Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
A2 MILK (:NZ / A2M:AX) BUY: Shorts Squeezed
A2 Milk shares jumped higher after providing another solid update, highlighting how well this top-quality
growth stock is being run – proving sceptics wrong, who have been weighing down on A2 Milk’s share price recently (a large proportion of A2 shares were short sold i.e. positions betting A2 shares will fall). A2 Milk said its operating margin would be stronger than previously reported in the 2020 financial year, off the back of improved price yield and a lower cost of sales. The company is guiding operating margins to be 29-30%, which compares to 28.2% when the company reported earnings in August, despite investing heavily into marketing and capability to continue to achieve its impressive revenue growth. Revenue growth is also expected to remain solid at around 30%, with growth across all their key areas, in particular growth is accelerating in China and the US being the 2 key target markets for A2. A2 are a well-run business that has executed well, delivering tremendous growth, and while there are risks of competition & regulation we still see the stock as best in class. Despite the recent jump A2 milk still appears attractively priced on a mid-20x price to earnings multiple, both compared to the past and when considering its impressive growth run rate. We remain BUY rated.
RYMAN HEALTHCARE (RYM:NZ) HOLD: Lifting Construction Levels
Ryman Healthcare (RYM) shares pulled back slightly on its 2020 first half result, despite posting a relatively strong set of numbers on strong volume given challenging property market conditions. Ryman indicated healthy guidance with underlying net profit for 2020 financial year to be between $250m to $265m, up +10% to +17% from the previous period, largely driven by a ramp up in sales volumes. However, given the recent recovery in the property market (Auckland and Melbourne), the market might have had higher expectations on better margins on both resales and new developments. Ryman posted an underlying profit (which excludes revaluations in the property portfolio and is their preferred measure of profitability) of $103m, which was up +6.2% from last year – driven by record resales volumes as margins tightened within challenging property conditions. As a result, Ryman lifted interim dividend in line with underlying profit growth and signalled a ramp in development introducing a medium-term ambitious target of adding 1,600 units and beds, and Ryman continues to expand in Australia. We are held back on Ryman by what we see as a full valuation, given in trades at a large premium to its peers at 3.33x NTA (Net Tangible Asset Value / the valuation of its property portfolio).
While we are positive on the retirement sector generally (given the tailwind of an ageing population and a
stabilisation in the property market), we prefer Summerset and Metlifecare over Ryman, given we believe
Ryman is too expensive in terms of relative valuation.
SKY NETWORK TELEVISION (SKT:NZ / SKT:AX) SELL: Maintaining Key Sports
Sky TV shares slumped even lower after announcing weak earnings guidance for the 2020 financial year.
Revenue is expected to fall about -6% from last year, whilst operating earnings (EBITDA) is expected to fall – 25% as SKY TV struggles with competition and invests into reshaping the business to meet customer and investor needs. After losing the NZ Cricket deal to Spark, SKY TV have been on a decent run securing the rights to Netball NZ as well as maintaining the Summer, Winter and Youth Olympics games and have rights to 2022 and 2026 Commonwealth games. More importantly SKY TV have secured the New Zealand, Australian, South African and Argentinian Rugby Unions (SANZAAR) rights up until 2025, with NZ rugby becoming a 5% shareholder of SKY TV as part of the consideration. Our outlook continues to remain negative – as we believe Sky won’t be able to reach critical mass on its streaming subscribers to offset the loss of its higher-valued satellite subscribers to cover its high fixed programming costs (which will only get more expensive at each renewal). While it has done well to secure some major sporting content lately – which may delay bleeding of sport subscribers, we believe intensifying competition and increased availability of content from other providers will force Sky TV to continue to lose subscribers, particularly non-sports subscribers, at a sizeable pace. There is potential that a large industry player may buy Sky, although we would not buy Sky shares simply
on the hope of a takeover.
Aristocrat Leisure (ALL:AX) BUY: Investment Paying-Off
Aristocrat shares jumped on the back of delivering another solid financial result for the 2019 financial year, as well as management maintaining a positive outlook. After a solid first half result Aristocrat delivered an even better second half for the 2019 financial year, reporting revenue of $4.3 billion and normalised net profit after tax of $894.4m – both up +22.7% and +22.6% respectively from last year. This was attributed to strong operational performance from Aristocrat’s America and Digital business segments and favourable currency movement. Profit growth remained inline with revenue growth as Aristocrats digital growth is largely driven by entry into new lower margin digital gaming business and increased investment into Design and Development and User Acquisitions – which is part of strategy to develop a competitive portfolio of market leading products – that we view as investment to maintain current and create new and fresh content to secure future growth. We welcome the strong share price reaction as Aristocrat gains more supporters behind its growth story.
G8 EDUCATION (GEM:AX) BUY (High-Risk): Tough Lessons
G8 Education (GEM) shares slumped lower after downgrading their earnings guidance for the 2019 financial year at their AGM. Despite benefiting from the new child care subsidy, GEM anticipate occupancy growth to
only increase by ~1% from last year, slightly lower than previous estimates as supply of new child centres
entering into the market continues to fall – however not decline as fast as anticipated, remaining at moderate levels more or less in line with demand. This is not allowing excess capacity to be as easily filled up. GEM also announced the sale of 25 Western Australian childcare centres as part of their review to optimise their portfolio. GEM expects 2019 full year underlying earnings (EBIT) to be between $131m and $134m for the year, down from its previous upbeat guidance of $140m to $145m. As it is adversely impacted by lower revenue from lower than expected occupancy and higher staff costs, which was to account for the previously upbeat uplift in occupancy rates. Despite heading towards the right direction, the road to recovery appears to be slower than anticipated as GEM is still very sensitive to any uplift in supply. We remain comfortable with our High-Risk BUY recommendation and a recovery although there might be some short-term pain and volatility on the way. The recent dip once again implies GEM is trading on a healthy mid- 6% dividend yield, which appears appealing in a low-interest rate environment & should help support the share price.