Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
SUMMERSET GROUP (SUM:NZ / SNZ:AX) HOLD: Another Weak Quarter
SUM fell after reporting a -9.6% decline in second-quarter sales for the 2019 year, which is worse
than the -4.2% sales decline reported in the first quarter. Unit sales are expected to pick up in the
second half for Summerset, given new villages opening shortly. However, 2019 full year unit sales are
now expected to fall short from last year and down significantly from the 2017 peak. SUM CEO Julian
Cook tried to allay investor fears, saying the property market was showing signs of stabilising as the
retirement sector has been hit hard following negative sentiment surrounding the property market
– as house prices continue to remain weak. While property market weakness is no doubt a near term
headwind, longer term there a still strong tailwinds from an ageing population which will benefit the
sector. Given Summerset’s lack of growth over the near-term and that it is currently trading well
above its NTA (Net Tangible Asset) per share of $4.38, we believe it is still overvalued even after the
recent dip.
SYDNEY AIRPORT (SYD:AX) BUY: Soaring Higher
Shares in SYD have continued on its strong run this year as it attracted income seeking investors in a
low interest rate environment. There is talk that the tourism boom may be over after SYD released
weak passenger numbers for the month of March. Fortunately, SYD’s traffic performance for the
month of April and May fared a lot better, particularly May which saw total passenger numbers jump
+2.4% from last year, on the back of +6.3% jump in international passengers passing through the
airport – lifting SYD’s share price & higher relieving some of the earlier negativity. We maintain our
BUY rating on SYD on a medium-term investment horizon.
PGG WRIGHTSON (PGW:NZ) BUY: Share Cancellation
Diversified agri-business PGW will hold a special meeting on 27 July 2019 for shareholders to vote on
whether they support the proposed method of distributing of $234m capital to shareholders. PGW
has identified the most effective means of returning capital to shareholders is by way of a court
approved scheme of arrangement undertake a two-for-one share split, followed immediately by a
31-cent payment per share to cancel one of every two shares. The board considered a number of
ways of returning its surplus capital to shareholders, and determined that using the scheme best
achieves a balance between a range of factors including shareholder interests, simplicity, timeliness
and achieving the desired outcome of returning $234m to shareholders on a proportionate basis –
which we would advise existing shareholders to accept. Given the revised corporate structure,
following the capital return we remain comfortable keeping PGW in our NZ portfolio. We believe the
business fundamentals are still sound, while acknowledging PGW is now a smaller, more
concentrated business which is more heavily impacted by any adverse NZ specific events.
WOOLWORTHS (WOW:AX) SELL: Focusing the Portfolio
WOW shares jumped recently after announcing is would combine Endeavour Drinks and ALH Group
(its hospitality business which is also one of the biggest pokies businesses in Australia) into a $10
billion business and spin them off through a demerger, initial public offering or trade sales. The
merger is expected to be completed this year, with the subsequent demerger scheduled for 2020
creating a standalone drinks & hotels business. This creates a more simplified business organisation
focused on becoming Australia and New Zealand’s leading food and everyday needs business. While
WOW shares have done well this year with news of the recent demerger to focus on core operations
to achieve growth, we continue to believe WOW will succumb to greater industry pressure. We
believe the market may have become too optimistic and overvalued the company with a price to
earnings multiple of 24x which is expensive for a company with low growth potential in our opinion
and many headwinds on the horizon (even across its new focused core offering). As a result, we
remain cautious on the retailers, in particular supermarket retailers.
Wellard (WLD:AX) HOLD: Debt Relief
WLD shareholders have experienced a turbulent month, after its already deflated share price sunk
down to all-time lows after a default with their debt repayments triggered a significant hike in
repayments to $1m per month with noteholders. Wellard entered into a trading halt as it continued
to arrange options to restructure its balance sheet. Fortunately, Wellard suspended its trading halt
announcing it was able to organise the sale of one of its livestock ships for US$22m, to pay down
debt and lower its repayment schedule significantly from the above noteholders. Wellard will
leaseback the ship for about two years (with the option to extend for another four years) providing
an attractive opportunity for Wellard to realise the equity value of its ship and consolidate its debt
while retaining the use of the vessel for chartering or exporting opportunities. We remain quietly
optimistic given management were able to lower their debt and tangible assets per share ($0.183 at
31 December 2018) are still well above what Wellard shares are currently trading at. However, there
is still a long road to recovery with further balance sheet improvements required, and operationally
there are still significant risks weighing down on Wellard, given a major customer being Turkey has
halted imports of live cattle, and there is large uncertainty around the impacts of recent floods in
Queensland – in terms of supply levels, prices, and planned voyages. While Wellard are heading in
the right direction, it is still far from smooth sailing ahead.