The S&P/ASX 200 (INDEXASX: XJO) is expected to rise when the market opens this morning. Here’s what’s making headlines.
ASX 200 recap
The ASX 200 broke its three-day run, falling 0.9% on Thursday due to a combination of weaker global markets and an unexpected outbreak from hotel quarantine in Victoria.
Every sector finished lower, but property (-2.4%) utilities (-2.0%) and energy (-1.2%) were among the hardest hit as Australia reported a record $73 billion trade surplus for 2020.
The Australian 10-year government bond yield reached 1.2% during the day, despite the RBA’s efforts to push the rate lower. This is the benchmark across which all asset prices are compared, hence an increase in yield sent listed property and long-term bond values lower. These increases take significantly longer to flow into residential property lending, therefore it’s likely that the sector remains hot in the coming months.
Furniture retailer Nick Scali Limited (ASX: NCK) reported a 99.5% increase in net profit for the first half of FY21 on the back of a 24.4% increase in revenue. Despite facing increasing pressure on imported product, the company has performed incredibly well and managed to increase its profit margin to 64% in the first half. Cash flow tripled to $53.5 million and the dividend was increased to 40 cents per share. Management has faced political pressure to return JobKeeper payments given the performance, but as yet has made no such decision. The Nick Scali share price finished the day 0.9% lower.
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ASX energy shares reset expectations
It was a tough day for Australia’s major energy suppliers, with both AGL Energy Limited (ASX: AGL) and Origin Energy Ltd (ASX: ORG) either writing down the value of their generation assets or flagging lower earnings on the back of weaker demand and lower electricity prices.
Starting with AGL, the company announced a further $2.67 billion in write-downs, but no change to its underlying or true net profit, which will land between $500 and $580 million. The reason for the write-down was twofold: the first, so-called ‘onerous’ contracts to support wind farm operations in the early 2010s, with agreed purchase prices significantly higher than the price at which the energy can be sold.
Secondly, the group has been forced to reduce the discount rate on its Environmental Restoration Program, through which it sets aside funds each year. Lower bond rates mean the discount rate has reduced from 10% to 3%, meaning the company needs to allocate three times more capital to these expenses in the future. This is a non-cash impact, and given recent movements in bond rates, may be reversed in the coming year. AGL shares finished 3.6% lower.
Meanwhile, Origin downgraded earnings, blaming milder summer conditions, lower energy demand and electricity prices. Management guided to a 13% reduction in the bottom end of its earnings range, from $1.15-$1.30 billion to $1.00-$1.14 billion, but highlighted $100 million in corporate cost savings. Both AP LNG and Natural Gas profits are expected to fall, with the former now unlikely to make a distribution in 2021. The Origin share price finished 6.9% lower.
US markets green, PayPal delivers record numbers
US markets continued their strong recent run, with the S&P 500 adding 1.1% to finish at another record, while the Nasdaq also gained 1.2% as the market moves on from the short-selling shock.
The US is facing a similar trend as Australia, with both the USD and government bond yield heading higher, putting a potential headwind on valuations.
Digital payments provider PayPal (NASDAQ: PYPL) offered further evidence of its incredible power, reporting its strongest year ever after revenue increased 23% during the final quarter of 2020. The company is seeing tremendous growth as those who we forced to shop online during the pandemic decide to keep doing so.
PayPal’s quarterly profit tripled to $US1.57 billion on US$6.10 billion in revenue, with management reporting record new customers, volumes, revenue, earnings and free cash flow. They are now forecasting another 20% growth in revenue in 2021 and are pushing forward with their acceptance of cryptocurrency payments. PayPal stock finished 7.4% higher on the report – an all-time high.
Digital music streaming and podcast service Spotify (NASDAQ: SPOT) reported a 27% increase in active users to 155 million, with premium subscribers growing by 11 million in the quarter. Revenue increased 27% but cash flow fell 56% as the company continues to invest in additional content; shares were flat.