Evening Wrap: ASX 200 slips in choppy trade, energy stocks shine + Brickworks earnings slide

The Index finishes slightly lower on Thursday, surging oil prices brings energy stocks along for a ride, Australian retail sales rose modestly in August as consumers continue to cut back on spending, JPMorgan is bullish on oil (as are all other investment banks), Brickworks earnings suffer broad-based weakness across its key portfolios and could ASX 200 inclusions be shorting opportunity (according to UBS data).

Let's dive in.

ASX 200 Session Chart

ASX 200 chops around and finishes slightly lower (Source: Market Index)

Markets

The ASX 200 finished lower for a third consecutive session. It was a relatively uneventful yet choppy kind of day, where the Index bounced between session highs of +0.32% and lows of -0.38%. Despite being oversold, the market's struggling for direction.

Energy was a major standout on Thursday after oil prices tested US$95 a barrel for the first time since November 2022. Materials also eke out a small gain with led by gains from Fortescue (+1.4%) and Rio Tinto (+1.2%).

Economy

Australian retail sales rose 0.2% month-on-month in August from 0.5% in July.

• Below consensus expectations of a 0.3% increase

• "The modest rise in August shows consumers continued to restrain their retail spending.” – Ben Dorber, ABS Head of Retail Statistics 

• “Considering how high inflation and strong population growth has added to retail turnover in the past year, the historically low trend growth highlights just how much consumers have pulled back in response to cost-of-living pressures.”

• Household goods retailing fell for a third consecutive month, and ninth monthly fall in turnover in the past twelve months

Latest news

Energy: The Supercycle Returns

JPMorgan released a note earlier this week, which reiterated the same calls from Goldman Sachs and Morgan Stanley about US$100 a barrel oil. Here are the key takeaways:

• "While energy equities have lagged the sharp move in oil prices since June (oil up 30%, SXEP up ~10%), we are turning bullish once again on the global energy complex."

• "Reiterating US$80 long-term target and ... that the upside risk to oil is over US$150 over the near-to-medium term."

• "We upgrade global energy equities to overweight owing to: 1) more positive macro outlook, 2) in-the-money corporate cash breakevens ... 3) upside risks to EPS, 4) attractive valuations relative to the market ..."

• "We do not find oil prices in the US$100-120 range to be "demand destructive" as they are broadly in-line with historical prices when measured in real terms and assuming higher for longer rates."

Is it time to hop on to local oil and gas names like Woodside (ASX: WDS), Karoon Energy (ASX: KAR), Beach Energy (ASX: BPT) and Santos (ASX: STO)?

Brickworks more like Propertyworks

Brickworks (ASX: BKW) shares fell 6.4% after reporting its FY23 results where underlying EBITDA was down 26% to $784 million. This is the breakdown of its earnings (EBITDA vs. pcp):

• Property down 21% to $506m

• Investments down 12% to $159m

• Building products Australia down 13% to $100m

• Building products North America down 18% to $40m

Brickworks used to be a company that ... simply put ... manufactured bricks (and building products). Now, 63% of its EBITDA comes from property.

Back in FY15, it was just 36.6%.

Shorting ASX 200 Inclusions

I was reading a note from UBS which studied the performance of stocks after inclusions into the ASX 200 and ASX 100.

As the chart's suggest, inclusion into the ASX 200 tends to drive a bit of short term weakness (about ~20 days or so).

Inclusion into ASX 100 (Source: UBS)

Inclusion into ASX 200 (Source: UBS)

This phenomenon has taken place rather aggressively for Genesis Minerals (ASX: GMD), where short interest has spiked to 9.66%. (Notwithstanding some other factors such as the market expecting another potential M&A play from the gold miner.)

Interesting news and movers

Trading higher

• +14.3% Cokal (CKA) – Receives permit

• +4.2% Mach7 Technologies (M7T) – Contract Renewal

• +6.1% Whitehaven Coal (WHC) – Reportedly bidding for BHP coal mines

• +0.8% Sovereign Metals (SVM) – Kasiya PFS

Trading lower

• -16.1% Bowen Coking Coal (BCB) – Transition mine to care and maint

• -10.2% Alpha HPA (A4N) – Secures $30m project funding

• -6.4% Brickworks (BKW) – Earnings

• -6.0% Washington H. Soul Pattinson (SOL) – Earnings

• -2.3% Atlas Arteria (ALX) – French draft bill

Broker notes

Citi’s recap of oil market conditions:

• “US commercial crude oil inventories fell nearly 2.2-m bbls to 416-m bbls, a slightly bullish outcome compared to Bloomberg median surveyed expectations calling for roughly 1-m bbl stock draw.”

• “The tightness at Cushing is intensifying, with yet another 1-m bbl stock draw, which brings the total stockpile below 22-m bbls, which is a near record seasonal low at just 25% utilisation of storage tanks.”

Citi’s note on China data:

• “China’s industrial profit growth jumped sizably in August, further confirming the cyclical bottom.”

• “Though still in the early stages to judge the size and the sustainability of the rebound, today’s data [1] confirmed the pickup in final demand and improvement in profit and [2] is boding well for further recovery, especially for corporate sentiment and capex.”

• “We expect a 25bp RRR cut and the resumption of PSL for the rest of this year. On the fiscal front, the holistic approach for local government debt resolution could have started to roll out …”

Scans