Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
Ooh! Media (OML:AX) Buy (High-Risk): Christmas Upgrade
OML shares surged higher, after a welcome upgrade to their earnings guidance attributed to an improvement in advertising bookings for the fourth quarter, which helped offset a spending decline from earlier in the year resulting in a weak third quarter. The out of home advertising company announced it expected 2019 full year operating earnings (EBITDA) to between $138m and $143m, a welcome upgrade from its previously downgraded guidance of $125m to $135m (both excluding integrations costs and the impact from the change in accounting standards). The shift shows that like with any industry, advertising industry revenue is underpinned and can be very sensitive by general economic conditions remaining stable and consumer confidence remaining supportive. A significant slowdown in the Australian economy creates a potential risk advertising spending on OOH (out-of-home) could fall – especially its non-digital signs. We still believe OML as set to benefit from growing spend on OOH advertising (particular digital) with advertisers shifting spend away from traditional formats over the long-term given their significant share of the overall OOH market in Australia and NZ. However, with a large number of non-digital signs yet to be converted OML are prone to downside risk if overall advertising spending were to drop. Given the recent rally, OML shares are relatively fairly priced, but we believe their assets have some considerable long-term value, given data remains supportive that spending on OOH advertising is increasing, with traditional formats losing out first with recent cost cutting.
METLIFECARE (MET:NZ) BUY: Takeover Target
MET shares have been on a strong run lately post positive news flows. Firstly, the property market, particularly Auckland where MET is heavily exposed, is recovering – which primarily impacts retirement village operator resale margins. Improved construction costs (in greater Auckland) meant MET is again willing to lift its medium-term development activity which had been toned down amidst a previously weaker outlook on the Auckland property market and inflated construction costs. More recently, MET shares surged higher after receiving and rejecting a highly conditional offer which failed to meet the board’s expectations. However, MET are still in discussion with the potential buyer and has suspended its share buyback programme. Given MET at the time traded well below its NTA per share of $6.96 (and still does), the first offer might have been an opportunistic bid given and we believe management is likely to decline any offer which would fall short of MET’s NTA per share. Especially as Ryman’s share price is currently trading at ~3.4x higher than its NTA per share and Summerset at ~1.6x, times higher than their NTA per share. MET still trading at a discount to its NTA, but this is now back in-line with its average historical discount. We believe the longer-term outlook remains robust for MET, and the recent takeover has supported our thesis that the shares were undervalued.
SCALES CORP (SCL:NZ) BUY: Planting Future Growth
SCL shares retraced after the fruit exporter warned 2020 operating earnings (EBITDA) would be flat due to
capital spending plans and cost pressures, offsetting potentially favourable price movements in their export markets. Fortunately, Scales continue to remain on track to meet 2019 profit guidance of $32m to $37m. For the 2020 financial year, Scales expects net profit after tax to be between $30m to $36m, down roughly -5% from the previous year and below expectations. Scales also announced that they would pay an interim dividend of 9.5 cents per share for the 2019 financial year, and reiterate their aim to pay an annual cash dividend of no less than 19 cents per share. While agribusinesses do come with associated, we remain confident in SCL’s ability to growth their earnings both organically and see significant upside potential via strategic acquisitions given the additional funds it has to reinvest – as it actively searches to make a value add agri acquisition. We believe a successfully executed acquisition will provide significant upside potential for investors at the current share price.
SELECT HARVESTS (SHV:AX) BUY (High-Risk): Turnaround Continues
SHV jumped higher after a successful year the nut grower attributes to a bigger than expected almond crop, firmer prices and the shrewd navigation of an expensive water market. The company delivered operating earnings (EBITDA) of $95.2m and a net profit after tax of $53m for the 2019 financial year, up significantly from the previous year. Operational efficiencies meant cost per kg of almond fell -14.7% from last year despite cost of water to doubling due to drought conditions. SHV also appears more upbeat over the coming year expected incremental increase in almond production over the next three years. After what has been a challenging three-year period for SHV, this has been a welcome turnaround with medium-term outlook appear to remain fruitful thanks to management’s crop maintenance and operational improvements. Also, favourable market conditions with demand for plant-based protein (particularity from China) outstripping supply with the outlook remaining promising, especially given the recent opportunity created by the China-US trade war (with China importing Almonds from Australia versus the US), and improved horticulture programs.
GREEN CROSS HEALTH (GXH:NZ) HOLD: More Pharmacy Pain
GXH shares managed to make some ground but then slid after delivering an uninspiring first half result for the 2020 financial year – as its net profit after tax fell -3% from last year down to $7.9m. Group revenue fell -2.5% from last year to $275m, due to the closure of two pharmacy’s and exit of two unprofitable community health contracts. Operating profit was $16m for the half up +7.4%, due to a strong performance from its Medical division (due to organic growth, and impact of recent successful acquisitions) and return to profitably for the health care division offsetting retail challenges and increased investment for GXH’s Pharmacy division.
GXH’s pharmacy division (its largest division) faces a few external challenges, despite achieving same store sales growth, margins had tightened with increased pricing. We believe the main headwind going forward will be low-cost retail giant Chemist Warehouse’s entry into the NZ market which will only get worse, who now have 12 stores in New Zealand (10 in Auckland) – up from 6 earlier this year. hold a strong positive stance on health care services. Despite GXH’s cheap valuation in an expensive market its share price reflective its negative outlook, for this reason we struggle to see enough upside or catalysts to upgrade our recommendation on GXH and we believe investors can gain similar healthcare exposures with better potential returns elsewhere.