ASX News LIVE | XJO Rises as City Chic, Flight Centre, Dicker Data, Prospa Report

From the @WSJ, a neat way to summarize the main takeaways from the three main indicators in this morning's monthly JOLTS release for the US (vacancies, layoffs and the quit rate):
"The job market isn't so strong that employees feel emboldened to quit loudly and find another job,… pic.twitter.com/IyOp6gqTrD

— Mohamed A. El-Erian (@elerianm) August 29, 2023

Incoming Reserve Bank Governor Michele bullock gave a speech yesterday on climate change and central banks.

Some might wonder how the two topics coalesce, but coalesce they do.

Bullock said both climate change itself and actions taken in response to it will have ‘broad-ranging implications for the economy, the financial system and society at large.’

Here are some other interesting quotes taken from her speech.

Energy transition may put pressure on inflation:

‘The phase-out of carbon-intensive production may reduce aggregate supply temporarily. But investment in alternative production methods will boost aggregate demand. Depending on how this transition plays out, if the net effect is to temporarily lower aggregate supply, this would put upward pressure on inflation.‘

Coal-fired power plant closures:

‘Coal-fired power plants are scheduled to be shut down over the next three decades (Graph 4). This could put upward pressure on energy prices if coal plant closures are not matched by renewables supply and storage. There is much uncertainty here.‘

Australia’s future coal exports:

‘The 2023 Intergenerational Report shows that in a scenario where global action limits temperature risks to 1.5°C, the associated reduction in global demand for thermal coal could reduce Australia’s exports to less than 1 per cent of current levels by 2063.‘

Climate change may affect the neutral interest rate:

‘Climate change might have important effects on an economy’s capacity to produce goods and services – that is, on potential output. It might also affect the neutral interest rate and, therefore, the stance of monetary policy. These concepts are difficult enough to assess in real time in the normal course, let alone when climate change is introducing additional variability and uncertainty.’

‘The neutral interest rate is the interest rate at which monetary policy is neither expansionary nor contractionary – and so it provides a conceptual benchmark for assessing the stance of policy. The impact of climate change on the neutral interest rate is not clear cut. In a world where significant climate risks materialise, households may be more likely to accumulate savings and firms may be less willing to invest, putting downward pressure on the neutral rate, and limiting the effective monetary policy space available to policymakers where interest rates are still positive. On the other hand, the extra investment required to replace capital stocks destroyed by more frequent natural disasters or to transition to a lower emissions economy could put upward pressure on the neutral rate.’

Australian banks exposed to climate risks due to mortgage exposure:

‘Australian banks face climate risks primarily through their extensive exposure to residential mortgages. If climate change makes a home’s location less desirable and significantly reduces its value, banks would then have less protection against default. Banks could also experience losses from transition risk associated with their exposure to carbon-intensive industries, through their lending to businesses in these sectors.’

RBA’s modeling quantifying property price falls from climate change:

‘In analysis conducted by Reserve Bank staff, a macrofinancial stress-testing model was used to estimate how climate change might affect the banking sector, using two scenarios – one with severe physical risks, another with significant transition risks.^[18] To capture the physical climate risks to residential housing, climate hazard data were used to measure the expected increase in insurance costs due to climate-related damage – such as more frequent flooding and more damaging cyclones – which were translated into housing price falls. As shown in Figure 1, around 7.5 per cent of properties are in postcodes that could see property prices decline by 5 per cent or more due to climate change by 2050.’

RBA modeling found 'around 7.5 per cent of properties are in postcodes that could see property prices decline by 5 per cent or more due to climate change by 2050.' #auspol #RBA pic.twitter.com/PMYXakOCDe

— Fat Tail Daily (@FatTailDaily) August 30, 2023

Narrative cycles pic.twitter.com/MEaZNX5lBv

— ʎllǝuuop ʇuǝɹq (@donnelly_brent) August 29, 2023

Narrative cycles pic.twitter.com/MEaZNX5lBv

— ʎllǝuuop ʇuǝɹq (@donnelly_brent) August 29, 2023

Forget AI, Dicker Data is focusing on cybersecurity as the key trend of the future.

Dicker Data said cybersecurity ‘continues to be a key focus for all sectors in 2023’.

Management said:

‘Cyber-attacks continue to increase as businesses and consumers centre more of their lives around technology, in turn driving awareness and demand for modern cybersecurity solutions. We are anticipating a high level of growth in the adoption of automation, machine learning and data capture and analysis tools as businesses and governments prioritise efficiency and productivity within their operations. The Company is in a strong position to continue to leverage local knowledge and portfolio diversification to address the next phase of digital transformation.’

Forget AI, Dicker Data is focusing on cybersecurity as the key trend of the future.

Dicker Data said cybersecurity ‘continues to be a key focus for all sectors in 2023’.

Management said:

‘Cyber-attacks continue to increase as businesses and consumers centre more of their lives around technology, in turn driving awareness and demand for modern cybersecurity solutions. We are anticipating a high level of growth in the adoption of automation, machine learning and data capture and analysis tools as businesses and governments prioritise efficiency and productivity within their operations. The Company is in a strong position to continue to leverage local knowledge and portfolio diversification to address the next phase of digital transformation.’

IT hardware and software distributor Dicker Data [ASX:DDR], up 4% in late Wednesday trade, reported 1H23 revenue growth of 5.3% to $1.11 billion.

Net profit after tax rose 9.4% to $37.59 million on ‘significantly improved’ margins of 13.6%.

Dicker Data said it saw revenue growth across all product segments.

Hardware and virtual services sales rose 5.2% to $1.14 billion and software sales rose 21.2% to $442.9 million.

Speaking of its performance, Dicker Data management said:

‘Following almost three years of continuous supply chain disruption and chip shortages, H123 exhibited the strongest signals yet of a normalising supply-side market. Demand from the Company’s base of over 10,200 partners across Australia and New Zealand (ANZ) has remained strong, however, the performance of certain technology segments, such as devices, continued to be impacted by accelerated technology refresh cycles undertaken by businesses and governments in recent years to enable hybrid work.

‘Due to the Company’s highly diversified portfolio and range of technologies represented, the Company was able to offset the decline in certain technology segments and meet the emerging needs of the ANZ market with growth in others, such as networking, datacentre infrastructure and software. Software continues to outperform expectations, delivering 21% growth in underlying gross sales on basis previously reported for the half year.’

 

It seems the market is taking the latest monthly CPI data in stride.

The All Ords marched higher after the ABS showed falling monthly inflation.

That said, trimmed mean inflation recorded a more modest fall, sliding from 6.1% in the 12 months to June to 5.8% in July.

The market’s strong reaction suggests it thinks the Reserve Bank is pretty much done with raising rates.

The question now is when will the RBA cut? Some time this year? Mid-2024? Late 2024?

In the 1970s, the Organization of Petroleum Exporting Countries (OPEC) closed its oil taps and sent oil prices soaring.

It was around this time that oil company, Exxon Mobil Corporation, decided that they needed to diversify from oil to create new revenue streams.

So, with this in mind, they hired a group of chemists and physicists to work on battery technology. Among the group was Dr M Stanley Whittingham.

As he told The Australian:

‘Exxon decided they wanted to be an energy company, not just an oil and chemical company. They thought oil would peak by about the year 2000. So we were allowed to work on anything in energy provided it wasn’t petroleum or chemical related.’

Whittingham and his team discovered that holding lithium ions between plates of titanium sulphide created electricity.

This breakthrough paved the way for the development of the lithium-ion batteries we use today in things like laptops, cell phones and electric vehicles (EVs).

Batteries are crucial for the energy transition

EVs…wind turbines…solar panels…for all, batteries play a key role. Batteries help store excess electricity to be used later when needed.

But lithium-ion batteries are a decades-old technology. What’s more, lithium batteries need massive amounts of critical minerals.

So, the battery industry is currently working frantically on two areas.

One is to improve existing lithium-ion batteries by trying to make them cheaper.

That’s one of the reasons why lithium iron phosphate (LFP) batteries have been gaining ground.

You see, lithium-ion batteries aren’t all the same. There’s more than one type, and they vary depending on the chemical composition of the cathode.

As you can see below, nickel manganese cobalt oxide (NMC for short) is the dominant lithium-ion EV battery today. But lithium iron phosphate batteries have been gaining share (in light green).

Source: S&P [Click to open in a new window]

LFP batteries have no nickel or cobalt. They are cheaper to produce and are more stable, although the downside is that they have less range.

The industry is also working on increasing driving range.

One interesting development in this area has come from Toyota. They’ve been busy developing a solid-state battery that would have a 1200-kilometre range and would recharge in 10 minutes…impressive.

Solid-state batteries have a solid electrolyte instead of a liquid one. They have higher energy density, are lighter, faster to charge, have a longer lifespan, and are safer and more stable when compared to traditional lithium-ion batteries.

But solid-state batteries are still pretty new. They are expensive and hard to manufacture at scale.

Still, solid-state batteries are something to keep an eye out for.

The other area the battery industry is working on is to create alternatives to lithium-ion batteries.

And there are plenty of companies experimenting with different types of batteries.

https://commodities.fattail.com.au/this-battery-race-is-up-for-grabs/2023/08/30/

One of the biggest headwinds for the market last year was the rising interest rate environment and the uncertainty when it would end.

We’re getting inklings that the world is turning back in the favour of you and I as share investors.

As far as rates go, case in point is this snapshot I took from financial firm Resimac’s results yesterday:

Source: Resimac [Click to open in a new window]

I doubt they say this lightly. Their business model is very sensitive to moves in the cash rate and wholesale funding.

The market is still jumpy around many stocks like this. Resimac shares took a panicky dive before their results release.

Then the shares rallied 20% yesterday on relief. It’s been a tough 18 months…but it’s not 2008 here.

They are a profitable, dividend paying stock and, yes, their arrears are rising, but it’s not a disaster, as many quite rightly feared last year.

In fact, it was an interesting day yesterday.

I also tuned into a webinar from the team at Yarra Capital.

I took a screen shot of this slide that points to their increasing confidence we could see rate cuts next year:

Source: Yarra Capital [Click to open in a new window]

We can’t be certain this is the way the cookie will crumble. But it’s a bet I’m willing to take and am positioning for accordingly.

I suggest you do the same. Inflationary pressure is fading fast.

You can make very good money when the weight of market money begins to move in a new direction.

Yarra also made an excellent point that any Aussie investor must know.

59% of the top 20 stocks are either exposed to banking, iron ore, or fossil fuels.

That doesn’t exactly scream ‘the future’, as I’m sure you’ll agree.

While they may all be profitable sectors, the market is unlikely to put a high forward multiple on their earnings.

The growth rate just isn’t high enough. That limits the capital growth you (and me, and everyone else) can expect.

Point being: if you want your portfolio to get a kick and actually go somewhere, you need to look at stocks outside this range.

I agree.

Personally, I specialise in small caps and am astonished how negative everyone is relative to the opportunities presenting.

https://www.moneymorning.com.au/20230830/why-2024-rate-cuts-are-coming-into-range.html

Electricity prices rose 15.7% in the 12 months to July and a whole 6% in the month of July alone.

The spike follows price reviews across all capital cities.

Rebates introduced last month mitigated the price rises for some households, with the Energy Bill Relief Fund providing eligible households rebates ranging from $40 to $250.

But the ABS has smart data crunchers who figured out that, excluding the rebates, electricity prices would have recorded a monthly increase of 19.2% in July!

ABS: Electricity prices rose 15.7% in the 12m to July and 6% in July alone.

If you exclude rebates introduced last month, electricity prices would have recorded a monthly increase of 19.2%. #ASX #auspol

— Fat Tail Daily (@FatTailDaily) August 30, 2023

And the latest monthly CPI data is out!

The monthly CPI indicator rose 4.9% in the 12 months to July, down from 5.4% in June.

Good news!

Let’s see how the market reacts.

The biggest contributors to the increase were Housing (7.3%) and Food & non-alcoholic bevvies (5.6%).

Counterbalancing these spikes were price falls for automotive fuel (down 7.6%) and fruits & veggies (down 5.4%).

But, some bad news.

Core inflation — excluding volatile items like fuel and fruit & veggies — was down only slightly from 6.1% to 5.8%.

Monthly CPI indicator comes in lower than expected but volatile items and electricity rebates assist the outcome materially. pic.twitter.com/M05IjSxogo

— Alex Joiner 🇦🇺 (@IFM_Economist) August 30, 2023

In FY21, City Chic posted sales revenue of $258 million, with net profit after tax of $21.6 million.

Two years later, in FY23, sales revenue grew to $268.4 million, but net profit after tax turned into a net loss of $45 million.

That’s a sign of compressed margins and runaway expenses. Gross margin as a percent of revenue fell a whole 18.7% in FY23.

City Chic resorted to ‘heavy promotional activity to drive sales’ and to ‘right-size’ inventory.

But heavy discounting didn’t always work to clear excess stock.

City Chic also resorted to stock write-downs of ‘aged and fragmented lines’.

In FY21, $CCX reported sales revenue of $258 million and NPAT of $21.6 million.

Two years later, in FY23, sales revenue grew to $268.4 million, but NPAT turned into a net loss of $45 million.$CCX blamed ‘heavy promotional activity to drive sales'. #ASX $CCX.AX pic.twitter.com/lOPqzjuXUX

— Fat Tail Daily (@FatTailDaily) August 30, 2023

Women’s apparel retailer City Chic Collective [ASX:CCX] is down 10% on Wednesday after swinging to a large FY23 net loss.

After posting a solid net profit from continuing operations in FY22 of $24.4 million, City Chic slumped to a net loss of $45 million.

It’s even worse when one factors in discontinued operations.

City Chic’s total comprehensive loss for the year was a substantial $99.8 million.

What happened?

Yes, FY23 sales revenue did fall 16% but it was still up 7% on FY21.

The answer lies in rising expenses and falling margins.

City Chic battled bloated inventory and the consequent heavy discounting withered away any profitable margin.