Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
Kiwi Property Group (KPG:NZ) HOLD: On the Fence
Shares in New Zealand’s largest listed property vehicle KPG slid lower after releasing a weak net profit after tax for the first half of 2020 financial year, adjusting for the new shares that were issued out. For the first half of the 2020 financial year KPG reported a reported a net profit after tax of $36.8m, down -23.8% from last year ($48.3m) due to realising a loss on interest rate hedge following heavy interest rate cuts – with the half year result unaffected by revaluation gains. Operationally, the existing portfolio of properties performed well increasing net rental income and improving vacancy rates offsetting lower net income due to the disposal of North City – with the highlight being filled vacant space in Vero building and opening of Kmart store in Sylvia Park. KPG’s property assets have increased in value up +$100m to $3.3 billion due to development activity primary at Sylvia Park (including the completion of Kmart store and continual development of Galleria and South parking) and acquisition of neighbouring sites.KPG is our preferred New Zealand commercial property exposure given the quality of assets in their portfolio and development opportunity across their mixed-use properties. However, we maintain our HOLD given its relatively expensive valuation even after its recent pull back it does trade at a rich valuation (still trading above its net tangible asset per share) and only paying 4.6% dividend we see limited upside potential at the current juncture.
LYNAS (LYC:AX) BUY (High-Risk): Cracking Site Secured
Shares in rare earth miner LYC continue to be volatile, but climbed higher after announcing it would build a new processing plant at Kalgoorlie in Western Australia. Lynas has also said it would submit a compliant tender in response to the US Department of Defense’s call for proposals to build a heavy rare earths separation plant in the United States. The need for a new cracking and leaching plant follows the order to remove that part of its operations from Malaysia, which had been the subject of controversy in the south-east Asian nation. This would then allow Lynas to continuing processing its rare earths at its LAMP plant in Malaysia and lift production levels which are currently being restricted. Operationally the new cracking and leaching plant in Kalgoorlie would also allow Lynas to lift production levels +46% to help meet the growing demand for rare earths. In our view, Lynas provides an attractive investment for those wanting to gain indirect exposure to electric vehicle theme. We still maintain our High-Risk Buy rating given the risks associated with commodity pricing and the hazardous nature of mining rare earths, while remaining optimistic on the long-term market dynamics supported by the forecast growing demand for rare earths.
ELDERS (ELD:AX) BUY: Resilient in Challenging Conditions
ELD shares were up after delivering a reasonable solid result for the 2019 financial year despite challenging market conditions, largely attributed to drought and dry conditions. Statutory net profit after tax came in at $68.9m, which was down -4% from last year and better than what the market had feared, highlighting the resilience of Elder’s business model despite unfavourable weather conditions – which has been weighing down negatively on its share price for some time. Underlying net profit after tax was flat with the previous year at $63.6m, with earnings from recent acquisitions of TitanAg and Livestock in Transit products offsetting the impact of lower margins from their retail business due to reduced summer cropping and lower wool volumes. More importantly Elder’s reiterate that 2020 would be another sound year with earnings growth driven largely by recent Australian Independent Rural Retailers acquisition (AIRR), a major contributor to 2020 earnings growth while the existing business remain supported by an average winter crop. We continue to see Elder’s as a key benefactor of our ‘dining boom’ investment thematic (we see multi-year demand for food from a growing Asian middle class) given its diverse agribusiness portfolio and strategic plan to seek further growth both organically and via acquisition.
CALTEX AUSTRALIA (CTX:AX) HOLD: Takeover Rejected
CTX shares surged higher on a number of news flow stories – trading close to all-time highs again. First being its proposed IPO of up to 49% of 250 core convenience retail freehold sites which could unlock $700m to $1 billion of value, to explore other capital cash management initiatives to improve earnings. Then Caltex shares jumped further after Canadian convenience store operator Alimentation Couche-Tard lobbed an $8.6 billion takeover offer at Caltex, which comes to $34.50 per share (less any dividends) – which was soon rejected as the board believes they can generate better value to shareholders. Caltex explained their plan to help lift earnings by $195m, which involved unlocking capital from their property including the IPO of 250 core stores, and the disposal of 25 higher use sites. With the $195m earnings boosting coming from costs savings and earnings boost from their investment strategies into their infrastructure and retail businesses. At the same time providing guidance for the 2019 financial year which is down significantly from the previous year, due to challenging market conditions but a strong turnaround from a weak first half of the year. We continue to believe the retail fuel market is a challenging industry, while Caltex strategies to improve its business especially its retail business are commendable, we believe their share price is overvalued and we do not see much upside.
Especially with a longer term we believe with the popularity of fuel efficient (hybrid vehicles) and uptake of affordable electric vehicles there will be unavoidable headwinds and uncertainties for the industry, as demand for fossil fuels head downwards creating further margin and earnings pressure and therefore lower foot traffic for their non-fuel items. The current share price is held up by the recent takeover bid and believe it over values the current business given our more negative view on the industry and headwinds.
Wellard (WLD:AX) HOLD: Manageable Debt
WLD shares jumped higher after announcing the sale of their largest (and under-utilised) vessel MV Ocean Shearer for US$53m (or A$77.8m). Fortunately, this was sold above book value and the proceeds will lower Wellard’s debt levels down to more manageable levels given their current level operations and existing fleet will become better utilised for its chartering services which have seen some pressure lately. Unfortunately, after delivering a maiden net profit for the first half of the 2019 financial year, the second half did not fare as good for Wellard. Wellard reported a larger net loss of after tax of $48.4m, compared with $36.4m net loss in the previous year due to poor market conditions in the second half, vessel impairment of $20.4m and significantly higher financing costs – following a breach in a debt covenant. Despite shifting their focus towards chartering, their fleet at the time was hugely under-utilised. Positives however, were improved operating earnings and cash flow due to the shift to chartering services as well stripping out operating expenses to become a leaner business. We remain quietly optimistic given management are able to lower their debt and looking at ways to cut costs and better utilised their assets and tangible assets per share ($0.103 at 30 June 2019) are still well above what Wellard shares are currently trading at – and likely to increase slightly assuming favourable trading conditions and proceeds of the sale (above book value). WLD are heading into the right direction now that debt levels are at more manageable levels (post the sales), but operationally there are still significant risks weighing on Wellard.