Rudi's View | Oct 26 2017
In this week's Weekly Insights (this is the second part):
-Hard To Be Bearish
-Beware Australian Chemicals
-Conviction Calls: Citi, Morgans, Morgan Stanley, CS, Canaccord
-An Evening With Rudi In November
-Rudi On BoardRoom.Media (Updated)
-The CPI Battle Among Economists
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appeared in part one]
Beware Australian Chemicals
Shareholders in both Orica ((ORI)) and Incitec Pivot ((IPL)) cannot help but walk around with a big smile these days. Orica has posted a nice and steady gain for the calendar year to date while Incitec shares have put in a mean rally from the August lows.
Stating that both share prices have experienced some tough times in years past does not do justice to the frustration suffered by loyal shareholders post-GFC. In mid-last year Orica shares were back where they were near the lowest point of 2009. Incitec Pivot shares, despite a significant investment in Louisiana, have essentially gone sideways a la Wesfarmers, only for much longer.
Recent share price action would have been welcomed with open arms, feeding expectations of maybe a new cycle might have started for both. After all, global synchronised growth, et cetera.
Analysts at Morgan Stanley released a 72 page report on both and the news isn't that pretty. While acknowledging the bottom is probably in for key fertiliser and explosives end-markets, investors better not position for a sustained pricing up-cycle, conclude the analysts. Too much growth in capacity (see also: Louisiana) is absorbing most of the industry's upside potential, says Morgan Stanley.
Whereas management at Orica is doing a great job in keeping cost growth under control, the absence of price growth is about to reveal rather disappointing operational leverage, predict the analysts. They cannot see how the share price, post 26% rally, won't be heading south in a while from now.
For Incitec Pivot the analysis contains a double disappointment as neither explosives nor key fertilisers can look forward to sustained price increases. Yet if one has to seek exposure, this is the one preferred by Morgan Stanley. Because the ammonia plant in Waggaman, Lousiana is ramping up, and there should be prospect for capital management on the back of it. But the report suggests this preference is borne out of relativity with Orica, rather than expecting great returns for shareholders in the year ahead.
Morgan Stanley last week resumed coverage on both with an Equal-weight rating for Incitec Pivot and Underweight rating for Orica. Sector view is Cautious.
And for the geeks among us (that would include myself), both stocks have been reclassified into the Australia Industrials industry from the Australia Engineering, Chemicals and Packaging industry "to better categorize them", according to the report. Both Orora ((ORA)) and Amcor ((AMC)) were also reclassified into the Australia Industrials industry for the same reason.
Conviction Calls: Citi, Morgans, Morgan Stanley, CS, Canaccord
Investors: be careful when jumping on board bricks and mortar retailers. The past cannot be relied upon as the changes sweeping through the industry in Australia are not just cyclical, they are structural, warn analysts at Citi this week. Their warning was in particular directed at investors looking for juicy yields in the share market.