Evening Wrap: ASX 200 slips, brokers turn bearish on IGO + Endeavour's pokies crackdown

The S&P/ASX 200 closed 5 points lower, down -0.06%. 

The Index experiences a slight pullback after a powerful four-day rally, China's GDP comes in below expectations as its post-Covid recovery loses steam, Endeavour shares nosedive after the Victorian government plans to introduce new gaming reforms by year end, Rio Tinto takes a 15% stake in Sovereign Metals and two interesting charts of interest.

Let's dive in.

ASX 200 Session Chart

A rather uneventful Monday session (Source: Market Index)

Markets

The ASX 200 breaks a four-day winning streak in a rather uneventful Monday session. Growth sectors like Tech and Discretionary led to the upside, which offset in weakness Resource and Defensive sectors. China posted a weaker-than-expected GDP print at noon, which reaffirmed its faltering recovery and the need for more stimulus to fund big-ticket infrastructure projects and support for consumers. Overall, the market is pulling back after a strong run. We just need to see where the dust settles (and hopefully not like prior pullbacks where the gains disappear over the next 3-4 sessions).

Economy

China released a series of data points including:

• GDP rose 6.3% year-on-year in the second quarter (vs. 7.3% expected)

• Industrial production rose 4.4% in June (vs. 2.7% expected)

• Fixed asset investment up 3.8% in June (vs. 3.5% expected)

• Retail sales up 3.1% in June (vs. 3.2% expected)

Latest news

Market Insights

A few stock-specific insights today.

An Intraday Short: Endeavour Group

Over the weekend, the Victorian government announced new gambling reforms that'll roll out by the end of 2023. This includes:

• All venues must close poker machine access between 4 am to 10 am from mid 2024

• All gaming machines to have mandatory pre-commitment limits and carded play. This will reduce load limits from $1,000 to $100

• New machines will have a spin rate of three seconds per game vs. 2.1 seconds prior

• The Victorian Treasury said it had no issues with lost revenue and the reforms are unanimously approved by the cabinet

Endeavour was downgraded by a few brokers including Jefferies (downgrade from Buy to Hold, cut price target from $8.0 to $6.50) as well as JPMorgan (downgraded from Overweight to Neutral, cut target from $7.80 to $6.70).

It was the perfect storm of bearish sector news as well as broker downgrades. The news came out over the weekend, so its also something that market might be reacting to (as opposed to immediately pricing in).

Endeavour shares opened 4.8% lower at $5.97.

By 10:45 am, it was down almost 13% to $5.45.

Endeavour intraday chart (Source: TradingView)

Rio Tinto takes a stake in Sovereign Metals

A few months ago, I had a look a which ASX-listed graphite stock offers the best value based on two factors: Mineral Resource and Market Cap.

Sovereign Metals' (ASX: SVM) operates the Kasiya Project in Malawi, which has the largest natural rutile deposits and one of the largest flake graphite deposits in the world.

On Monday, the company announce that Rio Tinto will make a $40.4 million investment resulting in an initial 15% stake at 48.6 cents per share (last close of 49.5 cents).

"Under the Investment Agreement, Rio Tinto will provide assistance and advice on technical and marketing aspects of Kasiya including with respect to Sovereign’s graphite co-product, with a primary focus on spherical purified graphite for the lithium-ion battery anode market," the company said in a statement.

SVM has been rangebound April 2021. While the stock rallied as much as

Sovereign Metals weekly chart (Source: TradingView)

MMA Offshore: The trend is your friend

I've been watching MMA Offshore (ASX: MRM) for quite some time now. The stock has been such a powerful trender after bottoming in early 2022. The marine services business upgraded its FY23 earnings outlook on Monday, with expectations of posting EBITDA between $66-68 million, up 100% against the prior period.

Please excuse the crayons (Source: TradingView)

IGO: Is this what they call a shakeout?

IGO posted a larger-than-expected non-cash impairment of $880-980 million for its Western Areas and Cosmos assets. (More details about it vs. analyst expectations below).

In short: It was well above analyst expectations and they cut its price target.

The price action on Monday was rather interesting. IGO shares opened 4.5% lower, hit session lows of -8.3% before closing where it started (4.5% lower). This suggests someone was buying the dip.

IGO intraday chart (Source: TradingView)

Interesting news and movers

Trading higher

• +7.4% Pantoro (PNR) – Initiated buy at Ord Minnett

• +7.1% Sovereign Metals (SVM) – Rio becomes strategic investor

• +5.1% Cyclopharm (CYC) – Guidance

• +3.8 MMA Offshore (MRM) – Guidance

• +2.7% Whitehaven Coal (WHC) – Q4 production

Trading lower

• -9.9% Endeavour (EDV) – Vic poker reform

• -7.9% Sayona Mining (SYA)

• -6.9% Magnis Energy (MNS) – Placement

• -4.5% IGO (IGO) – Guidance and impairment

Broker notes

Citi’s take on two earnings updates:

IGO (IGO)

• Rating: Neutral

• Target price: $16.30 (from $16.80)

• “IGO has announced a non-cash impairment of A$880-980m (pre-tax) for the WSA assets vs our modelled A$410m … the magnitude is surprising against the A$1.3bn acquisition price.”

• “Given we ascribe A$100m to Forrestania, the key question we now have is just how bad is Cosmos? ~A$550m has been sunk into the project (IGO spent ~A$250m).”

• “We ascribe no value to IGO's downstream nickel strategy (study due mid-24); it's hard to be more positive on this given the build-out of Indonesian supply, issues ramping up Kwinana hydroxide plant and risk-reward vs negotiating better offtake terms.”

Whitehaven (WHC)

• Rating: Buy

• Target price: $7.80 ($6.65 at 14 July)

•  “Despite weaker than anticipated ROM coal prodn, WHC’s managed coal sales were at the top end of its 15.3-16.0mt guidance with an actual of 16.0mt.”

• “WHC generated A$435m cash from operations this quarter and now has a net cash position of ~A$2.65bn vs Citi estimate of ~A$2.5bn.”

Goldman Sachs’ take on IT Services:

• “We update key industry data points and refresh views on our three IT Services stocks under coverage, MAQ (Buy, on CL), DTL (Buy) and DDR (Neutral).”

• “Demand remains generally robust across IT services, supported by digital transformation spending by medium-large enterprises and government clients”

• “However, spending is not even across the tech stack with Gartner forecasting public sector software/IT Services spending growth of +14%/+7% in CY23 vs Hardware +3%.”

• “Generative AI has driven a surge in investor interest across the tech sector offshore, as well as upstream data centre player NextDC in Australia … The clearest beneficiary across our IT Services coverage is MAQ.”

• “That said, there may be potential longer-term implications for DTL and DDR in our view, besides possibly driving higher IT spending over time.”

Scans