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The Trump Card

He may be “uniquely unqualified to be US President” according to President Obama, but the Donald Trump effect is making things difficult for equity markets.

Exhibit A – the plethora of earnings downgrades and profit warnings that have sprouted like weeds across the Australian Annual Shareholders Meeting season.

Flight Centre (FLT)

My favourite one so far is Flight Centre which has an unshakeable case of the guidance yips.

Earlier this year, the company flagged that its previous FY16 guidance of 4-8% profit growth would instead become a 2-5% profit decline, and so it was.

But someone in the PR department forgot to readjust the profit guidance for FY17 and the company trotted out the 4-8% profit growth line again, confident that things were getting better. Turns out that the only things getting better are airfares (lower) and although FLT is writing bucket loads of tickets, the profitability of those tickets is falling.

Time to roll out the profit downgrade announcement which this week says FY17 profit could be down by as much as 7% by the time the full year result is landed.

Dragging FLT’s FY17 profit down to around the mid-point of that guidance (if it can be trusted) starts to make the stock look pretty cheap at 13x earnings per share with a gross dividend yield nudging 7.5%.

Flight Centre’s woes are symptomatic of the growth in international airline capacity that is also afflicting Qantas and Virgin. Both airlines are fighting against an influx of new airlines flying to (and from) Australia, with many existing flights also up-gauging the size of the aircraft thus providing even more seats with which to compete.

Just about the only company enjoying this formula is Sydney Airport (SYD) which is flat out ushering 14.3 million passengers (FY16) through its international terminal and herding them past their flash new retail offerings and Duty Free precinct.

The newer aircraft types, such as the Boeing 787 Dreamliner and the Airbus A350 are almost custom designed to suit the long haul flights from Asia and this is helping to encourage yet more visitors to Australia. There are now 44 airlines flying to 97 international destinations from Sydney Airport.

No hint of a downgrade for SYD then.

Soiled linen

Retail bric-a-brac homewares store Adairs (ADH) had an embarrassing moment this week too as it realised it needed to change the bedsheets. It seems no-one liked the designs so the category, which accounts for 40% of group sales, has put a hole in ADH’s FY17 guidance which now reads 15% lower than last year at the EBIT and earnings per share line.

Downgrades aren’t exclusive to listed companies as potential investors in the Ingham’s IPO have discovered. While not an earnings downgrade, the IPO price has been skewered from the original $3.57-4.14 per share down to $3.15 per share. The multiples of earnings at that level look fairly undemanding so the float should succeed, but it’s not a great start to listed life.

Serial downgrader

Fairfax can’t turn a trick with its publishing business but the latest profit warning was a shock as it was due to lower listing volumes in its star Domain Group.

Listings in Sydney and Melbourne have drooped by 18% and 5% respectively meaning Domain’s first half EBITDA is likely to be lower than last year.

But Domain’s numbers are still largely artificial as the company continues to invest in the business, thus supressing the real earnings potential. About 75% of Domain’s EBITDA comes from its digital products and that is where the real value is, rather than the tired print products.

It’s not a new idea, but if the Domain business was valued at a similar multiple to REA at say 15x EBITDA and then geared to around two times net debt to a conservative FY17e EBITDA of $150 million (REA delivered $347m EBITDA in FY16) then Domain alone can be valued at approximately $0.87 per FXJ share.

The current FXJ share price is around $0.80, including the wilting publishing business that still includes the almost jettisoned NZ media publishing business.

There are also numbers being bandied around on the possible value of the Stan subscription video on demand business that is a joint venture with Nine Entertainment Group (NEC). I think it’s too early to ascribe any real value to Stan given the likelihood that prices for such services are more likely to go down than up, while content costs never go down and the competition is intense.

REA is likely to report a soggy first quarter update next week which should reflect what Domain has experienced. That is probably already reflected in the share price now so REA is probably back into buy territory at around $47 per share.

FBI and the Fed

Tuesday’s US election will not be the last we see of that shemozzle. The fallout from the election will continue to impede stock markets from focusing on fundamentals and instead we could see FBI investigations into Hillary’s email affairs plague her position as the next POTUS if she should win.

The Donald as POTUS, on the other hand, could be a catalyst for market chaos.

The US Federal Reserve seems set to raise official interest rates in December but it could all be lost in the fog if the Trump effect descends across America and the rest of the world.

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