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) BUY (High-Risk) was HOLD: Upgrade
Rio Tinto shares have remained relatively resilient, delivering a solid result for the 2019 financial year, as it managed tomeet market expectations. RIO also delivered a record ordinary dividend of US$3.82 per share, which was up +24% fromlast year. RIO shares have been under pressure as the covid-19 epidemic which caused China to go into a temporary lock down saw iron ore prices dip, while sparking market wide fear of a global recession as governments shutdown cities to contain the spread. Iron ore prices have pulled back from their rally last year but look like they have stabilised. News flow is indicating that China is re-opening, and officials are pumping money into industrial production, which should be positive
for RIO and something which has been overlooked by many in the market. The Aussie dollar has also fallen significantly which is positive for RIO as an iron ore exporter. While it is notoriously difficult to forecast iron ore prices, we see relative value in RIO, combined with a number of tailwinds highlighted above. There are always risks, but on balance we have a positive view and upgrade our rating to a BUY on a medium term view.
A2 MILK (:NZ / A2M:AX) BUY: Healthy Demand
A2 Milk shares have been remarkably resilient amidst the corona virus pandemic, with the company so far actually a beneficiary in some respects of the coronavirus outbreak – the Chinese lockdown saw a spike in online a2 infant formula orders to China. A2 shares jumped higher on its 2020 first half result, after delivering another positive set of numbers, slightly ahead of expectations. Given the challenging environment, it was encouraging guidance for shareholders with management maintaining their earnings (EBITDA) margin guidance of 29-30% and demand is expected to remain fairly strong in China due to the nature of their product. Group revenue was $805.3m, up +32% from last year due to strong growth in all core products, particularly infant nutrition, with infant formula sales in China doubling as sales were brought forward by distributors to in advance for Chinese New Year. 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. A2 is a quality growth company – which has yet to deliver a formal downgrade amidst the coronavirus. We remain BUY rated, although acknowledge there may be short term volatility with an uncertain macroeconomic environment and global coronavirus related recession.
CROWN RESORTS (CWN:AX) HOLD: Hold Your Bets for Now
Crown Resorts shares (CWN) have been hit hard as the covid-19 outbreak turns into a global pandemic with travel restrictions and containment measures impacting the tourism facing sector, combined with weak market sentiment over the globe. Crown have announced social distancing initiatives to mitigate the spread, but it is likely the casino will be closed completely in the near future. Crown are set to face a very difficult 2020, as well as challenging 2021 given the uncertainty on how swiftly the global economy will recover from recession. Crown reported their 2020 first half result, with softening VIP gaming at their Melbourne casino dragging underlying net profit after tax of-11% from last year down to $172.7m. Crown updated that the progress of their Crown Sydney Hotel Resort is going well with a partial opening set
for December 2020. We have generally maintained a positive view on CWN’s business, and believe the shares are now reflecting a significant amount of negativity, However, given the heightened market volatility and uncertainty on when normal business activity will return there is still significant downside risk.
KATHMANDU (KMD:NZ / KMD:AX) HOLD: Retail Collapse
Kathmandu shares have been under strong selling pressure, down heavily after management announced its earnings for the second half of the 2020 financial year will adversely impacted by coronavirus. Sales are coming to a standstill with lower foot traffics and enforced store closures, as governments impose rules to prevent unnecessary interaction to prevent an extreme outbreak. This is likely to continue over the near-term as the number cases grow exponentially. Governments around the world are trying to cushion the adverse economic impact of these shutdowns with various stimulus packages to spur a recovery, although the situation is very concerning for the retail sector near term. We believe the current share price reflects a lot of negativity – but market forces are still in play to create more downside risk over
the near-term. KMD will likely need to undertake a capital raise, although there are far too many unknowns to formulate a strong view in the current environment.
HARVEY NORMAN (HVN:AX) SELL: Weak, Even before the Flu
Harvey Norman (HVN) shares have been under pressure as the covid-19 epidemic escalates, and were lower when they released a weaker than expected result for the first half of the 2020 financial year (for the 6 months ending December 2020). More recently HVN provided a covid-19 update, and stated sales across most of its core regions reported higher sales for the first half of March, with limited number of stores forced to closed as HVN do not operate in covid-19 hotspots yet. Clearly this will not be the case as the virus spreads. Even ignoring coronavirus, we continue to have a negative outlook and believe things are more likely going to get worse for the retailer, as retail performance in their core Australian
business was weak. HVN shares are likely to face more volatility over the near-term and on a medium-term view we see limited upside.