Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
New Stock Reports
METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High-Risk): Competition Overplayed?
MPG shares jumped on its 2019 full year result, after delivering an operating result in line with its downgraded guidance provided in March 2019. Within the year good progress has been made in New Zealand, however this has been overshadowed by significant challenges in Australia – both due to poor internal operations and tough market conditions. Reported net profit after tax was $5m for the year, down -69% from last year, largely due to a $9.6m impairment charge against its Australian Glass Group business – as a result of the poor performance in Australia, but MPG did report a turnaround in the second half after addressing some of poor internal operations following a business reset. The highlight has been the $11m reduction in debt as MPG priorities debt reduction over dividend payments. Management also mentioned the market may have overreacted to the announcement of the entrant of a new competitor, given customers currently have a wide variety of suppliers to choose from. MPG are making efforts to improve internal operations, and while it is still early days, new management appear to be driving MPG in the right direction. We continue to believe there is still a chance of a turnaround – particularly given the bar has been set low.
Aristocrat Leisure (ALL.AX) BUY: Quality Growth
Aristocrat has had a strong start to 2019, with the recent jump attributed to another positively released result for the first half of the 2019 financial year being well ahead of market expectation and with management maintaining a positive outlook. Aristocrat experienced a solid first half for the 2019 financial year reporting revenue of $2,105.3m and normalised net profit after tax of $422.3m – both up +29.8% and +17% respectively. This was attributed to strong operational performance from Aristocrat’s America and Digital business segments and favourable currency movement. Profit growth was behind 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 – which we view as an investment to maintain current and create new and fresh content to secure future growth. We welcome the recent recovery and believe nothing has changed fundamentally for Aristocrat’s business and remain supportive of their growth prospects.
RYMAN HEALTHCARE (RYM.NZ) HOLD: Margins Limiting Growth
RYM shares were lower after releasing their 2019 full year result but have outperformed retirement village
peers in recent times. Ryman posted an underlying profit (which excludes revaluations in the property portfolio and is their preferred measure of profitability) of $227m, which was up +11.5% from last year – driven by increased development margins and solid demand – despite slightly slower sales. As a result, Ryman hiked its dividend in line with underlying profit growth and signalled a ramp in development as it looks to offset anticipated weaker margins with increased volumes. However, reported net profit after tax was down -16% from last year to $326m, due to lower unrealised fair-value gain on its assets which was $102.4m for the year, compared with $185.3m in the same corresponding period last year – showing signs of a slowing property market. While we have viewed the business positively with strong long-term growth prospects given the tailwind of an ageing population, we are held back by what we see as a full valuation. We are not comfortable with upgrading to a buy rating at the current juncture and would wait for further share price consolidation, particularly given the recent market and industry related volatility.
FISHER & PAYKEL HEALTHCARE (FPH:NZ / FPH:AX) BUY: The Bar Was Set High
After a strong run this year FPH shares have pulled back after reaching all-time highs as investors took profit after its latest result. The breathing mask maker reported another record profit for the 2019 financial year of $209.2, up +10% from last year and at the top end of management guidance. Operating revenue grew +9% from last year to $1,070.4m due to a strong performance from its hospital care business partially offset by a weaker performance from its OSA mask due to a delay in product release. Encouragingly FPH remain upbeat for the 2020 financial year, guiding net profit after tax to be between $240m and $250m up +15% to +20% from the current year. This is reflective of a new tax credit available on spending on research and development, a significant reduction in patent litigation expense, forecast favourable currency movements and continued strong performance from its hospital care business. Taking a bigger picture view, FPH continues to experience strong market share gain and there remains growth potential looking forward given the tailwinds of an ageing population and our expectations around the NZ dollar. We remain positive on FPH as a solid defensive healthcare holding, although new investors may want to be selective on their entry point as FPH shares aren’t “cheap” even after the recent pull-back.
JAMES HARDIE (JHX:AX) BUY (High-Risk): Fermacell Drives Growth
Shares in construction company JHX were up on its 2019 full year result after delivering revenue of US$2.51 billion and adjusted net operating profit of US$301m which were both up +22% and 3.4% respectively. With its acquisition of Fermacell in Europe being primary driver of revenue growth as well as modest growth in North American Fibre Cement business thanks to stable US housing market demand – being better than previously anticipated. Weaker profit growth was attributed to increased production costs which lowered gross margins, with larger operating expenditure and one-off costs related to the Fermacell acquisition. JHX provided more upbeat guidance, with management expecting modest growth in the US housing market in the 2020 financial year – albeit at a slower pace achieved in 2019. The European buildings products segment is also expected to achieve strong year on year net sales and earnings (EBIT) margin growth driving long-term growth offsetting short term weakness in the Australian market. We have been supporters of JHX given its exposure to the US housing market recovery. Given the recent volatility and likely slower growth opportunity in the key US market we maintain our recommendation of a High-Risk BUY, given a greater risk of a potential slowdown in the US/Aussie housing markets.
