Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
RIO TINTO (RIO:AX) HOLD: Iron Ore Spike
Rio shares have continued to run propped up by the price of iron ore hitting $108/tonne, up +51%
since the start of the year. Iron Ore is currently trading at five-year highs after a mining disaster in
Brazil cost 60 lives, with expectations that supply could be restricted following strong new regulations
and a crack-down on current practices. Since then iron ore prices continued to rally further as further
supply shortages coupled with increased demand from China for the commodity. Current iron ore
prices do not appear to be sustainable at these levels in our view, and there is a risk of a price
correction. More recently RIO announced a second downgrade to their 2019 iron ore shipment
guidance due to operational challenges and a higher proportion of lower grade product being mined.
We believe RIO is fully priced at the moment, reflecting the recent surge in the price of iron ore –
which is more likely to pull back as demand from China eases and supply starts to ramp back up.
While management are focused on delivering value to shareholders, RIO’s high sensitivity to the iron
ore price does make it a close to pure a play on the price of iron ore.
NZ King Salmon (NZK:NZ / NZK:AX) HOLD: Environmental Challenges
NZK shares continue slide after releasing their operating earnings guidance for the 2020 financial
year will be between $25m to $28.5m, in line with the 2019 forecast. The guidance is underpinned
by 2020 harvest volumes being around 8,000MT, improving slightly from the current year’s expected
harvest volumes. The above assumes mortality rates remaining higher than historical averages. NZK
also announced an increase in capital expenditure over the next two years to facilitate future growth
opportunities and improve fish survival rates, with increased production costs required to mitigate
the effects of warmer waters. NZK will also be changing its farming practices to mitigate the
environmental impact of its harvesting activities which will also reduce potential harvest levels and
increase production costs. While NZK has a great business and product in high demand which it is
able to sell at a premium price, weather events such as this are largely an unavoidable risk for
companies such as NZK. Unfortunately, the warmer water temperatures are creating a setback to
NZK’s production growth and without any regulatory (government) support so far to relocate their
farms to more suitable deep-water sites, there is limited opportunity to grow production to meet
demand.
Pushpay (PPH:NZ / PPH:AX) BUY (High-Risk): Another Upgrade
PPH jumped after lifting its earnings guidance for the 2020 financial year at its AGM. At the annual
meeting management also went through the 2019 financial result, highlighting the strong revenue
growth and expanding operating margins (as operating expenses stabilise) delivering their first
positive operating earnings result and are now breakeven on a monthly cash flow basis. Pushpay
expects its operating earnings for the 2020 financial year to be between US$18.5m to US$20.5m on
the back of a strong start to the year, with Pushpay lifting its processing volumes guidance by another
+$200m higher from the previous guidance to be between US$4.8 billion and US$5.0 billion. With
revenue expected to continue to growth at a strong rate and gross and operational margins also
improving we expect earnings are likely to follow and grow substantially.
WESFARMERS LIMITED (WES:AX) HOLD: Cracks in Kmart
Wesfarmers’ repositioning of their portfolio with a number of disposals and de-merger of Coles has
been well received by the market. However, the share price recently fell on the back of a weak trading
upgrade for its Kmart and Target businesses. The Kmart group announced a difficult trading update
as market conditions for the 2019 financial year remained very competitive with increased price
investment and higher levels of promotional activity from competition. These pricing levels along
with cautious consumer sentiment are placing pressure on many industry participants – including
Kmart which in the past performed well in a competitive environment given their product offering.
However, it now appears to have hit a turning point with Kmart’s earnings for 2019 expected to fall
-10% to -18% from last year given challenging industry dynamics. Earlier, Wesfarmers also announced
acquisition of Catch group to supplement its retail offering as well as making an offer to acquire
lithium miner Kidman Resources (as an exposure to growing uptake in electric vehicles) after an
unsuccessful attempt to acquire Lynas.
CALTEX AUSTRALIA (CTX:AX) HOLD: Refining Slump
CTX shares slumped lower after the service station owner said it expects it 2019 first half net profit
after tax is expected to be between $120m to $140m, down -56% from the same corresponding
period last year of $296m – under replacement cost basis. This was largely driven by weaker refining
margins and lower production volumes, while Convenience and retail earnings is expected to fall –
50% from last year down to $75m to $85m. The weaker result is largely driven by a difficult macro-economic condition, arising from a slow Australian economy reducing demand, low refining margins
and high crude oil prices and a weaker than average Aussie dollar. This is creating difficult market
conditions for both sales volumes and margins with industry-wide fuel sales volumes down ~2-3%
from last year outlining the headwinds facing in the industry. The retail fuel market continues to be
a very challenging industry, and longer term we believe with the popularity of fuel efficient (hybrid
vehicles) and uptake of affordable electric vehicles there will be unavoidable headwinds and
uncertainties for the industry.