Weekly review: RBA tipped to leave cash rate on hold at year’s final meeting

RBA rates on hold Reserve Bank Australia ASX Westpac Woolworths bank Caltex
WEEKLY MARKET REPORT

With the Reserve Bank of Australia to meet for the final time this year on Tuesday, analysts are predicting the cash rate will remain on hold at its record low of 0.75%.

At this week’s annual dinner of the Australian Business Economists, RBA Governor Philip Lowe reiterated the bank’s recurring theme that interest rates are likely to remain low for an “extended period”.

However, he noted that unlike other countries such as Japan, Switzerland and Denmark, negative interest rates in Australia were “extraordinarily unlikely”.

“We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better, and we have not had a period of deflation. So, we are in a much stronger position,” Mr Lowe explained.

He added that conventional monetary policy in Australia was still working.

Mr Lowe conceded a quantitative easing program would probably be an option if the cash rate was cut to 0.25%.

In the event that the bank had no choice but to undertake a quantitative easing program, he said it would purchase government bonds in the secondary market.

However, he added he did not expect quantitative easing would be necessary in the “near future”.

“It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector,” Mr Lowe pointed out.

“Given the significant reductions in interest rates over the past six months and the long and variable lags, the board has seen it as appropriate to hold the cash rate steady as it assesses the growth momentum both here and elsewhere around the world.”

Westpac drama continues to unfold

A major scalp at Westpac Banking Corporation (ASX: WBC) was claimed this week in the wake of the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) legal action against the bank for more than 23 million breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.

Chief executive officer Brain Hartzer’s head was on the chopping block and stepped down amid mounting public pressure on Tuesday.

Chairman Lindsay Maxsted also said he would bring forward his retirement with the new date set for the first half of next year.

Other changes to the bank’s executive team included long-standing director Ewen Crouch announcing his retirement.

Westpac’s breaches include facilitation of child exploitation due to a failure to detect and monitor certain transfers on its international funds transfer platform LitePay.

It is alleged the bank was aware of up to 12 customers using LitePay to transfer low value funds to the Philippines and South East Asia to suspected child exploitation facilitators.

In its bid to restore its reputation, the bank has engaged Promontory to carry out an external accountability and financial crime review.

Commenting on the appointment, Mr Maxsted said Westpac was “determined” to “urgently address” the issues laid out in AUSTRAC’s claim.

“We are genuinely remorseful for any hurt caused by the shortcoming in our systems and processes and understand we need to find the root causes and ensure accountability.”

In addition to engaging Promontory, Westpac said it will establish an accountability review advisory panel, which will include three independent experts to consider Promontory’s report and provide recommendations.

Additionally, after launching a $2.5 billion capital raising earlier this month, the AUSTRAC allegations have prompted the bank to allow shareholders who have already participated to withdraw.

The banks remedial actions helped it gain back some ground to close Friday at $24.52 – up 0.08% for the week after taking a bashing the week before.

Bank of Queensland slides

Bank of Queensland (ASX: BOQ) was on the slide this week with the company’s share price falling more than 9% to close at $7.83.

The drop follows a $250 million placement to institutional investors on Tuesday which resulted in 32.1 million new fully paid shares issued at $7.78 each, which the bank claims was the top of the bookbuild price range.

Bank of Queensland managing director and chief executive officer George Frazis said the proceeds would boost the bank’s buffer above Australian Prudential Regulation Authority’s “unquestionably strong” benchmark and provide the bank with additional to implement its “strategic transformation”.

The bank has also launched a $25 million share purchase plan, with the share purchase price to also be determined by a variable bookbuild price between $7.69-7.78 per share and underwritten at the $7.69 floor price.

Woolworths CEO and chairman take pay cuts to woo back investors

Another major Australian executive to take a hit this week was Woolworths Group (ASX: WOW) chief executive officer Brad Banducci who is taking a $2.6 million pay cut following the group’s wage theft revelations which showed 5,700 workers had been underpaid by a combined $300 million.

Mr Banducci claims it was his own decision to give up the short-term FY 2020 bonus because it was the “right thing to do”.

Woolworths chairman Gordon Cairns said he would also take a cut in the form of a 20% deduction to his board fee for FY 2020.

In a joint statement, Mr Cairns and Mr Banducci said they had “let many of [their] salaried team members down”.

“And our priority is to ensure that they receive the money they are owed as quickly as possible.”

The news prompted Woolworths to end the week up 1.71% to $39.76.

Caltex $1b retail float plans

Investors reacted positively to Caltex Australia’s (ASX: CTX) plans to spin out 250 retail outlets in an IPO analysts anticipate could be worth close to $1 billion.

The fuel and retail giant said it was planning to IPO a 49% interest in 250 of its freehold retail sites, while retaining a 51% majority.

The 250 sites are part of Caltex’s core network of 500 petrol and convenience outlets.

Caltex managing director and chief executive officer Julian Segal said the company was “focused on unlocking value” in its portfolio and this avenue would help it free up capital.

If the IPO gets the green light, it is scheduled for completion by mid-2020.

The company followed up the IPO news with an announcement it had received a non-binding and indicative takeover proposal from Alimentation Couche-Tard Inc.

This latest proposal follows an earlier approach to acquire Caltex at $32 per share which was rejected on the basis the offer price was “inadequate”.

Caltex said its board was considering the new proposal, which is “highly conditional”, and that discussions were at a preliminary stage.

The week’s events helped spur Caltex’s share price up more than 15% to close Friday at $34.56.

Zip to expand into UK

Popular buy now pay later stock Zip Co (ASX: Z1P) has announced plans to raise $60 million – comprising a $50 million placement to professional and sophisticated investors and $10 million share purchase plan for all existing eligible shareholders.

Zip said placement proceeds would be used to expand into the UK’s rapidly growing BNPL market, which is valued at $630 billion.

Funds will also be used to strengthen Zip’s balance sheet, boost investment in product and technology development, and increase its product range by launching Zip Biz, which is Zip’s BNPL solution for small businesses.

The offer price of $3.70 per share is a 5.6% discount to Zip’s last trading price of $3.92 and a 4.7% discount on the company’s 10-day volume weighted average price of $3.88.

Zip closed the week at $3.92 – up 1.82%.

Rio Tinto’s $1b iron ore mine upgrade

In the mining space this week, major Rio Tinto (ASX: RIO) unveiled plans to invest $1 billion in upgrading its Greater Tom Price operations – the company’s oldest mine in WA’s Pilbara.

The company expects the upgrade will facilitate mining of existing and new deposits including construction of a new crusher and a 13km conveyor.

Rio claims the new conveyor will reduce the mine’s greenhouse gas emissions by 3.5% compared to road haulage.

The company noted it would also assess other options for reducing emissions including renewable energy solutions.

As part of the upgrade, the haul truck feel will be transitioned to autonomous, which has the advantage of increased safety and productivity while reducing costs.

Rio is targeting construction of the upgrade to begin in the first quarter of next year.

It is expected the upgrade would boost Rio’s operating margins at the mine as the iron ore price declines.

Iron ore has fallen away from its mid-year highs of over US$100 per tonne to its close of US$84.42/t on Wednesday.

Small cap stock action

The Small Ords index finished up 1.06% for the week on 2915.9 points.

ASX 200 Small Ords 2019 November chart
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Simavita (ASX: SVA)

Diaper sensing technology developer Simavita has secured CE Mark approval for its Smartz unit which when incorporated in diapers can provide real-time alerts on wetness, temperature and other wellness indicators.

Simavita executive chairman Michael Spooner said the company would push ahead with commercialising its “disruptive technology” in the EU with adult diapers the first market to be targeted.

The company followed up its positive news with the appointment of Dr John McBain to its board.

Dr McBain is currently a director of the Royal Women’s Hospital Foundation and has a long career in obstetrics, gynaecology and fertility.

Invion (ASX: IVX)

A pre-clinical study using Invion’s Photosoft compound has destroyed tumour tissue in mice without adverse effects to surrounding healthy tissue.

The technology uses non-toxic photosensitisers, visible light and oxygen to generate a cytotoxic-reactive oxygen that destroys malignant cells and shuts down tumours, while stimulating the immune system.

In this latest study, the Hudson Institute of Medical Research revealed ovarian tumours in mice treated with Photosoft technology decreased to half their original size over three weeks.

The results from the study indicate it is likely a superior treatment to chemotherapy could be developed.

Digital Wine Ventures (ASX: DW8)

Digital Wine Ventures has moved into the craft spirit market after its WineDepot brand signed Vodka Plus.

The agreement paves the way for WineDepot to stock Vodka Plus products and deliver them to customers Australia-wide.

WineDepot uses four major distribution centres across Australia and enables orders to be filled from large inventory to reduce delivery time and freight costs, while providing a greater variety of products.

“WineDepot provides the opportunity for new and emerging brands like Vodka Plus to connect with and deliver to their customers in a fast and cost-effective manner. Previously many of their customers had to wait up to two-weeks for deliveries, which just doesn’t cut it in 2019,” Digital Wine Ventures founder and chief executive officer Dean Taylor said.

OpenDNA (ASX: OPN)

AI and e-commerce marketing company OpenDNA has acquired China-based digital marketing company Quality Brands International Direct (QBID) for $50,000 in cash and a further $492,000-worth of shares.

OpenDNA will also provide $125,000 in working capital for QBID’s ongoing operations.

The strategy behind the acquisition was to “immediately and significantly” boost OpenDNA’s annualised revenue.

As part of the deal, QBID’s founders will join OpenDNA to drive growth.

QBID facilitates business-to-business distribution for registered imported products in China such as Celebrity Slim, Essano, Nutriverse, Veta and Nuria.

Big Star Energy (ASX: BNL)

Helium explorer Big Star Energy announced on Tuesday it had collared what it called a “transformational” lease package in Colorado for $107,000.

The company acquired 63 new helium leases across 88.31sq km in the US state, which has effectively increased its acreage by 1,400%.

Big Star Energy claims the acquisition has transformed it in into the region’s dominant player.

“These acquisitions, in addition to our existing acreage, bring us to 271sqkm gross across nine prospects, significantly exceeding our targets and making us by far, the dominant player in this highly prospective area,” Big Star Energy managing director Joanne Kendrick said.

On Thursday the company reported it had leased a further 59,510 gross acres across its prospect and lead portfolio in Colorado bumping the company’s gross acreage to 86,614.

Catalyst Metals (ASX: CYL) and St Barbara (ASX: SBM)

St Barbara has teamed up with Catalyst Metals to advance Catalyst’s Drummartin gold project near Kirkland Lake Gold’s high-grade Fosterville mine in Victoria.

Gold miner St Barbara has agreed to spend $3.5 million on advancing the project over two years to lock-in a 50% stake.

Catalyst technical director Bruce Kay said the agreement with St Barbara was part of the company’s strategy to share exploration risk and provide the best return on shareholder funds.

Drummartin encompasses 648sq km of underexplored tenements and is 60km north of the Fosterville mine which is on track to produce up to 610,000oz gold for 2019.

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 company to make its way onto the ASX this week was:

Carbon Revolution IPO ASX 2019

Carbon Revolution (ASX: CBR)

Carbon Revolution was admitted to the ASX official list at midday on Friday on a deferred settlement basis after raising $30 million.

The Australian-based advanced manufacturing company was established in Geelong more than 10 years ago to develop and commercialise single piece carbon fibre wheel technology.

It is believed the technology has potential across a range of transport industries and was initially commercialised for the global automotive new vehicle wheel market.

Carbon Revolution claims carbon fibre has the advantage of being lighter than traditional automotive wheel materials, which are usually steel and aluminium.

The lighter weight brings with it performance and efficiency benefits.

Carbon Revolution plans to use IPO proceeds to invest in new manufacturing equipment to reduce unit and production costs, while increasing production capacity.

The company’s wheels are already used in Ford, Ferrari and Renault vehicles after rigorous testing.

Carbon Revolution ended its first day on the ASX at $3.45 – up 32.7% on its offer price of $2.60.

The week ahead

As mentioned above, the RBA will make its decision on interest rates on Tuesday with no change expected.

On Wednesday GDP for the third quarter of 2019 will be revealed.

Retail sales for October are out later in the week which will reveal if recent rate cuts are having any impact. The rise in Australia’s jobless number may be a concern however.

Manufacturing and balance of trade data out of both China and the US is worth keeping an eye on to see the impacts of the ongoing trade war. Should numbers come in weaker than expected we may see both parties come to the table with an increased urge to secure an agreement.

This week’s top stocks