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
LYNAS CORP (LYC:AX) BUY (High-Risk): Fuelling Electric Vehicles
Lynas is the only major rare earths miner outside of China and holds a strategic asset – Mount
Weld which contains one of the largest and highest-grade rare earths deposits in the world.
We believe there will be multi-year demand tailwinds for rare earth minerals given their use
in electric vehicles, which are proliferating at a tremendous rate around the world. Unlike
other resources, rare earths are difficult to mine and process, making barriers of entry very
high. What makes Lynas an interesting miner is that the industry is expected to enter a multi-year
growth phase. Lynas also has ended its cash burn phase and is operating efficiently,
assuming production levels hold, and the price of rare earths remain stable. However, as a
miner of a commodity it is exposed to pricing risk, and the hazardous nature of processing
the rare earths means it is also prone to regulatory risk and government scrutiny. For these
reasons we initiate coverage on Lynas with a High-Risk BUY recommendation.
FLETCHER BUILDING (FBU:NZ / FBU:AX) Buy (High-Risk): Don’t Press Sell Yet
Shares in FBU fell to nine-year lows as they warned investors of weaker than expected
earnings for the 2019 financial year. Their attempts to turnaround the business have hit a
speed bump as the slow-down in residential construction activity in Australia came sooner
than FBU had initially anticipated. The slow-down in the Australian property market has been
well documented. However, with macro factors remaining stable we believe the chance of
full-blown collapse are limited. In other news, Steel & Tube have rejected FBU’s takeover
attempt, which comes as a relief to us – as we believe the takeover attempt did not make
sense given FBU’s new strategy to simplify and streamline its business. While there are
challenging times ahead, FBU appear to be a multi-year turnaround play from here.
COSTA GROUP (CGC:AX) BUY: Fruitful Acquisition
CGC, Australia’s leading producer in the fresh fruit and vegetables market, saw its share
price bounce after the market was clearly excited when Costa announced its acquisition of citrus and grape grower Nangiloc Colignan Farm (NCF). It is also encouraging that Costa is
diversifying its growing regions, meaning it can continue supplying clients even if there are
problems at one particular location. This reduces its risk profile relative to other more
concentrated peers. We maintain our positive view on CGC as it benefits from the constant
and growing demand for food globally as well as being attractive to health conscience
consumers.
Heartland Group (HGH:NZ / HGH:AX) HOLD: Restructure
HGH have successfully executed their corporate restructure with shareholders approving a
split in New Zealand and Australian operations, which are now wholly owned by Heartland
Group Holding Limited, with a new ticker code of HGH. The new structure provides flexibility,
as the previous structure constrains its ability to grow due to Reserve Bank regulations. HGH
shares fell post its 2019 first quarter result despite reporting an +8.7% jump in net profit after
tax, with a larger impairment expense likely what upset the market. HGH does not focus on
low risk mortgages as their strategic priority is to focus on niche products where customers
are under-served by the other banks. The risks of a slowdown in the NZ economy, combined
with their higher risk profile has seen us hold a more cautious view on the outlook for HGH.
MYER HOLDINGS LIMITED (MYR:AX) HOLD: Focused on Profit?
Shares in retailer MYR have plummeted as it was forced to release its first quarter trading
update, which it earlier decided it would stop doing so, to rectify incomplete financial
information which was leaked highlighting Myer’s poor sales performance. Unfortunately for
Myer, the numbers were close to that of the leaked information with total sales down -4.8%
from last year, while same store sales were down -4.3% from last year. Myer’s new CEO
stated the business focus has shifted away from sales growth and has a greater emphasis
on profitability, and they will not engage in heavy discounting to chase sales growth and to
protect critical profit margins. Interestingly enough, Myer’s net loss after tax did improve from
last year suggesting margin improvement and cost efficiencies. Looking forward greater focus
needs to be placed on their crucial second quarter result which includes the Christmas trading
period and the most important contribution to Myer’s full year profitability. For now, we
maintain our HOLD rating on Myer and current holders who may want to hold out for a
possible turnaround led by new CEO John King.