chart October 2019
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Northern Cobalt (ASX: N27)

It was a big news week for Northern Cobalt which announced it was acquiring a highly prospective brownfields gold project in Alaska next to Northern Star Resources’ Pogo mine and Goodpaster discovery.

Known as the Goodpaster project, Northern Cobalt can earn a 60% interest in the asset from TSX-listed Millrock Resources by spending US$20 million on exploration over four years.

The new Goodpaster project is along strike from Northern Star’s same name discovery that has produced drill results like 4m at 67.5g/t gold, 5.2m at 15.7g/t gold, 0.3m at 129g/t gold, and 2.1m at 44.5g/t gold.

According to Northern Cobalt founding director and newly installed managing director Duncan Chessell, Goodpaster is along strike and surrounds Northern Star’s discovery and Pogo mine that produces 300,000ozpa of gold.

To reflect its new direction, Northern Cobalt plans to change its name to Great Northern Metals and raise $1.5 million to fund initial exploration and acquisition costs.

Armour Energy (ASX: AJQ) and Santos (ASX: STO)

Santos has executed a proposed farm-in with junior explorer Armour Energy where the duo will jointly explore and develop Armours’ oil and gas project in the South Nicholson Basin.

The deal paves the way for Santos to acquire a 70% operating interest in 408 million acres of the project which includes two exploration permit applications in the NT, plus a granted permit and three applications in north Queensland.

Once a formal farm-in agreement has been executed, Santos will pay Armour $15 million in cash within 10 days, and make further cash payments amounting to $15 million upon certain conditions being satisfied.

Additionally, Santos will carry 100% of Armour’s share of exploration costs for a committed four-year work program.

Today’s new follows Santos’ recent deal to acquire ConocoPhillips northern Australia assets for US$1.39 billion (A$2.05 billion).

Roots Sustainable Agricultural Technologies (ASX: ROO)

Roots Sustainable Agricultural Technologies’ cooling system has boosted dry cannabis flower yield by up to 118% at a premium production facility in Southern California.

In May, Canndescent paid Roots $28,000 to supply and install the Root Zone Temperature Optimisation system within a climate-controlled greenhouse.

The RZTO system stabilised the cannabis plant roots at 20°C, with the system achieving yield increases between 30-118% during the US summer on 400 and 200 plants.

Roots claims the system helped Canndescent battle Southern California’s dry desert climate, with temperature extremes having a detrimental impact on cannabis production and crop quality.

In addition, Roots announced it will collaborate with cold thermal energy storage company Nostromo to increase efficiency of Roots’ off-grid irrigation by condensation technology.

Immutep (ASX: IMM)

Immutep has gathered “mature positive efficacy data” from a phase I clinical trial using a combination of its lead drug candidate eftilagimod alpha with Keytruda to treat metastatic melanoma.

The trial involved 24 patients suffering from late-stage melanoma, with 75% of participants classified with a low probability of survival.

The patients were using Keytruda and received eftilagimod injections every two weeks for either six or 12 months.

Immutep chief scientific officer Dr Dr Frédéric Triebel said the combination therapy showed “very encouraging efficacy signals” and a “favourable safety profile”.

De.mem (ASX: DEM)

Water treatment company De.mem is acquiring a 75% stake in German industrial wastewater treatment firm Geutec Umwelt-und Abwassertechnik GmbH for $915,000 in cash.

As part of the deal, De.mem reserves the right to lock-in the remaining 25% at the same valuation.

Once the acquisition is completed, the combined entity will be known as De.mem-Geutec GmbH with a water treatment chemicals division to be created.

De.mem chief executive officer Andreas Kroll said the companies were “highly synergistic”, with the acquisition allowing De.mem to expand its product range into supplying industrial chemicals for water and wastewater treatment.

OpenDNA (ASX: OPN)

Artificial intelligence and e-commerce focused OpenDNA will be pushing brand awareness for Australia’s National Breast Cancer Foundation under a new deal.

OpenDNA’s CHOOSE Digital division has been appointed by NBCF to boost brand awareness, perception and engagement.

CHOOSE Digital was selected after its strong digital performance led to a 30% increase in online donation revenue for NBCF.

OpenDNA anticipates the agreement will contribute to the group’s revenue – pushing it higher than FY2019 results.

As part of the agreement, OpenDNA will make WeChat and Alipay payments available to facilitate donations from Chinese residents in Australia.

Later in the week, OpenDNA topped up its cash reserves by completing a $500,000 placement to the Lobster Shack founders the Thompson Family.

Dropsuite (ASX: DSE)

Dropsuite has teamed up with one of the world’s largest web hosting and cloud providers for small and medium-sized businesses – 1&1 IONOS, which is a division of United Internet Group.

According to Dropsuite, the deal is expected to have a positive impact on its annualised recurring revenue.

The company added it was on track to deliver its forecast of almost $5 million in ARR before the end of the year.

Under the partnership, Dropsuite will provide 1&1 IONOS customers with easy-to-use, affordable and automated email archiving and backup functionality – helping EU companies comply with the region’s data regulations.

“This again reinforces our leadership position in the data protection and compliance sector globally which has ever-growing regulatory requirements and constantly evolving cybersecurity threats. This is why our solution is in demand globally,” Dropsuite managing director Charif Elansari said.

ASX floats this week

Small Caps readers who want to view upcoming IPOs or see the performance of stocks that have listed in 2019 can now do so.

The latest companies to make their way onto the ASX this week were:

Damstra Holdings Home Consortium DTC HMC ASX IPO

Home Consortium (ASX: HMC)

Home Consortium was admitted to the official ASX list on Wednesday after satisfying all market conditions.

In its IPO, Home Consortium issued 97 million shares at $3.35 each to raise $325 million.

Established in 2017, a consortium of investors established the entity to acquire the former Masters Home Improvement portfolio from Woolworths.

The foundation security holders include Spotlight, Chemist Warehouse, Primewest and Arrum groups.

By the end of this year, Home Consortium’s portfolio will comprise 21 operating retail and service centres and a further nine under redevelopment across Victoria, New South Wales, Queensland and Western Australia.

The company plans to pursue other expansion and revenue initiatives while cementing its portfolio.

By the end of its first week on the ASX, Home Consortium’s share price had closed at $3.80 – up 13.4%.

Damstra Holdings (ASX: DTC)

Also debuting on Wednesday was workplace management solutions provider Damstra Holdings, which raised almost $50 million via the issue of 38.8 million shares at $0.90 each.

Damstra has been operating since 2002, when it started as a single office in Singleton, NSW.

The company now has 350 clients across eight countries including Australia, New Zealand, the US and UK, with a global operations centre based in the Philippines.

Damstra will use IPO proceeds to provide financial flexibility and funding to support growth, while also repaying debt.

The company also said being a publicly listed entity would enhance its brand profile and broaden its shareholder base.

Damstra closed out its first week at $1.18 – a 31% premium to the $0.90 offer price.

The week ahead

The coming week is one in which real world results will be the main influence on world markets compared to fresh economic data.

The US profit reporting season clicks into top gear and as usual will provide investors with the sort of data they really need – in terms of revenue and profits for major companies in various industries.

So far, the results have largely been better than expected with the major banks including JP Morgan, Citigroup, Bank of America and Morgan Stanley all posting strong results that “beat the street” – the forecasts by Wall Street analysts.

That led to a fairly good performance by US stocks which were also buoyed by strong performances by Netflix, Johnson & Johnson and UnitedHealth Group, although IBM was a disappointment.

This week there are a host of US household names reporting with some of those that are better known here including 3M, Kimberly-Clark, Lockheed Martin, McDonald’s, Whirlpool, Caterpillar, Amazon, Colgate Palmolive, Amgen, Goodyear and Moodys to name just a few.

With the US still by far the world’s biggest economy, the overall “vibe’’ from these results can be expected to set the tone for share markets right around the world.

There are a few Australian data releases to watch out for skilled internet job vacancies, the ANZ-Roy Morgan weekly consumer sentiment survey and the Commonwealth Bank’s manufacturing and services sector activity gauge.

Housing activity is also big with data releases in the US and China plus some important US releases on ‘flash’ October purchasing manager indexes and regional US manufacturing surveys.

This week’s top stocks