Companies’ confidence clears way for ‘melt-up’

UBS analyst Jon Mott says NAB’s credit impairment charge of just one basis point for the ­period is its lowest recorded credit impairment charge since it began reporting quarterly earnings in 2008.

Some of Australia’s biggest companies are expressing their confidence in a sustainable recovery from the COVID-19 pandemic amid plunging US case numbers and encouraging results from vaccines.

Tuesday’s heavyweight standouts included BHP and NAB, while outperformance from the energy, industrials, healthcare, materials and real estate sectors also contributed to a 0.7 per cent jump in the S&P/ASX 200 to 6917.3 points — its highest close in almost 12 months.

With the benchmark index hitting a new multi-month high for the second time in just over a week, amid buoyant global markets and a stronger-than-expected February reporting season, conditions remain ripe for a “melt-up” in the Australian market as feelings of TINA (“there is no alternative”) and FOMO (“fear of missing out”) increasingly lead investors to shift out of low-yielding cash.

A 2.7 per cent rise in BHP share price lifted it to a four-week high of $47, just 4c off its highest daily closing price on record.

BHP alone contributed almost 30 per cent to the rise in the S&P/ASX 200 index.

While the miner’s underlying profit missed Bloomberg’s consensus estimate by almost 6 per cent, it still had the confidence to return $US5.1bn ($6.6bn) to shareholders via a record interim dividend of $US1.01 a share, fully franked, thanks to stronger than expected cash generation and lower net debt. BHP’s dividend beat the consensus estimate by 20 per cent, despite recent upgrades.

With free cashflow yield of 10 per cent, BHP is more and more being seen as a dividend stock.

RBC’s Pekar Kaan reiterated his outperform rating and $55 target price on BHP, saying its cashflow yield “will serve to drive even further income-based rerating”.

Macquarie Equities’ Hayden Bairstow saw a continuation of “strong upgrade momentum” for BHP.

While some analysts are expecting the iron ore price to retreat after an extraordinary run (reinforced by China’s pledge to lower its steel output for environmental reasons this year), Bair­stow notes that on a spot iron ore price scenario, his earnings forecasts would be 30 per cent and 90 per cent higher for its 2020-21 and 2021-22 financial years respectively for BHP.

UBS analyst Glyn Lawcock says consensus dividend forecasts for BHP are likely to be revised higher as long as it continues to return 100 per cent of its free cashflow.

BHP’s 85 per cent dividend payout ratio compared to its three-year average of 70 per cent.

Fortescue Metals fell 3 per cent amid bloodletting over cost overruns at its Iron Bridge magnetite joint venture, but Rio Tinto — which is due to report its interim results before the market opens on Wednesday — surged 3 per cent to $123.05, its third-highest daily close on record.

The other main driver was the banking sector.

Strong results from Commonwealth Bank and Bendigo and Adelaide Bank, plus an equally strong trading update from N­ational Australia Bank, leave the ASX 200 Banks index within striking distance of a 12-month high hit early last week — despite a 70 per cent bounce from the March low.

Even as CBA traded ex-dividend, the sector rose, with NAB and ANZ up about 1 per cent.

NAB’s first-quarter trading update showed a big fall in provisions for bad and doubtful debts due to a better economic overlay, as well slightly better net interest margins, which will drive upgrades to the consensus estimate for NAB’s earnings per share.

UBS analyst Jon Mott says NAB’s credit impairment charge of just one basis point for the ­period is its lowest recorded credit impairment charge since it began reporting quarterly earnings in 2008, and its lowest annualised credit charge since 1980.

NAB’s regulatory capital ratio of 11.7 per cent was 15 basis points above expectations and pro-forma capital will rise to 12.05 per cent after completion of the MLC Wealth sale.

“With a strong capital position and strengthening economy, we expect NAB to announce higher dividends and we have factored in a $3bn buyback with its FY21 result, subject to APRA approval,” Mott says.

“While some may question NAB’s decision to raise $4.25bn in April 2020 at $14.15 and potentially give some back 18 months later above $25, we believe this is more a reflection of the changing environment and outlook, management conservatism at the time and the underlying economic leverage in the banks.”

Mott upgraded his earnings per share forecasts for NAB by 3-7 per cent, reflecting slightly better net interest margins and much lower bad debts. UBS maintained its buy rating on NAB.

There should also be some read-through to the rest of the banking sector from the positive results so far. Add in the steepening bond yield curve and another up-leg seems increasingly likely.

There was also a solid rise in “reopening” stocks including Vicinity Centres, Transurban, Flight Centre, Webjet and Qantas amid expectations that Victoria’s latest lockdown will end early.