Evening Wrap: ASX 200 extends gains, iron ore stocks rally, CSL slumps on FY24 guidance miss

The S&P/ASX 200 closed 23 points higher, up 0.32%. 

Broad-based gains for iron ore miners help offset an almost 7% drop from CSL, German producer prices slide in May, the UK economy returns to growth in April, why China's stimulus decisions could be a deciding factor for where the ASX 200 is headed and Macquarie provides an update for lithium and rare earth sectors.

Let's dive in.

ASX 200 Session Chart

ASX 200 choppy but higher (Source: Market Index)

Markets

The ASX 200 is up almost 1.0% in the last three sessions. Although sector performance has been very mixed over the past few days, with certain sectors lifting the market higher while others lag. The Materials sector powered ahead on Wednesday thanks to China's unexpected interest rate cut on Tuesday and growing expectations of more stimulus. Heavyweight iron ore miners lifted the Index, notably Fortescue (+4.3%), BHP (+3.6%) and Rio Tinto (+2.9%). Conversely, the Healthcare Index nosedived after CSL (-6.9%) flagged a major drag on its FY23 earnings.

Economy

Germany’s wholesale price index fell 1.1% month-on-month and down 2.6% year-on-year in May.

• Wholesale disinflation is gathering momentum after a 0.5% year-on-year decline in April, which marked the first year-on-year drop since December 2020

UK GDP rose 0.2% month-on-month in April after a 0.3% contraction in March.

• The services sector was the main contributor to growth, up 0.3%

• Production and construction segments fell 0.3% and 0.6% respectively 

Latest news

Market Insights

CSL: Hedging blunder and FY24 miss

Hedging is one of those things you don't really care about until the company announces a foreign currency headwind of US$230 million to US$250 million (up from prior guidance of US$175 million).

CSL also provided FY24 NPATA guidance of 13-18% to US$2.9 billion - US$3.0 billion at constant currency. This was flagged as well below consensus expectations of US$3.33bn.

CSL finished 6.9% lower, up from session lows of 8.6%.

ASX 200: Eyes on China

There have been quiet a few sessions in the past 1-2 weeks where the ASX 200 struggled for upside thanks to the underperformance of Materials and Energy stocks. But names like BHP, Rio Tinto and Fortescue rallied 3-4% on Wednesday, close to 2-month highs.

On Tuesday, China's central bank lowered its short-term interest rate from 2.0% to 1.9%, marking its first rate cut since August last year. The People's Bank of China also injected 2 billion yuan or US$280 million into its banking system.

"PBoC announced a short-term policy interest rate cut, which could be seen as a sign that officials are stepping up stimulus to boost the recovery," Macquarie said in a note on Tuesday.

"More easing actions especially those of low threshold could follow, but for significant moves, we may still need to wait until the July Politburo meeting," noted Citi analysts.

The ASX 200 is beginning to muster up a few solid sessions thanks to the strength we're seeing across the Resource space. The question is, will China follow through with stimulus?

Interesting news and movers

Trading higher

• +10.2% Azure Minerals (AZS)

• +2.5% Perenti (PRN) – Contract award

• Investment managers sector move: WAM Microcap (+6.5%), Australian Ethical (AEF) +5.2%), Platinum Asset Management (+3.0%), Magellan (+2.5%)

• Lithium sector move: Latin Resources (+7.9%), Leo Lithium (+6.7%), Patriot Battery Metals (+5.3%), Allkem (+4.6%), Pilbara Minerals (+2.95%)

• Iron ore sector move: Mt Gibson Iron (+23.1%), Fortescue (+4.3%), Fenix Resources (+4.2%), BHP (+3.6%), Rio Tinto (+2.9%)

Trading lower

• -21.9% Challenger Gold (CEL) – MRE and placement

• -10.1% Panoramic Resources (PAN) – Suspends production, lower guidance

• -6.9% CSL (CSL) – Guidance

Broker notes

Macquarie’s take on lithium and rare earth miners:

• Stronger EV sales in China: “There are signs indicating continued improvement in EV sales in China. According to data from the China Passenger Car Association (CPCA), Tesla sold 77,695 EVs in May, 2.4% higher MoM.”

• Rare earth prices in May: “While the market continued its soft performance at the start of May, prices stabilised during the month with NdPr prices rebounding from ~US$63/kg to US$70/kg.”

• Lithium valuations: “At spot prices, PLS boasts the lowest FY23 EV/Ebitda of 3.5x followed by IGO and AKE at 5.4x and 6.2x. MIN's EV/Ebitda is higher at 8.6x given its exposure to iron ore.”

Plus a few standalone Macquarie notes: 

Domino’s Pizza (DMP): Neutral with $46.00 target price

• “DMP flagged that its FY23 same-store sales growth (SSSg) remains below its medium-term outlook of 3-6% annual growth.”

• “We have flagged that risks have been building for the business in recent months. Softer franchisee sentiment post-Covid results in our cautious outlook for the business.”

• “We maintain our preference for Staples in the current macroeconomic environment.”

NextDC (NXT): Outperform with $15.80 target price

• “We are now Outperform-rated on NXT following a period of restriction. Investment thesis underpinned by continued DC demand.”

• “We believe consensus EBITDA estimates are too high for FY24 due to head office and S5/M4 holding costs that have not been appropriately reflected. While this is expected to result in some near term share price volatility - we believe the longer term investment thesis remains sound.”

Scans