Evening Wrap: ASX 200 lower, Megaport tumbles + Short interest saves Pilbara Minerals

The Index is down five of the last six sessions to a near 12-month low, Megaport shares nosedive almost 20% after posting an underwhelming September quarter result, RBA Governor Michele Bullock gives a dovish speech and sends the Australian Dollar to its lowest level since November 2022, short covering might be saving Pilbara Minerals shares and recapping some mixed retail results.

Let's dive in.

ASX 200 Session Chart

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

Markets

The ASX 200 finished lower but off session lows of -1.12%. This marks a near 12-month low for the Index. This weakness follows a weak overnight lead where growth-heavy and yield-sensitive sectors like Technology, Real Estate and Retail led to the downside.

Our sector performance met the same fate with Tech and Real Estate sectors down more than 2.0%. Megaport shares tumbled 16.9% after a weak quarterly update but most other tech heavyweights finished 1-3% lower.

Economy

RBA Governor Michele Bullock speech highlights:

• On Wednesday's CPI: "We thought it was going to be about where it came out.”

• State of play: Good prices are coming down but services inflation remains persistent and higher than "what we are comfortable with." The RBA will build this into its forecasts

• Bullock avoided any hawkish rhetoric and the likelihood of a rate hike in November fell down to 31% from around 50% the day before

• The Australian dollar is down 0.5% to 62.7 cents which marks its lowest level since November 2022

Latest news

Megaport: Modest growth

Megaport (ASX: MP1) is a name that can do both: Impress (e.g. earnings upgrade in July and better-than-expected earnings in August) and depress (e.g. today).

While Megaport is leveraged to megatrends like AI, its slides like these that remind us that the company often punches out modest growth while trading at a forward PE of around 100.

Source: Megaport

The stock has more than doubled off its April low and also faced headwinds from the weaker-than-expected Alphabet result. It was a shocker of a day, with the stock down 16.3% to a near 3-month low.

Pilbara Minerals: Sizeable miss

Pilbara Minerals' (ASX: PLS) September quarter result was pretty ugly and a broad miss against consensus expectations. I wrote about this earlier today but in summary:

• Production of 144,200 tonnes vs. 159,400 expected (9.5% miss)

• Shipments of 146,400 tonnes vs. 162,100 consensus (9.7% miss)

• Unit operating costs of $747 a tonne vs. $609 consensus (18.5% miss)

• Average realised spodumene prices down 47% year-on-year

• Cash position down $300 million quarter-on-quarter to $3.0bn

This places a lot of pressure on the remaining three quarters (if PLS wants to meet its full-year guidance) and analysts are beginning to guide towards no dividend for FY24.

What makes PLS' price action rather complicated is its ~15.5% short interest.

This might explain why the stock opened 4% lower and rallied to a brief session high of around 2%.

Pilbara Minerals intraday price chart for 26 Oct (Source: TradingView)

Azure Minerals: SQM's takeover

Azure Minerals (ASX: AZS) rallied 43% after a cash takeover of $3.52 per share from SQM. The stock is now up 1,150% year-to-date after making one of the largest lithium discoveries worldwide.

More than 80 million Azure shares were traded on Thursday, representing approximately 18% of its outstanding shares. The company has been listed since 2007 and has never seen such volumes.

There's growing speculation that the buyer could be none other than the Liontown-takeover-blocker Gina Rinehart.

Let's see how this one plays out.

Retail Results: Holding up

A few retail trading updates of interest.

Wesfarmers (ASX: WES) eased amid a relatively sound trading update (for the first 16 weeks of FY24). It notes:

• Bunnings' sales growth remains in line with 2H23, with growth in both consumer and commercial segments

• Strong financial results have continued in Kmart Group

• Officeworks' sales YTD are broadly in line with pcp but costs have increased

• Expect to see first earnings and cashflows generated from the lithium business for FY24

JB Hi-Fi (ASX: JBH) sales are starting to show some signs of weakness. Australian sales for the first quarter of FY24 fell 1.4% year-on-year, marking the weakest growth since late 2021.

I mentioned Super Retail Group (ASX: SUL) on Wednesday as a rather unlucky name that sold off after the hotter-than-expected inflation report. The company reported 4% sales growth for the first 16 weeks of FY24, which was ahead of analyst expectations. The stock opened 4.1% higher but closed around breakeven.

Today, brokers including JPMorgan, CSLA and Jarden upgraded their price targets in response to the solid results. The stock finished 4.6% higher.

Interesting news and movers

Trading higher

• +43.0% Azure Minerals (AZS) – SQM acquisition at $3.52 a share

• +16.9% WA1 Resources (WA1) – Drilling results

• +4.6% Super Retail Group (SUL) – Upgraded by multiple brokers

• +2.6% Stanmore Resources (SMR) – Wards Well sale for $136m 

Trading lower

• -16.3% Megaport (MP1) – Q1 results, reaffirms FY guidance

• -11.8% G8 Education (GEM) – Agreement to sell 31 centres

• -10.0% NextEd Group (NXD) – Trading update

• -8.3% Next Science (NXS) – Canaccord Genuity downgrade

• -8.1% Argosy Minerals (AGY) – Q3 report

• -4.6% Imugene (IMU) – First patient dosed in Phase 1 trial

Broker notes

A few Goldman Sachs notes of interest: 

Mineral Resources (MIN) – Sell with $51.00 target ($57.43 at Oct 25)

• “MIN reported a slightly weaker than expected Sep Q production result with lower-than-expected Li & Fe sales and Li pricing … but offset slightly by better-than-expected Fe pricing and a 14% QoQ rebound in mining services volumes.”

• Iron ore and lithium sales were 13% and 29% lower than expected, offset by better realised pricing of 9% and 17% respectively 

Super Retail Group (SUL) – Buy with $14.40 target ($12.20 at Oct 25)

• SUL reported its first 16-week FY24 trading update, with group LFL sales accelerating to 2% for first 16 weeks (vs 0% 6-week update) and ahead of GSe (-0.1% for 1H24).

• This comprised sales acceleration across all four key segments, and management noted that while Supercheap Auto's sales trend was largely consistent.

• “We continue to believe that the auto and sports categories remain more resilient amongst discretionary consumers and SUL’s advantage of 10.5mn members, contributing to 70%+ of group sales.”

Woolworths (WOW) – Buy with $42.40 target ($35.63 at Oct 25)

• “Food retail sales +6.1% year-on-year was supported by +2.2% item growth. Key drivers were positive Fruit & Veg and Meat due to lower prices and improved availability.”

• “WOW noted that Oct to date sales trends were largely in-line with 1Q accelerating exit growth rates for eComm across AU Food, NZ Food and Big W.”

• “We expect this to further benefit WOW’s market share as it has a larger leadership vs COL in online.”

Scans