Two developments occurred today that are positive for Telstra Corporation and its shareholders.
KAR's third well in offshore Brazil, Bilby-1 has encountered oil in one of the secondary, upper targets, the Mastrichtian sands. It would also appear the well has drilled down to the Campanian sands KAR reports that oil has been sampled over a 200 metre gross section and apparently 150 metres down dip. At this stage it is too early to be definitive on commerciality because we do not know what the net-to-gross interval (i.e net pay), the quality of the oil, and whether it is movable (i.e. capable of flowing). There is the possibility of up dip potential higher in the structure. Pre-drill expectations for Bilby-1 were ~110mmbbl (gross) for all reservoir zones. We expect to see KAR provide further comments this week on the recovered fluid samples (i.e once brought to surface). Relative to the Kangaroo-1 oil discovery, Bilby-1 has intersected a larger or thicker zone.
We believe that the opposition had been softening its stance against the Lynas rare earths plant in Malaysia. The incumbent party victory is a positive, but a contested victory is likely to see some continued anti Lynas rhetoric. Ultimately, the market will judge Lynas on is profitability as the plant ramps up. The ramp up appears to be going very well, and should drive the share price in the near term.
Brazil deal was flagged last year, and today’s announced buy in is low cost (stage 1 US$4m 50% BCI) and BCI will have 40% of any project and carry 40% of any funding. Major expenditures and value add are a year away to least, and does not change our view that some $50M of the current A$100M cash on hand is available for a special dividend.
After deterioration in many of the regional purchasing managers’ surveys, April’s ISM reading of 50.7 offers additional affirmation of slower growth in the manufacturing sector for the second quarter. The ISM averaged 50.8 in the final six months of 2012, so the latest print of 50.7 suggests that businesses are essentially about in the same shape as they were in the second half of last year. Still, of the 18 sectors represented in the report, 14 are still in expansion mode. One small bright spot in the report was the gain in new orders. New orders slowed to 51.4 in March but picked up to 52.3 in April and have now been in expansion mode for each of the first four months of the year. The ratio of new orders to inventories actually was at the highest level of the year, suggesting that manufacturers will have to commence restocking over the coming months.
5-Year Senior Credit spreads on the four major banks have fallen to their lowest levels today since May, 2010. Falling credit spreads have been cited as a key catalyst for the increase in share prices of the major banks from their 2011 lows, aside from other, more obvious factors like yield chasing and improving asset quality. Credit spreads as a measure of corporate default risk are highly correlated with wholesale funding costs for the major banks. In fact, as global financial conditions continue to improve, one can assume that financial credit spreads may continue to fall, netting lower funding costs and hence improved margins. Today, the fact that credit spreads on the four major banks are at 3-year lows weighs heavily in favour of share prices trading at record or multi-year highs.
The result was a little better than we thought because 1) the global markets result was particularly strong; and 2) The NIM decline was barely noticeable from 4Q12 to 2Q13. Depending on which income definition you wish to use (we use underlying income as the starting point), income growth was 2.4% from 2H12 to 1H13 and expense growth was 0.8%. In the jargon, there were positive jaws. CET1 was 8.2% but will fall after the payment of the dividend which was a healthy 73 cps. Asset quality improved with new impaired assets falling by 15% from 2H12 to 1H13. The new impaired assets for 1H13 were $1.6B. There was no change in the collective provision and the bad debt charge was $599M in 1H13. The performance of the APEA business continues to be intriguing. Cash profit fell by 11% from 2H12 to 1H13 but risk weighted assets increased by 13% (of which probably 5% was due to the introduction of Basel 3). The fall in profit was due to a doubling in the bad debt charge. We maintain our BUY recommendation but continue to rank it number 4 of the 4 major banks. We sense an increase in risk. In spite of this, the stock should go well today.
While there is increasing evidence of modest Chinese demand growth, with 0.5Mt fall in the 21Mt of non-mill steel inventories in mid-April, the extraordinary 775Mtpa production rate in early April has to pull back, and is expected to do so shortly. Mills are running low stockpiles, and preferentially restocking from cheaper port stocks, which are now at 70Mt vs last year’s average of 90-100Mt. Chinese iron ore production has also rebounded, India is about to add another 16Mtpa from Karnataka province, and RIO and FMG are also adding 50Mtpa and 20Mtpa respectively to the market in the current quarter. Construction demand in the US has improved, but not as much as expected. Japan is also expecting higher third quarter demand, arising from capital spending and infrastructure projects. Europe continues to be of concern, with improving weather unaccompanied by increasing construction demand.
Assurant (AIZ US Equity) is QBE’s largest competitor in the high-margin lenders placed insurance segment. Recent trends in lenders place insurance include regulator-enforced lower premium rates and a shrinking market due to a decline in mortgage delinquencies.