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: Initiation of Coverage
Ooh! Media Limited (OML) is a leading media company across Australia and New Zealand that
specialises in “out of home” (OOH) advertising, such as billboards and digital advertising displays
creating deep engagement between people and brands through advertising solutions which include
30,000+ physical locations.
We see OML as set to benefit from growing spend on OOH advertising (particular digital) with
advertisers shifting spend away from traditional formats. OML have a significant share of the OOH
market – in Australia, 2018 was a year of consolidation for the OOH industry with two major players
dominating the market now versus four, creating duopoly like power.
After an impressive run since listing, the OML share price has been hit given concerns around the
consumer, in particular given weakness in the retail space. We believe these fears are over-done,
and OML is an attractive business with its shares offering value on a medium-term view.
While with any industry, advertising industry revenue is underpinned by general economic conditions
remaining stable, and a significant slowdown in the Australian economy creates a potential risk
advertising spending on OOH could fall. However, recent data remains supportive on spending on
OOH advertising is increasing, with traditional formats losing out first with recent cost cutting. Other
risks include technology changes and relaxations in billboard regulations.
We are adding OML to our Model Portfolio at a 5% Weight.
Briscoes (BGP:NZ) HOLD: Stabilising Outlook
BGP shares were up temporarily after delivering a surprise lift in sales for the first half of the 2019
financial year, shrugging off headwinds in the retail sector. Sales for the half came in at $303m for the
group, up +3.34% from last year, and adjusting for store additions and disposals same store sales
growth was up +2.74%, which is an impressive feat given subdued business and consumer
confidence. The result was helped by a stronger second quarter which benefitted from a strong finish
from their winter clearance programme. Given the heavy rate cuts by the RBNZ this year, we now
have a more neutral outlook towards the retail industry as consumer confidence is more likely to
remain stable (upgrading from negative). As a result, overall retail spending should remain supportive,
however challenges remain with intense competition likely to weaken margins and cost inflation
offsetting modest sales growth – with profits likely to remain flat assuming the New Zealand economy
remains stable over the medium-term. In saying that, given Briscoes strong past performance it remains as one of our top retail sector picks, and those who are comfortable with a retail sector position may still be comfortable investing in Briscoes which provides investors with a stable dividend
yield of 6%, which appears more attractive
in a low-interest rate market.
KATHMANDU (KMD:NZ / KMD:AX) HOLD: Surprise Update
Kathmandu shares jumped +16% after a well-received trading update for the 2019 financial year,
providing profit guidance well ahead of last year’s and market expectations. For the year ending 31
July 2019, Kathmandu is expecting total sales to be $545m, up +9.6% from last year. Operating
earnings (EBIT) and net profit after tax (NPAT) are both expected to increase by +11.2% and +11.4%
respectively on last year. The better than expected result was driven by a strong second half
performance in Australia, which was surprising given they were cycling off an impressive second half
in the previous year, while trading conditions in NZ were challenging as expected. We have had a
negative view on the retail industry for some time, largely due to expectations of slowing economic
growth at the end of an impressive decade long run and competition intensifying. However, given
heavy interest rate cuts by the RBNZ & RBA this year, we have changed our outlook on retail and
consumer sentiment from negative to neutral. Kathmandu have bucked the trend against intense retail
competition and continued to deliver growth in the past due to their unique product offering. In saying
that, we are wary there is a risk consumer spending particularly on discretionary items (such as the
products Kathmandu sells) could be pressure over the medium-term if economic growth starts to slow.
We believe the share price fairly reflects a neutral outlook.
RIO TINTO (RIO:AX) HOLD: Temporary High
Rio Tinto shares slipped despite delivering an impressive first half result for the 2019 financial year,
which fell short of market expectations due to some operational challenges. The main driver was a
+36% increase in the average price of iron ore realised in the half helping widen margins which lifted
operating earnings (EBITDA) by +11% from last year to US$10.25 billion. The result was partially
offset by weaker aluminium prices and lower iron ore production levels due to a number of disruptions.
Net profit after tax was down -6% from last year down to US$4.13 billion, due to a US$800m
impairment charge against their You Tolgoi underground project. A major highlight was their cash
generation, giving Rio the ability to return US$3.5 billion (equivalent to 211 US cents per share) back
to shareholders in the form a record interim dividend of US$2.5billion and a special dividend of US$1
billion. Iron ore prices have rallied on further supply shortages coupled with increased demand from
China for the commodity. Current iron ore prices do not appear to be sustainable at these levels in
our view, and there is a risk of a price correction.