ASX 200 lower, Australian unemployment jumps to 3.7% + Core Lithium's steep raise

The Index fell for a second consecutive session but bounced off worst levels, Origin Energy posts a $1bn profit from a $1.4bn loss a year ago, Core Lithium shares tumble after the company raise $100 million at a steep discount, Japan's trade balance unexpectedly fell into a deficit, Australia's unemployment rate rises to 3.7% and UBS' take on a few of today's results.

Let's dive in.

ASX 200 Session Chart

ASX 200 lower but off worst levels (Source: Market Index)

Markets

The ASX 200 continued to sell off on Thursday but finished off session lows of -1.23%. The market managed to find a little bit of a bounce, with large cap names like BHP (+0.0%) and Commonwealth Bank (-0.1%) closing around breakeven. Still, it feels like sellers are in control of this market on top of several macro-related headwind. One of the major pain points for markets right now is the growing divergence between expected cuts and hikes. The odds of an additional Fed hike this year jumped to 39% (the highest in a month) after Fed minutes flagged the "potential need for higher rates." This creates another one of those scenarios where the market needs to recalibrate and digest the new outlook.

Economy

Japan’s trade balance unexpectedly fell back into a deficit of 78.7bn yen (US$538m) from a 43.1bn yen (US$290m) surplus a month ago)

• Exports dropped for the first time in more than two years

• Exports fell 0.3% year-on-year as a rise in auto shipments failed to offset declines in other segments such as semiconductors

• Imports tumbled 13.5%, raising uncertainty over the country’s economic outlook 

Australia’s unemployment rate ticked up to 3.7% in July from 3.5% in June.

• Above analyst expectations of a rise to 3.6%

• “July includes the school holidays, and we continue to see some changes around when people take their leave and start or leave a job. It’s important to consider this when looking at month-to-month changes, compared with the usual seasonal pattern. The only other fall in employment in 2023 was in April, which also included school holidays.” – Bjorn Jarvis, ABS Head of Labour Statistics

Latest news

Market Insights

#1 Developers are in a bit of trouble

There's a growing number of miners tapping the market at a steep discount.

• 26/07: Panoramic Resources (ASX: PAN) raised $40m at a 45.7% discount to last close

• 07/08: Poseidon Nickel (ASX: POS) raised $6m at a 23.1% discount

• 09/08: Pantoro (ASX: PNR) raised $30m at a 14.3% discount

• 14/08: Rumble Resources (ASX: RTR) raised $11.1m at a 20% discount

• 17/08: Core Lithium (ASX: CXO) raised $100m at a 26.6% discount

• 17/08: 29Metals (ASX: 29M) rumours of a US$100m raise

There's also Calidus (ASX: CAI) and Aeris Resources (ASX: AIS) that have taken on debt.

What are some key takeaways or learnings from these raises?

• The economics of a project will eventually matter (e.g. Aeris Q4 AISC climbed to $5.68/lb) and its dangerous to run a 'marginal' project with a little cash buffer

• Funding assumptions can be dangerous (e.g. Core Lithium raised to fund expansion projects, why could they not fund it from existing cash flows instead?)

#2 Origin Energy's takeover trade

I wrote about Origin Energy's (ASX: ORG) FY23 result today with the help of Vertium Asset Management Chief Investment Officer, Jason Teh. You can read the full coverage here.

But Origin has entered into a binding scheme implementation deed with a consortium led by Brookfield Asset Management. As I explain in the article:

"There's a US dollar component to Origin Energy's takeover. At an exchange rate of 0.70 cents, the bid is valued at $8.90. At current levels of 0.64 cents, it's worth $9.20. This suggests the stock is trading at a discount between 5-8% (excluding the upcoming 20 cents per share final dividend)."

Understandably, that 5-8% reflects the potential risk that the takeover doesn't go through. So perhaps I need to speak with Jason again for some scenario analysis:

• What's the risk of it not going through?

• A peer like AGL Energy has been surging, does this cushion the fall for Origin if the deal is blocked?

• Is the 5-8% a mispricing that investors can take advantage of?

Interesting news and movers

Trading higher

• +14.8% Inghams (ING) – Earnings

• +10.8% IPH (IPH) – Earnings

• +10.5% Maas Group (MGH) – Earnings

• +7.5% Ridley Corp (RIC) – Earnings

• +5.7% Goodman Group (GMG) – Earnings

• +2.9% Super Retail Group (SUL) – Earnings

• +2.6% Seven Group (SVW) – Earnings

• +1.8% Origin Energy (ORG) – Earnings

Trading lower

• -29.2% NextEd (NXD) – Earnings

• -24.8% Core Lithium (CXO) – Placement at 40 cps

• -10.5% Southern Cross Media (SXL) – Earnings

• -9.1% Nuix (NXL) – Earnings

• -7.8% Domain Group (DHG) – Earnings

• -5.7% Sonic Healthcare (SHL) – Earnings

• -4.2% Growthpoint Properties (GOZ) – Earnings

• -3.5% Centuria Office REIT (COF) – Earnings

• -2.9% Amcor (AMC) – Earnings

• -2.8% Telstra (TLS) – Earnings

• -1.8% NRW Holdings (NWH) – Earnings

Broker notes

UBS’ take on a few of today’s results:

IPH (IPH) – Buy with $9.80 target ($7.32 at 16 Aug close)

• “Solid result overall, beat; combined with new acquisition should see stock up.”

• “Result better than expected overall (2H 3% beat to cons / 7% to UBSe), though some moving parts compositionally - driven by ANZ (sales better than feared), Canada contribution and corporate costs; but offset by softer Asia performance in 2H."

Orora (ORA) – Neutral with $3.50 target ($3.57 at 16 Aug close)

• “Solid FY23 result with Group EBIT c.3% ahead of UBSe/cons. FY24 outlook for earnings "to be higher" vs. UBSe/VA cons. implied EBIT growth of 0% vs. FY23.”

NRW Holdings (NWH) – Buy with $3.10 target ($2.74 at 16 Aug close) 

• “Solid result. Strong 2H operating cash flow the highlight.”

• “Result in line. Focus on METS project execution and margin improvement as well as conservatism of FY24 guidance given strong level of FY24 contracted revenue.”

Ridley (RIC) – Buy with $2.50 target ($2.00 at 16 Aug close)

• “EBITDA broadly in line, with slightly stronger Stockfeeds offset by softer Ingredients result.”

• “Positive progress on Project Boost: >60% delivered vs UBSe 43% and remaining benefits largely expected in FY24 (supporting UBSe).”

Sonic Healthcare (SHL) – Sell with $34.00 target ($33.97 at 16 Aug close)

• “NPAT miss driven by labour costs and below consensus FY24 EBITDA guide at the midpoint, ex any M&A.”

• “Labour costs remain an issue although some indication these are legacy (i.e., Covid-related) in nature so we expect questions around whether they can be cut further. Consensus currently sits out of the top end of the EBITDA guide, although the guide does not include making further tuck in acquisitions.”

Scans