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Good afternoon, 

ASX200 up 59pts today (+0.91%) as energy, resources and healthcare bounced.  Strong afternoon trade. Market plus 1.38% for the week and about square for the month. 
It's been a busy week, I thought I'd start by updating on DXN on the back of their fully underwritten rights issue announcement. 

DXN Ltd (DXN), last trade 7.1cps
Company is offering existing shareholders an opportunity to increase their shareholding by 25% (1 for 4) at 5.5cps with a free attaching option at 10cps.  The offer is fully underwritten and once finalised will deliver the company c.$5m to upgrade the power at Sydney and put some working capital aside for some of these bigger Module contracts that are in the pipeline.  

Look, this has been a disaster.  Previous management had exceedingly poor cost control, over-promised on what could be achieved from both a timelines and budget perspective and were removed by shareholders as a result. 

The board has been partially refreshed, the new CEO, Matthew Madden, is doing a stellar job so far in my opinion and the quality of the people in the business is improving every day.  If the company can start to consistently deliver sales in both the colocation and modular business units, this stock should significantly re-rate.  

If you're buying shares at 7c now, up until the 16th October, you're still buying the stock cum-entitlement. So that means you can average down your position with 25% more stock at 5.5c and a free attaching option at 10c.... not a bad deal in my book. 
I read an interesting pieces from UBS during the week, it had a lot of good information about the deterioration of data, it's impact on equities in the past and where we are in the cycle right now.  The most interesting thing was they highlighted that while interest rates falling has been largely responsible for equities rising during the first half of this year, it appears rates and equities are now positively correlated...
Rates and equities are now positively correlated...
Source: UBS
What's my point?  Well maybe, lower interest rates won't help equity markets much more and risk-aversion is about to increase.  The leading indicators don't look good, and when they've looked this bad before and earnings have rolled over... according to the UBS report, the S&P500 has been down double digits as investor sentiment turns very negative. 
What to do about it?  Well, for me, interest rates are going nowhere fast and economic growth isn't going to suddenly surprise us to the upside.  I see defensive assets, like everyone, the safest bet, with cash or liquid fixed income as offering valuable optionality.  
But let's face it, both of those are expensive, though not extremely so. 

Yields on SYD and TCL look about >10% more expensive than recently, but yields have been trending up... 
Why are they trending up against rates?  Well their dividends actually have growth.  Dividends per share over the same period, indexed at 100 (up 61% and 63% respectively.)
This is what you want to look for in tough markets.  Companies that can pay you a dividend come hell or high-water.  Companies that have a competitive advantage that gets more pronounced during a period of economic contraction or risk aversion. 

Though I think the often overlooked category is cyclicals that can win market share during a period of low/no/negative growth.  My Mum taught me about this, in real estate.  She reckons that all agents suffer during property downturns, but the best ones, they survive and come out the other side with less competition, greater market share, a stronger brand and better pricing power. 

So while everyone is looking for defensive businesses, don't forget to keep an eye on some of those beat up cyclicals that get dragged down in the carnage, might even see earnings go backwards/flat for a few years... but manage to gain market share and survive and come out stronger, leaner and meaner when economic growth returns. 


Right now, Reliance Worldwide (RWC) fits this billing for me. Cyclical downturn in the US housing market and some adverse weather conditions held them back, but its a market leading product, gaining market share in its core markets while expanding geographically. And you can buy it on 17x FY21 forecast earnings.  A simple chart of earnings forecasts and price. 
This is isn't the only one.  But I'm not giving away all my secrets. 
After the recent (and continued) demise of Webjet (WEB), Flight Centre (FLT) followed suit, FINALLY!  Two companies that just never made any sense to me, well the businesses made sense, I get it, but I just didn't get the valuations. 

Over the last 10 years Webjet has averaged just 1.72% EPSg whilst paying an average of 20x for it over the last 3 years. 

FLT only averaged 0.96% EPSg, and we paid almost 17x for that (22x at one point of lucid dreaming). 


Anyway, Webjet is -43% from its peak and Flight is now -42%... Price charts look terrible, WEB breaches $9.50 it might head back to something starting with an $8. 
FLT similar, if it falls through $40, next stop is $30 on the chart. 
I can't remember the last time anyone I know book a flight on either of these services.  I shop on Webjet for every domestic flight I buy.... then I go and buy it direct from the airline.  As for a travel agent.... I mean seriously... there's this new up and coming company that's made them near-redundant.
Movers & Shakers

I don't know if you can tell, but I'm struggling for inspiration this week.  Anyway, a bit of biotech stuff up the top of the pops this week (not in my wheelhouse so I barely pay attention.) and ORA flipped its paper business to the Japanese for a decent price (11.5x EV/EBITDA). Market opinion is split on the outlook, its either a smart move to focus on higher return businesses or creates an overly heavy reliance on a dubiously-position US business. 
Nothing to savage to speak about except FLT on the downside.  
Have a good week, 
LL
Luke Laretive
CEO & Investment Adviser
cid:F27FE85A-DED2-4884-B3DE-021840FD5DA3@pidgeon.com.au
T  +61 3 8639 1601  |   M  0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000 
AFSL No. 492686
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