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
ANZ BANK (ANZ:AX / ANZ:NZ) BUY: Simpler & Still Profitable
ANZ shares jumped after delivering a sound 2019 first half result given difficult trading conditions in Australia. Cash Profit (from continuing operations) for the half grew +2% from the same corresponding period last year to $3.564 billion. The result was helped by reduction in operating expenses and lower credit impairment charges for the half, which offset a drop in total revenue due to tightening net interest margins. It appears ANZ are now beginning to realise the benefits of its decision in 2016 to simplify its business and strengthen its balance sheet – by selling riskier businesses. They have done well lowering operating costs and mitigating their risk exposure which will help them weather the strong headwinds facing the Australia and New Zealand banking sector over the near-term. The key risk for the Banks remains the property market, and while there has continued to be talk of a property correction or collapse, we believe a full-blown collapse is unlikely and that ANZ look less exposed given their portfolio is shifting towards lower risk loans.
NZ King Salmon (NZK:NZ / NZK:AX) HOLD: In Hot Water
NZK shares fell sharply after warning that warm water had once again increased its fish mortality rates, meaning its harvest would be smaller than expected for the next two seasons. While NZK has a great business and product in high demand which it is able to sell at a premium price, weather events such as this are largely an unavoidable risk for companies such as NZK.. Unfortunately, the warmer water temperatures are creating a setback to NZK’s production growth and without any regulatory support so far to relocate their farms to more suitable deep-water sites there is limited opportunity to grow production to meet growing demand. NZK also continues to be priced at a premium valuation, holding us back from being more positive especially with production growth now limited on their existing farms.
MACQUARIE GROUP (MQG:AX) BUY: Conservative Downgrade
MQG shares fell sharply after guiding their 2020 financial year net profit after tax will be “slightly down” on its 2019 result – citing most of their businesses will perform broadly in line with 2019, other than its commodities and global markets businesses which performed strongly with improved trading opportunities and increased activity. The 2019 result was driven by a strong performance from its capital markets facing businesses nearly doubling their profit contribution for the year up +76%, as merger and acquisition activity and trading fees improved over a period that saw more volatility in the markets. With growing concerns over the Australian property market, Macquarie’s offers a more diversified income stream over the big 4 Aussie Banks both regionally (with 66% of income earned globally) and varied product offering – with a balance between stable annuity style earnings as well as its volatile capital markets facing businesses. For this reason, we believe Macquarie offers a more attractive risk/return proposition relative to the big banks who are highly exposed to the headwinds facing the mortgage market.
Z ENERGY (ZEL:NZ / ZEL:AX) HOLD: Dividend Trap?
ZEL shares jumped on its 2019 full year result as it significantly increased its dividend and signalled further increases in dividend payments to shareholders. ZEL anticipate a more upbeat 2020 as it benefits from further cost savings from its 3.0 Strategy – due to its larger scale after adding Caltex to its fuel network. A difficult start to 2019 due to the extended outage at Marsden Point refinery and as record prices at the pump trimmed petrol volumes meant net profit after tax (under replacement cost basis) was down -13% from last year to $178m, while better than expected cost savings helped to mitigate losses. While the boost in dividend payment has been well received by shareholders providing some near-term
optimism, we believe industry wide headwinds such as electric vehicles are likely to act against ZEL’s favour over the long-run. To add to this, there is government scrutiny & regulatory uncertainty, with the Commerce Commission into fuel prices.
TJX Companies (TJX:NYSE) BUY: Bargains Drive Retail Traffic
TJX shares jumped after delivering a solid end to its 2019 fiscal year beating market expectations yet again. The “off-price” brick and mortar retailer appears to be immune to pressure caused by online giant Amazon, as its net sales for the year jumped +9% to $39 billion, by adding another 236 stores to its growing portfolio over the year. Same store sales growth was up +6%, which was impressive especially when compared to a +4% comparable sales growth figure in the previous year but also beating market expectations of +3%. What is more impressive is TJX continues to generate ample cashflow to expand its portfolio of stores as well as increasing cash returns to shareholders in the form of share buybacks and
a +18% increase in dividend for the 2020 fiscal year. We believe that despite the risks of further disruption in the sector, TJX are slightly more immune to these risks given their cost advantage and ability to create a ‘bargain hunting experience’ – improving their cash generative ability. For this reason, we maintain our BUY recommendations for investors seeking exposure to retail.
