Evening Wrap: ASX 200 hits 4-day win streak, ACCC clears Origin buyout + Lithium stocks bounce

The S&P/ASX 200 closed 70 points higher, up 1.01%. 

The Index is up 2.2% in the last four sessions, Australia's consumer confidence climbs in October but remains in depressed levels while business confidence remained stable, lithium stocks bounce after a positive note from Citi, Origin Energy's takeover is approved by the ACCC and Baby Bunting provides a read-through for retail.

Let's dive in.

ASX 200 Session Chart

ASX 200 higher and finished near best levels (Source: Market Index)

Markets

The ASX 200 finished higher and near best levels on Tuesday – It's now on a four-day winning streak up 2.2%. The market has shrugged off potential headwinds from the Israel-Hamas war and continues to bounce from the extreme oversold conditions from last week. Every sector finished higher, led by a mix of yield-sensitive and growth sectors. Rising geopolitical tensions is driving a bit of an uptick in safe haven demand with gold bouncing off recent lows and yields pulling in from 2006-07 highs.

Economy

Australia’s consumer confidence rose 2.9% to 82 in October. Here are the key takeaways from the Westpac report:

• “At 82, the latest Index read is still in deeply pessimistic territory, consistent with a continuation of the contraction in per capita spending seen since late last year.”

• “While there are some faint glimmers of hope around family finances and the outlook for jobs, these are being overshadowed by still high inflation and renewed rate rise concerns.”

• ‘Time to buy a major household item’ sub-index surged 7.6% in October – “If sustained, the lift may be signalling that the inflation situation for consumers is starting to improve.”

• Medium-term views remain positive, with the ‘economic outlook, next five years’ sub-index to 92.4, in-line with long-run averages of 92 – “This suggests consumers remain confident that the current cost of living problems will eventually be brought under control.”

Australia’s business confidence was steady at +1 index point, where it has been for several months. Here are the key takeaways from the NAB report:

• “Labour cost growth, which had been moderating gradually in the first half of the year, rose sharply in July to 4.0% in quarterly terms.”

• “In terms of purchase costs, the recent downward trend was similarly disrupted by a rise in August, possibly reflecting movements in fuel prices as well as exchange rate impacts on import prices.”

Latest news

Lithium Bounce

Lithium stocks experienced a broad-based rally from oversold conditions. This move was further bolstered by short covering (Pilbara Minerals, Liontown and Core Lithium are among the top 10 most shorted stocks on the ASX) and a positive note from Citi which:

• IGO (ASX: IGO): Upgraded to Buy from Neutral; target price decreased to $13.00 from $15.50

• Pilbara Minerals (ASX: PLS): Upgraded to Buy from Neutral; target price decreased to $4.50 from $4.70

• Core Lithium (ASX: CXO): Upgraded to Neutral from Sell, target price decreased to 38 cents from 40 cents

• Expect lithium prices to track sideways over the next 12-18 months but remain positive over the long term

Origin Energy: Takeover Approved. What About Price?

The ACCC approved Brookfield's takeover bid for Origin Energy (ASX: ORG), which opens the door for talks with key shareholders such as AustralianSuper and Perpetual about price.

Two months ago, I thought the Origin takeover trade was free money and explored this view with Vertium Asset Management CIO Jason Teh. My key takeaways from our chat were:

The current offer:

• A consideration mix of $5.78 per share and US$2.19 per share

• The total considerable will be reduced by any dividends paid by Origin prior to the implementation of the Scheme

• Any reduction in the amount payable due to dividends lowers the Australian dollar component of the total consideration

• A 4.5 cents per month ticking fee will accrue on a daily basis if the scheme is delayed beyond 30 November 2023

Back then, the trade offered a 2.3% fully-franked final dividend and 2-3% capital return. This was based on its trading range of around $8.60 to $8.70. If the deal is delayed beyond November, shareholders would also be rewarded with that extra 0.5% ticking fee per month.

Why the market wants better terms:

• Teh said there was a 26% probability that shareholders could vote no with the view that the stock is only trading at a 13x PE multiple

• Since the initial $8.90 per share bid, Origin has added approximately 35 cents per share in net cash in the first half of 2023

• NSW government is working with Origin to keep their Eraring coal-fired power station open

What I've learnt from watching this: If it sounds too good to be true. It probably is. But if the math adds up ... then its a compelling opportunity.

Baby Bunting's Retail Update

Baby Bunting (ASX: BBN) held its AGM today, which might have some interesting comments as a read-through for the broader retail sector.

• "Pressure on discretionary spending and affordability remains."

• "Year-to-date total sales performance has seen total sales down 3.3% against the corresponding period last year, where total sales growth was 12%."

• "Comparable store sales are down 8.5%, cycling positive 7.6%."

• "First quarter, gross profit percentage was 37.9%, up 70 basis points compared to the prior corresponding period."

Baby Bunting 12-month price chart (Source: Market Index)

Interesting news and movers

Trading higher

• +28.6%  Mobilicom (MOB) – Extends delisting date (Mon)

• +4.9% Weebit Nano (WBT) – Israel operations unaffected

• +5.5% Origin Energy (ORG) – ACCC authorising grant for Brookfield takeover

• +1.7% Paradigm Biopharma (PAR) – Clinical trial update

Trading lower

• -33.3% LiveTiles (LVT) – Restructure and cost-reduction program

Broker notes

Goldman Sachs on Platinum Investment Management (ASX: PTM)

• Sell with $1.14 target price ($1.20 at 10 Oct) 

• “PTM announced that its FUM at the end of Sep-23 quarter was $16.1bn (down from $17.3bn at Jun-23) vs GSe of $16.4bn”.”

• “We note that PTM’s flow trajectory remains weak and uncertain with consistent monthly net outflows alongside a $650m redemption taken over the quarter as previously flagged.”

Goldman Sachs on Magellan Financial (MFG):

• Neutral with  $7.55 target price ($7.18 at 9 Oct)

• “MFG announced that its FUM as at end Sep-23 quarter was $35bn (down from $39.7bn at Jun-23) v GSe of $35.4bn.”

• “While the flows were slightly worse than what we were forecasting, institutional flows were very weak in Sep-23.”

Morgan Stanley on REITs:

• “REITs look cheap on a P/NTA basis, with our coverage universe trading at an average 23% discount.”

• “We think this is macro rather than fundamentals driven. If cap rates were to reflect the Aust 10 year bond yield trajectory, most stocks would be trading in line with adjusted-NTAs.”

• “However, if we were to assume asset values (and NTAs) are adjusted such that cap rates are above bond yields by the historical spread, we estimate most stocks would be trading in line with adjusted NTAs.”

• “Assuming bond yields stay where they are and spreads revert to the long-term average, we think there is a material 17-33% downside to asset valuations across our coverage.”

• Overweight stocks: GMG, MGR, SCG, SGP, CNI

• Underweight stocks: DXS, NSR, COF, BWP, WPR 

Scans