ASX News LIVE | XJO Flat; US GDP Growth Revised Down; Harvey Norman, IGO, Airtasker, Pointsbet Report

Here’s something other than boring market news.

The Financial Times recently published an interactive piece on coffee, the fuel of modern society.

‘About 3 billion cups of coffee are drunk around the world every day — a number expected to double by 2050 if current trends continue.

‘But warming temperatures mean up to half of current coffee farmland could soon be unusable.

‘Climate change is already having a devastating impact on yields.

‘Whether the world can produce enough beans to fulfil growing demand is in doubt.’

 

Why don’t we quickly run some numbers on Harvey Norman [ASX:HVN].

What is it worth? And what assumptions is the market making to come up with its current value?

Let’s first come up with our own estimate of intrinsic value using the trusty return on equity valuation formula.

Using a discount rate of 8% and FY24 consensus estimates, we get a valuation of $4.20 a share, slightly above today’s closing price of $4.04 a share.

It seems the giant retailer is fairly priced.

Which means the market’s implied forward assumptions are as follows:

• FY24 ROE of 9%
• Payout ratio of 73%
• Discount rate of 8%

 

Small fintech MoneyMe [ASX:MME] is up over 10% in late Thursday trade after releasing its FY23 results.

While long-term shareholders will welcome today’s spike, MME is still down 85% over the past 12 months. Since July 2021, MoneyMe is down 97%.

A huge fall.

But are things looking up? It’s hard for things not to, from the nadir.

After moderating originations, MoneyMe delivered a statutory NPAT of $12 million. Based on its FY23 EPS of 3.8 cents, MME is trading on a trailing P/E of 2. Bargain or value trap?

The fintech said it’s taking a ‘prudent approach to loan book provisioning’, too, upping its loan book provision to 6.6% from 6.1%.

MoneyMe was prudent with costs as well, improving cost efficiency by 45%, and the customers it pursues. The average customer Equifax profile is now 727, up from 704 in FY22 and 635 in FY20.

That last part stood out.

MoneyMe, transitioning from ‘high growth to profit delivery’, is choosier when it comes to customers.

That may undermine its message today:

‘Recognising the importance of standing by our customers during trying times, we also improved our financial hardship processes.’

Clearly, it’s not exactly standing by customers with lower Equifax scores.

Which raises a question about the sector.

If MoneyMe’s shift to ‘higher credit quality customers’ is emblematic, what happens to the customer base with lower credit quality? Will they be shut out? Will they be exploited by stupendous rates?

Non-bank lender $MME rebounded to a net profit in FY23 after moderating originations and pursuing 'higher credit quality customers'.

On a FY23 NPAT of $12 million, $MME.AX is currently trading at a trailing P/E of 5. #ASX #MoneyMe pic.twitter.com/li2yAYfRdc

— Fat Tail Daily (@FatTailDaily) August 31, 2023

In June, Airtasker signed a media-for-equity deal with massive UK television network Channel 4.

Channel 4 has a monthly reach of 47 million people, or 78% of the UK population.

Under the deal, the network will invest $6.7 million, ‘through the provision of media advertising services, in exchange for a 20% stake in Airtasker’s UK subsidiary’.

The gig economy firm thinks this will build brand awareness in the UK, ‘growing users and building network effects’.

Airtasker said it successfully implemented a similar deal with Seven West Media, ‘resulting in 20x revenue growth over 5 years and a 5x investment return for Seven West Media’.

Just prior to listing in March 2021, Seven West Media’s stake in Airtasker was over 17%. A stake the company cleared in full at the IPO.

Interestingly, if $6.7 million got Channel 4 a 20% stake, it means the deal implicitly values the UK subsidiary at about $34 million.

$ART inked a 'media-for-equity' deal with UK's Channel 4 where the network will invest $6.7m for a 20% stake in $ART.AX's UK subsidiary.

That implicitly values Airtasker UK at $33.5 million. $ART's current market cap is ~$90m, down 45% YTD. #ASX #Airtasker pic.twitter.com/Ik0Z9AJXTW

— Fat Tail Daily (@FatTailDaily) August 31, 2023

Gig economy platform Airtasker [ASX:ART] is up modestly on Thursday after reporting its FY23 results.

• Revenue rose 40% to $44.2 million
• Gross marketplace volume up 34% to $253.5 million
• Net loss after tax down from $20.4 million to $12.9 million
• Cash and cash equivalents down from $23.7 million to $16.1 million

Airtasker’s revenue overwhelmingly came from the Australian market.

Its fledgling businesses in the UK and the US brought in $900,000 in revenue combined, that’s $0.9 million.

Airtasker management said:

‘The UK marketplace is still in the ‘one to 100’ stage during which the goal is to build network effects by balancing supply and demand to drive marketplace activity and grow GMV. During FY23, Airtasker experienced steady growth in its UK marketplace with GMV up 34.6% on pcp to £3.7 million while revenue increased 92.5% on pcp to £0.5 million.’

 

Financial Times’s Robin Wigglesworth, heading the Alphaville column, took aim at central bankers’ use of R* — the purported neutral rate of interest prevailing in the economy.

The interest rate that neither stimulates or stalls the economy and keeps inflation stable over the medium term.

Wigglesworth writes:

‘R* still matters because a lot of influential central bankers think it matters. It kinda signifies where they think interest rates should theoretically end up in the long run, even if history pretty clearly shows that in practice rates tend to go up until something breaks, and then go down until that something heals.

‘Anyway, there IS actually a decent proxy for what the market thinks the long-term “neutral” level of interest rates are. More accurately — and perhaps more importantly — it shows the market’s view of long-term bond yields. And over the past year it has repriced dramatically.

Source: Financial Times

‘This is the 10-year, 10-year Treasury forward (ticker G0025 10Y10Y BLC2 Curncy GP on the Bloomberg terminal, if you’re interested). It’s derived from the curve of the US government bond market and shows what investors think the 10-year Treasury yield will be in a decade’s time. Its long term nature strips out a lot of noise, and makes it a decent shorthand for what investors reckon R* is — albeit with some caveats.

‘It’s obviously just a nominal rate. You have to plug in some kind of implied or assumed inflation rate to get you to a “true” market-implied R*. It’s also not the most liquid market in the world, which is why a lot of people prefer 5y5y overnight index swaps.

‘However, instead of being merely flawed proxy for the market’s view of R*, the 10y10y can be seen as a clean-ish indicator of what the bond market thinks its own long-term future looks like.

‘And as you can see from the chart above, it is now showing that the looooooooooooong low-yield era has passed on. It is no more. It has ceased to be. It’s bereft of life. It rests in peace. It’s hopped the twig, kicked the bucket, shuffled off its mortal coil, run down the curtain and joined the great fixed income market in the sky. Just a few years ago, the 10y10y was signalling that investors thought “low for longer” had become “low forever”. Today it is whispering that bond yields will still ebb and flow, but we will not return to Ye Olde ZIRP days for a generation.’

Excerpt from Ryan Clarkson-Ledward’s latest dispatch for Money Morning.

***

The question on the mainstream media’s lips right now seems to be ‘when will China go bust?’.

Just look at these headlines from the past week:

[Click to open in a new window]

[Click to open in a new window]

Source: MacroBusiness, Bloomberg, Reuters [Click to open in a new window]

Now, to be fair, this is nothing new.

I think I’ve seen at least one doomsday prophecy about China every week for the past seven years. The media just loves to hate on the Middle Kingdom, probably because it gets clicks.

But I digress…

The point is, the media is making the China bust narrative seem more pronounced than it likely is. And don’t get me wrong, China’s economy has issues, just don’t expect it to ‘collapse’ like some suggest.

As Cal noted in yesterday’s Money Morning:

‘Another year and another fake China crisis has washed through the Aussie market, scaring everyone…and yet, there seems to be little signs of genuine financial distress anywhere. It’s almost a tradition now.

‘I told you last week that this was a chance to buy the dip. The market has rallied up since.

‘…Why is this so? Truth be told, I’m not 100% sure, except to say perhaps China is stronger than most presume.’

I think Cal’s right.

Not only is China stronger than most realise, but it’s also driving gains in Aussie stocks…

The great pivot

Of course, the first thing that comes to mind when thinking of Chinese exports is iron ore.

The crucial commodity has formed the backbone of our trading relationship with China. Even with a struggling property market, iron ore has proved fairly resilient in terms of price and demand.

But that’s not what I want to talk about today.

Instead, what’s far more interesting for investors is our second-biggest export to China. Because historically, it has been liquefied natural gas — another one of our staple commodities.

In 2023 though, things have changed…

Thanks to a huge surge in demand in the first half of the year, lithium is now second only to iron ore. $11.7 billion was spent on this ‘white gold’ between January and June by Chinese buyers.

And to put this surge in perspective, you need to realise that just two years ago, this figure was only $470 million. In other words, in the span of roughly 24 months, China has increased its spending on lithium by 25 times what it used to.

Talk about a pivot in demand.

Here’s the kicker though, it’s not just Aussie lithium that China is buying. They’re trying to corner the entire market!

https://www.moneymorning.com.au/20230831/china-isnt-going-bust-its-going-after-white-gold.html

Pharmaceuticals firm Mayne Pharma [ASX:MYX] is down 20% on the release of its FY23 accounts.

While revenue from continuing operations rose 17% to $183.6 million, Mayne Pharma widened its net loss 44% to $317.4 million.

That’s a substantial loss, with asset impairments of $70 million playing their part.

Marketing and administration expenses both rose substantially, outpacing revenue growth.

That’s a recipe for ballooning losses.

Note, too, that admin expenses alone nearly accounted for all of Mayne Pharma’s revenue from sale of goods.

China’s latest readings from the official purchasing managers indices (PMIs) are out.

China’s factory PMI was the one grabbing attention, contracting for the fifth straight time.

China official purchasing manager's indexes (PMIs):
Manufacturing 49.7 August (survey: 49.2) July 49.3;
Services 51 August (survey: 51.2) July 51.5;
Readings below 50 denote a contraction in activity. #ausecon #auspol @CommSec pic.twitter.com/fYNDn9FI9D

— CommSec (@CommSec) August 31, 2023

Let’s assess HVN’s profitability.

Harvey Norman’s average equity in FY23 was around $4.38 billion. On a net income of $546.8, that’s a ROE of 12.5%.

What was the ROE during Harvey Norman’s favourite comparison year, FY19?

13%.

Profitability seems to be normalising.

 

‘Macroeconomic headwinds’, ‘significant deterioration in business and consumer confidence’, and a ‘contraction in trading conditions’ were some of the factors blamed for falling profits and margins in Harvey Norman’s FY23 results release.

Harvey Norman’s overseas retail profitability fell a whole 40% YoY.

HVN was quick to point out overseas profitability was still up 7.2% on FY19. Is that enough?

As for its biggest market, Australia’s franchising segment profitability fell 32.5% on FY22.

Importantly, franchising operations margin fell from 8.19% to 5.82%.

Again, HVN was quick to roll-out FY19 as the favoured comparison. Australia’s franchising operations segment (that’s a mouthful, let’s abbreviate to FOS) profit before tax is up 50.3% on FY19. And the FOS margin improved 143 basis points in that time, up from 4.39% in that fateful year.

Mammoth retailer Harvey Norman [ASX:HVN] is the final big retailer to report annual results.

It wasn’t able to buck the industry trend of falling sales and compressed margins.

Harvey Norman reported a 33% fall in FY23 net profit after tax to $546.8 million.

Sales of products to consumers were flat at $2.78 billion while revenue from franchisees fell 10% to $1.17 billion.

Occupancy and finance costs both rose substantially.

With these results, what did chairman Gerry Harvey wish to highlight?

Net assets.

Harvey said ‘we have delivered a substantial 40% growth in net assets since the beginning of the pandemic, rising to $4.47 billion as at 30 June 2023’.

FY19 featured heavily as the comparison year of choice. The retailer wanted it known that however disappointing FY23’s numbers are relative to FY22, they are great compared to FY19.

So, for instance, profit before tax fell 32% year on year but PBT is ‘still well-above pre-pandemic levels growing by $201.5 million or 35.1% from FY19, delivering a 4-year CAGR of 7.8%’.

Second-quarter US GDP growth was revised to 2.1% from 2.4% as firms liquidated inventory.

While the figure was revised, GDP growth was still a tad higher than the 2% registered in the first quarter.

Despite a historic hiking cycle, Americans are still spending and the economy is still expanding.

The personal saving rate — personal saving as a percentage of disposable income — was 4.5% in the second quarter.

The government’s measure of inflation — the price index for gross domestic purchases — rose 1.7% in the second quarter, a downward revision of 20bp.

The core PCE price index rose 3.7% in the quarter, a downward revision of 10bp.

Is that enough to assuage the Fed?

Many boffins think so. Lydia Boussour, senior economist at EY-Parthenon told Reuters:

“The downgrade to second-quarter GDP growth will be welcomed by Fed officials and reinforces our expectations for a policy pause in September but the door will remain open to further tightening. Data point to steady economic momentum into the second half of the year and confirm that a recession isn’t on the near-term horizon.”

Revised GDP out this morning, headline is 2.1% growth in Q2 (revised down from the original 2.4% estimate). GDP is basically where CBO thought it would be absent the pandemic.

But… pic.twitter.com/WJ5TLdO5nl

— Jason Furman (@jasonfurman) August 30, 2023