Evening Wrap: ASX 200 tumbles + Iron ore skids to US$95 a tonne, BHP near 6-month lows

Iron ore continued to sell off as Chinese demand misses expectations, the Tech sector breaks a five day winning streak, UK's inflation comes in hotter than expected and core inflation jumped to a three-decade high and UBS initiates coverage on several ASX 200 stocks.

Let's dive in.

ASX 200 Session Chart

ASX 200 slides intraday (Source: Market Index)

Markets

The ASX 200 sold off intraday and closed at worst levels. It was a pretty heavy day led by Materials. Singapore iron ore futures fell around 3% on Wednesday to US$96 a tonne, down for a fifth straight session. This led to notable declines from Rio Tinto (-2.1%), BHP (-2.2%) and Fortescue (-4.1%). The S&P/ASX 200 Tech Sector also snapped a five day winning streak, in-line with the Nasdaq pullback overnight. A few Defensive sectors finished green. Energy led to the upside thanks to higher oil prices overnight. Overall, choppy and hard.

Economy

UK’s inflation eased to 8.7% in April from 10.1% in the previous month.

• Missed market expectations of a decline to 8.2%

• Core inflation accelerated to 6.8% from 6.2% in March

Latest news

Market Insights: Iron ore

Singapore iron ore futures are down around 11% in the last five sessions and set to finish Wednesday at the lowest level since November 2022.

China's peak construction season is coming to an end and steel demand is not quiet meeting expectations, analysts said.

"However, considering the lack of significant changes in monetary and fiscal policies, it is anticipated that China's economic cycle will reach its trough in Q3. This bearish expectation stems from the residential sector and private corporate sector," said industry consultancy and data provider Mysteel.

"Currently, there is a significant gap between steel supply and demand, leading to a continued drop in inventory."

"It should be noted that real estate investment and new construction in the January-April period continued to decline, posing a constraint on steel demand."

Singapore iron ore futures (Source: TradingView)

From a technical perspective, things are looking pretty dire for a name like BHP (ASX: BHP). It's slumped to a key inflection point around the $43.00 level, where it needs to bounce or runs the risk of breaking down.

BHP price chart (Source: TradingView)

Interesting news and movers

Trading higher

• +40.0% Carbon Revolution (CBR) – New $60m debt program

• +11.7% Plenti Group (PLT) – Earnings

• +7.6% Immutep (IMM) – Phase 1 Clinical Data

• +5.3% Leo Lithium (LLL) – Drill results

• +5.1% Thorn Group (TGA) – Increases MoneyMe stake

• +3.8% Webjet (WEB) – Earnings

Trading lower

• -19.1% 29Metals (29M) – Guidance

• Retail sector move: JB Hi-Fi (-2.7%), Harvey Norman (-2.8%), Lovisa (-6.9%), Eagers Automotive (-4.9%), Accent (-8.5%)

Broker notes

A few standalone UBS notes today:

Ansell (ANN): Initiates coverage with Neutral rating and $30.00 target price

• “We see negative growth for exam/single use sequentially in 2H23 as pricing continues to deteriorate, but a modest return to growth at group level (+5%) in FY24.”

• “The Industrial division has been more stable but margin expansion is limited by inflation short term and top line growth could also be challenged at the end of FY23.”

• “On balance, we think there is likely not much further downside to come on fundamentals … could likely support the shares if the cadence ticks up.” 

Cochlear (COH): Initiates coverage with Neutral rating and $255.00 target price

• “Cochlear is the undisputed leader in the cochlear implant space with c.60% market share. Most topline growth is from the adult market, including older adults, where we see long-term volume growth of c.7% but limited pricing power.”

• “At 48x FY24 EPS on our estimates and a c.200% premium to the ASX200 vs c.100% historically, it is difficult to argue for multiple expansion, but given a lack of near-term negative catalysts we do not see much to provoke a downward re-rating.”

Sonic Healthcare (SHL): Initiates coverage with Sell rating and $31.00 target price

• “We think the top line returns to modest growth in FY24 following FY23e ramp-down of Covid testing revenue from A$2.4.”

• “We think though that this will not be enough for investors to look through the FY24 EPS trough, particularly since risk appears skewed to the downside for the largest sales line, US Pathology.”

• “We see EPS downgrades driving a re- rating from the current FY24 multiple of 25.5x PE (UBSe) and premia relative to US listed peers (c.90%) and the ASX200 (c.60%).”

Technology One (TNE): Neutral with $16.00 target price

• “With TNE already tracking at $351m ARR, its $500m+ target by FY26E looks conservative and we now expect $530m (prior $500m) in FY25E and $605m in FY26E (prior $571m).”

• “TNE is a high quality stock, supported by structural thematics around ERP/cloud spending, product innovation pipeline (particularly the DXP) and a track record of execution.”

• “However, we are cognisant of the strong growth we are already factoring in, sitting above company ARR targets, vs 45x 1yr fwd PE or 30x FY26E / 51x PFCF or 32x FY26E.”

Scans