Stock and Sector Updates

October 19, 2018

 

It’s been a tough couple of weeks in the markets and with that in mind we thought it worth commenting on a few of our stocks. Nobody has been immune to the sharp sell-off but some have been more affected than others. Sensitivity to news or even innuendo is red-hot at the moment. We can assure our investors that now is the time to remain calm and that is what we are doing here at Glennon Capital.

 

Afterpay Touch (ASX:APT)

If the US market correction wasn’t bad enough, the announced Senate inquiry into dodgy lenders helped hurl Afterpay’s share price off the roof-top. It bounce  d pretty well, though, and we expect it to keep bouncing. We have been well aware of the threats to investigate Afterpay for a long period and this disruption does not change our view on the stock, although it is why we have taken profits on the stock as it rallied. In fact the buy-now-pay-later segment was cleared of any harmful threat to consumers in NZ recently and our very own ASIC has been investigating the sector for some time with Afterpay’s full co-operation. Indeed Afterpay management are happy to have ASIC’s regulation and, therefore, endorsement. Long-term the progress made by the group in the US, and then the UK, will make Australia look small in comparison. And so far on that front progress has been better than expected.

 

Leigh Creek (ASX:LCK)

We recently wrote about the gas market being one to watch. To that end we have a small holding in the underground coal gasification company, Leigh Creek. After overcoming numerous obstacles, including environmental objections, a change in government (SA) and a last minute indigenous court challenge, the company successfully gasified its asset a week ago, producing its first syngas. And in encouraging news for the company and the sector, the Federal Senate defeated a motion by the Greens to ban underground coal gasification. Leigh Creek will now flow gas for 90 days to determine how it should construct its production facilities, with the aim of producing a combination of gas, power generation and fertiliser/urea.

 

Emeco (ASX:EHL)

Emeco is performing well enough to generate excess cash and it recently put a proposal to buy back around $5m of the (expensive) senior secured notes it issued some time ago (when the company was struggling). It ended up getting acceptances for more than $47m worth which will save the company around $4.4m in interest expense savings per year. This is significant in the face of last year’s interest bill of $63m, but when you consider there is another $450m of these exorbitant notes still out there, the future savings to the group as they are redeemed will be material. Meanwhile every miner, driller and earth mover we have spoken to has said there is already a shortage of large equipment as the mining revival continues to gather speed. Emeco is well placed to benefit.

 

Otto Energy (ASX:OEL)

Otto is using the cash from its hugely successful Gulf of Mexico oil production program to fund a serious drilling program in the same region. Unfortunately, the first two of these wells have turned up very little and have been abandoned. The share price has sold off as a result, however, the production cashflow continues and the company will drill eight prospects in the next 15 months, seven of which are part of a JV with US oil giant, Hilcorp. There is a fair bit of science behind drilling targets so we expect the company to add to its success to date.

 

Sectors that should keep humming along

Infrastructure remains a strong prospect and is still building momentum, particularly in NSW and Victoria. Mining, oil and gas are all on the up. Gas shortages are well documented, gold has come back into focus given share market volatility (which has reminded us of the high A$ gold price) and coal prices are encouraging the reopening and extension of old coking coal mines. These sectors all support both direct investment and the services companies that surround them.

 

Cannabis is all the rage in the US and Canada (with Canada legalising marijuana production and sale this week). We had feedback from a broker, who visited a major gold conference in the US in recent weeks, that plenty of the money up there that used to look towards gold is now going into cannabis investments. Could be an indicator for Australian markets. So far the industry here is in its infancy. Watch this space.

 

Sectors that aren’t

Retailers are in the news for all of the wrong reasons again. US department store giant Sears has gone broke, as have local shops Max Brenner and Roger David. The Reject Shop has had yet another downgrade and Harvey Norman is once again bailing out its franchisees with loans support.

 

While this is happening the traditional media market continues to flag, with Fairfax downgrading across its titles. It’s not helping that the housing market headlines are poor, wage growth is still constrained and government chaos reigns.

 

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Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

 

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