Evening Wrap: ASX 200 fades early strength on hawkish RBA minutes

The S&P/ASX 200 closed 30 points higher, up 0.42%. 

The Index gave back all of its intraday gains as RBA minutes come out more hawkish than expected, Citi says Paladin Energy is trading more than what it's worth, Bapcor shares near a three-year low amid deteriorating business conditions and a closer look at a cool tool to track stock correlations.

Let's dive in.

ASX 200 Session Chart

ASX 200 higher but closed off session highs (Source: Market Index)

Markets

The ASX 200 finished higher but well-off session highs of 1.05%. Technology led to the upside thanks to a strong lead from mega cap stocks on Wall Street. Despite varied sector performance, almost all sectors fell from session highs to finish near worst levels. The market continues to chop through mixed signals such as peak Fed vs. buoyant yields and macroeconomic headwinds vs. upbeat US quarterly earnings.

Economy

RBA meeting minutes were a little hawkish and all about waiting for incoming data and the apparent lags in monetary policy. Here are some of the key comments:

• China risks: “A material slowdown in the Chinese economy remained a key risk to the global outlook.”

• China steel demand: “Despite the weakness in the property sector, Chinese steel demand had been resilient owing to ongoing demand from infrastructure and manufacturing investment. This had helped to support iron ore and coking coal prices.”

• Sticky rents: “The still-tight conditions in the rental market suggested that rents would be an ongoing source of inflationary pressure over the year ahead.”

• House price risks: “They noted that while rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected.”

• Wait and see: “They concluded that there had not been sufficient new information over the preceding month from economic data or financial markets to necessitate an adjustment in the stance of monetary policy.”

Latest news

Citi: "Paladin Glowing Brighter Than It's Worth"

One of the major criticisms of the recent surge in uranium stocks is that they've rallied well-beyond fair value and pricing in US$80-100 spot price.

Citi initiated coverage of Paladin Energy (ASX: PDN) with a Sell rating and $0.90 target price ($0.99 at Oct 13 close). The key comments include:

• "PDN is a play on rising uranium demand due to the projected global supply deficit and nuclear energy’s role in the global energy transition."

• "The spot market has surged from utilities and financial institutions, driving prices above US$70/lb. However, we anticipate U3O8 price stabilisation in 4Q-CY23 with an average price of US$65/lb."

• "While we remain optimistic about LT S&D dynamics, we are Sell rated based on valuation concerns with the shares currently trading on 1.14x P/NPV."

Beyond Citi's concerns, valuation was not an issue for lithium stocks emerging from the bear market in late 2020, as long as spot prices continued to rise.

For now, uranium prices have eased to US$69 a pound from a recent peak of US$73.

Bapcor Shares Near Three-Year Lows

Bapcor (ASX: BAP) shares tumbled 11.5% after providing a downbeat trading update at its AGM. The key takeaways include:

• Shorter-term macroeconomic headwinds have led to a more moderate growth profile in Trade and Wholesale markets

• Retail segment has continued to deteriorate

• Challenges compounded by short-term margin pressures from cost inflation and increasing payroll taxes

• Investments in capability, depreciation and amortisation costs and higher interest were also notable drags

• YTD net profit at the end of September is behind expectations

Does this provide a read-through of what's to come for peers such as ARB Corp (ASX: ARB), Super Retail Group (ASX: SUL) and Eagers Automotive (ASX: APE).

A Cool ASX Tool

ASX Correlations is an analytical tool that helps find correlations between stocks. I've linked it to what'll show up if you search for Bapcor.

If you're too lazy to click, it shows (in order of most correlated and excluding ETFs):

• Super Retail 60.0%

• Breville 51.8%

• Eagers Automotive 48.9%

• Arb Corp 48.8%

Interesting news and movers

Trading higher

• +18.8% Volpara Health (VHT) – June quarter report

• +13.2% AIC Mines (A1M) – June quarter report and guidance

• +9.1% Carbon Revolution (CBR) – Trading update

• +6.7% Alpha HPA (A4N) – Appoints CFO

Trading lower

• -8.2% Spartan Resources (SPR) – Drilling results

• -3.7% Paladin Energy (PDN) – Initiated Sell at Citi

Broker notes

A few Citi notes of interest:

CSL (CSL) – Overweight with $325.00 target ($239.90 at Oct 16)

• CSL held its capital markets and R&D day on Monday, with commentary “consistent with consensus expectations”

• “CSL remains confident in its ability to generate double-digit EPS growth over the medium- term, in-line with consensus/Citi forecasts of 14%/15% EPS CAGR over FY23- 28e.”

• “CSL forecasts Ig market volume growth of 6-8% CAGR over FY23-28.”

• “CSL doesn’t expect GLP-1s to have a significant impact on its Vifor division. There was no change to FY24 guidance.”

Liontown (LTR) – Downgrade to Sell from Neutral with $2.30 target ($2.79 at Oct 13)

• “We cut our Target Price 70cps to A$2.30/sh and move to Sell on valuation. ALB has a 4.3% shareholding which they may divest; on the other hand free float is limited given management & Hancock control almost 40% of the register.”

• “We’ve previously flagged our concerns on ramp-up expectations and noted implied sustaining capital costs are ~A$100mpa.”

• “We think a counter cash bid for 100% is unlikely from Hancock given existing offtakes are locked in until 2030 and project ramp up risk.”

Treasury Wine (TWE) – Sell with $10.50 target price ($11.44 at Oct 13)

• “The key highlight from today’s trading update was the 45%/55% 1H/2H group EBIT skew for FY24, which is more significant than the 49%/51% skew that Visible Alpha consensus had forecast.”

• “This appears to be a function of the phasing of Penfolds’ shipments to accommodate for the potential removal of tariffs, which may be taking longer than some expected to occur.”

• “While the removal of tariffs should be positive for sentiment for the stock (should it occur), the short to medium term earnings upside may not be as significant as some may expect given i) the company may not be willing to divert wine from other Asian markets where it is investing in building its brand.”

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