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
INFRATIL (IFT:NZ / IFT:AX) BUY: Vodafone Deal
Infratil (IFT) is set to acquire Vodafone NZ for $3.4 billion, in partnership with Brookfield Asset management. Initially, Infratil shares fell, with some questioning the merits of acquiring a telco company but then rebounded suggesting it was acquired at an attractive price. This comes after Infratil have trimmed their portfolio disposing almost $450m of non-core assets as the addition of Vodafone significantly strengthens its cash generative core portfolio, helping fund investment into growth businesses and increasing its exposure to long-term data and connectivity growth – complementing its Canberra Data centres. Infratil released their 2019 full year result and at the same time have been placed into a trading halt as they announced a $400m equity raise to help fund the Vodafone acquisition, at $4 per share. We would advise exiting shareholders take up the rights offer as we back management on the new deal, in part given their solid investment track record. In summary, we maintain our BUY rating on IFT as we believe there are strong tailwinds and growth potential for many of IFT’s businesses – with the Vodafone acquisition supplementing its data centre business and providing additional cashflow to fund medium-term growth projects.
ELDERS (ELD:AX) BUY: Second Half Recovery
Shares in agribusiness Elders have been in recovery mode after falling heavily as the market priced in the
difficult drought conditions last year. Clearly it is a challenging period for Elder’s with reduced agriculture
activity, particularly in New south Wales where they are overrepresented. As a result, Elders underlying net
profit after tax fell heavily down -34% from last year to $26.4m due to difficult trading conditions with all major business divisions performing poorly and increased investment into Eight-point plan. In saying that, more recently Elders are citing a return to more normalised seasonal weather conditions with April and May trading strongly and ELD see a recovery in the second half – with ELD on track to deliver a full-year net profit aft tax of $61m to $65m, which is in line with 2018 record net profit after tax of $63.7m. This illustrates the resilience of the company and ability to bounce back with more normalised conditions.
XERO LIMITED (XRO:AX) BUY (High-Risk) Wary of the Competition
Xero shares hit new highs after delivering another amazing result for the 2019 financial year. Xero’s subscriber base grew to 1,818,000, adding another 432,000 subscribers over the year. The growth was driven by a strong second half in the UK where Xero added 108,000 subscribers in that half and 151,000 in the whole year – as it benefits from the digitisation of tax returns in the UK. We expect Xero’s financial position will continue to improve as it builds it scale and develops operational efficiencies. While we continue believe Xero is a great business with strong growth potential, at the current valuation it is priced for perfection, making it subject volatility if future growth rates are below the markets high expectations. Also, given the execution and competition risk from its US rival we change our recommendation to a High-Risk BUY. Taking into account Xero’s valuation it would be prudent for new investors to wait for some share price consolidation and time their entry.
PGG WRIGHTSON (PGW:NZ) BUY: Less Cash Back
Shares in diversified agri-business PGW fell after a disappointing update prior to settling the sale of its seeds business. PGW has announced plans to return $235m or 31 cents per share to investors in a buyback after selling its seeds division, which is well below the $292m PGW initially flagged that it could return to shareholders. While this looks disappointing, we will wait for full details of the proposal to be released regarding the use of funds and are happy to hold PGW shares in the interim. The board will also reveal plans of its new corporate structure to adjust to the new smaller business in order to operate in a more efficient manner going forward. PGW also announced operating earnings (EBITDA) is now expected to be near the lower end of their guidance range of $25m to $30m – due to farmers hesitancy in the cattle livestock market which is a heavy contributor to PGW’s earnings over May and June. We believe the business fundamentals are still sound, and the business is trading at single digit price to earnings multiple. However, PGW is now a smaller, more concentrated business which is more heavily impacted by any adverse NZ specific events. Once again, PGW will announce a new corporate structure and investors may want to wait for the full disclosure before buying/selling – as it is hard to make a recommendation change without being fully informed.
WOOLWORTHS (WOW:AX) SELL: Overpriced
Shares in retail giant WOW have been on a strong run lately after delivering a strong third quarter sales result, as the business made a turnaround after a difficult first half of the 2019 financial year. Woolworths reported group sales of $14.9 billion for the third quarter of 2019, up +5.1% from last year with top line sales and same store sales growth experienced across all continuing operations. While WOW has done well to improve its business by revitalising their stores and growing sales, eventually we believe WOW will succumb to greater industry pressure. We believe the market may have become too optimistic and overvalued the company with a price to earnings multiple of 24.9x which is expensive for a company with low growth potential in our opinion and many headwinds on the horizon.