Evening Wrap: ASX 200 gives back early strength, NAB swings lower, Xero tumbles on earnings

The Index finished higher but off best levels, CSL leads healthcare stocks higher, Xero shares slide after first half FY24 results come in weaker than expected, China's inflation falls below 0% again, NAB shares swing on a strong FY23 result vs. weak macro outlook and a closer look at Ingham's recent price action.

Let's dive in.

ASX 200 Session Chart

ASX 200 higher but closed near worst levels (Source: Market Index)

Markets

Hello, Kerry here. Just filling in for Carl (who has taken the reigns for Evening Wraps).

The ASX 200 finished higher but off session highs of 0.72% – Could the counter-trend/oversold bounce be running out of steam? We've seen plenty of 3-5% rallies fizzle so far this year. In the event of a pullback, will we see a constructive one or one that's plagued by classic distribution and weakness?

Sector performance was somewhat positive, with Healthcare led to the upside after CSL rallied 2.2%. Telcos were also strong, led by gains from Telstra (+0.8%), Chorus (+1.3%) and Carsales (+2.0%). Interestingly, Telstra shares are up 2.3% since Wednesday aka the Optus outage.

Tech underperformed by a wide margin after Xero (-13.3%) reported weaker-than-expected 1H24 results. Other names including Wisetech (-2.4%), Dicker Data (-2.3%) and Life360 (-1.9%) also pulled back.

Economy

China’s inflation rate dipped below zero again, down to -0.2% in October from 0% in the previous month. 

• Below analyst expectations of a -0.1% print

• “What China has right now, is a low rate of underlying inflation, which reflects the fact that domestic demand is fairly weak … what we are seeing today is mainly the result of a supply excess, rather than a collapse in demand.” – ING Economics

• “While negative headlines for Chinese CPI inflation provide the media with a hook to hang a juicy story on, the truth is considerably less tasty. Next week, we get further activity data for China.”

Latest news

Xero: Absolutely Dumped

Xero (ASX: XRO) briefly opened around breakeven and aggressively sold off to -12.4% close. The stock was close to undercutting the key $100 level and finished near a 6-month low. The company's first half results were a little softer than expected, to say the least. All figures below quoted in NZ dollars.

• Revenue up 21% to $799.5m vs. $805.7m expected by analysts

• EBITDA up 90% to $206.0m vs. $212.0m expected

• Net profit of $54.0m from $16.1m loss a year ago but below expectations of $56.9m

• Total subscribers up 13% to 3.945m vs. 3.955m expected

Xero intraday chart Nov 9 (Source: TradingView)

NAB: Strong FY23 vs. Weak Outlook

The price action for NAB (ASX: NAB) was incredibly choppy for a big four bank. The key numbers for its FY23 results released this morning:

• Net interest income is up 13.3% to $16.8bn, in line with expectations 

• Cash earnings up 8.8% to $7.7bn vs. $7.3bn expected

• Full-year dividend up 16% to $1.67 per share vs. $1.68 expected

• Net interest margin of 1.74%, in line with expectations

• Outlook: “Growth is slowing, competitive and inflationary pressures are elevated and asset quality is deteriorating." - CEO Ross McEwan

Peers Westpac (ASX: WBC) reported similar upbeat results on Monday, 6 November and rallied 1.95% on the day. NAB shares also finished that session ~1% higher.

So here we are: A strong readthrough from a peer, an FY23 beat and downbeat macro outlook.

NAB intraday chart Nov 9 (Source: TradingView)

Inghams: A Review of Recent Events

This is a little bit of an education piece/recap of events for Inghams (ASX: ING).

Setting the scene: Inghams shares tumbled ~40% between September 2021 and October 2022 due to weak poultry prices, inflationary pressures and balance sheet risks (rising debt and subdued cash flow).

August results: Inghams shares rallied around 30% in the two or so weeks after its FY23 result – which topped revenue and earnings expectations as price hikes successfully offset cost inflation. Analysts were very upbeat about the company's outlook and expected favourable market conditions to continue paired with robust demand, tight supply and prices increases .

The pullback: The stock experienced a relatively calm and shallow pullback, no more than 10% from its August peak. It traded sideways for about 5 weeks, chopping around the $3.30 level.

Smashing expectations: Inghams announced a 1H24 trading update on October 31 – Underling net profit was forecast to come in at $71.0 million vs. analyst expectations of $42.9 million. It was a massive beat against forecasts.

Reaction: The stock rallied 7.9% on the announcement and another 6.4% over the next five days.

Inghams chart (Source: TradingView)

My key takeaways: Inghams' FY23 results kicked off a major turnaround in both fundamentals and share price. What validated the turnaround was the calmness that followed the ~30% post earnings result. There wasn't any wild selling or elevated profit taking. Perhaps this is one of those events where price leads news, as a major 1H24 trading update was announced just three months after August.

Interesting news and movers

Trading higher

• No major stocks trading higher on news

Trading lower

• -16.0% Brainchip (BRN) – Responds to ASX query

• -12.4% Xero (XRO) – First half earnings

• -2.3% Invictus Energy (IVZ) – Upper Angwa fluid samples

Broker notes

A few Citi notes of interest:

Domain (DHG) – Neutral with $3.70 target ($3.67 at Nov 7)

• “The key negative from Domain’s 1Q update was the decline in listings in 1Q, which raises questions of market share loss given REA’s Proptrack data points to a 1% year-on-year growth in national listings.”

• “We do not anticipate meaningful consensus earnings changes (assuming revenue deferrals is reversed through the course of FY24e) but see potential for the stock to under-perform due to the lack of earnings upgrade (given expectations of better listing volumes).”

James Hardie (JHX) – Buy with $55.30 target ($46.97 at Nov 8)

• “With declining input costs, further price rises and new cost out initiatives; JHX have incremental gross profit dollars they can do with how they please.”

• “While we are unsure whether higher volume growth or a structurally higher margin range is preferred, either way we see positive options regardless of what the new management team choose and reiterate our Buy rating.”

Woodside (WDS) – Neutral with $31.50 target ($33.35 at Nov 8)

• “The five-year outlook presented at the 2023 Investor Briefing Day is not only a deterioration in the outlook versus the 2022 IBD, but also falls meaningfully short of the VA consensus forecasts.”

• “Our upgrade to Neutral last week was predicated on the shares finding yield support, despite some reservations on fundamentals.”

Scans