Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
New Stock Reports
A2 MILK (.NZ / A2M.AX) HOLD: Growth over Margins
After disappointing the high expectations of investors and the market in recent times, shares
in A2 Milk jumped as it more than doubled net profit to $195.7 million in the June 2018 year,
with revenue just beating its $900 million-to-$920 million forecast. While operating margins
improved slightly they are expected to remain flat as A2 continue to increase their marketing
spend, expanding the business and growing their market share. Overall it was a solid result,
and we see the share price move after a period of consolidation as a sign that market
expectations may have now been reset to realistic levels. While we are encouraged by the
result and remain believers in the medium term A2 story, we remain HOLD rated as we now
see the shares as fairly valued.
FLETCHER BUILDING (FBU.NZ / FBU.AX) BUY (High Risk): Still Looking for a
Turnaround
FBU fell after announcing their 2018 full year result, which was within guidance with operating
earnings excluding B+I (commercial construction) of $710 million, and the B+I loss was
unchanged at $660 million which was pleasing to see. With the residential property market
softening both in Australia and New Zealand, a significant portion of Fletcher’s business has
a more muted outlook which seems to have scared the market. However we believe the
recent restructure plans which put a greater emphasis on expanding FBU’s core business
and cuts down unnecessary overheads, improving its operating efficiencies and reduce its
risk profile. We continue to forecast a multi-year turnaround for medium term investors, with
the caveat that there are still considerable execution risks.
COSTA GROUP (CGC.AX) BUY: Costa Hits a Speedbump
CGC saw its share price plunge after posting its 2018 result. We saw the result as solid, and
would note that the share price did run up into the announcement, with market expectations clearly getting ahead of themselves to some extent. The fundamentals of the business remain
solid, with CGC meeting guidance reporting revenue which was up +10.2% and net profit up
+26.3% from last year. In saying that, the market appeared to have higher expectations and
there was some weakness in the berry business both locally and internationally, as well as
pricing pressure on the tomato segment. Our BUY rating remains unchanged and the current
dip could provide an attractive entry point for medium term investors, although it would be
prudent to wait for some stability in the share price before entering.
INVOCARE LIMITED (IVC.AX) BUY: Short Term Pain for Long Term Gain
Funeral services company IVC saw its shares slump on its 2018 interim result which was
negatively received with weaker case volumes due to lower death rates and the closure of a
number of sites due to refurbishment. The closure of sites is part of IVC’s Protect & Grow
plan which can be seen as short-term pain for long-term gain. The death rate is subject to
short term fluctuations; however over the long-term we expect no significant changes to the
trend death rate. Our long-term thesis remains intact as we believe IVC is set to benefit from
favourable demographics of an ageing population.
WOOLWORTHS (WOW.AX) SELL: Supermarket Slowdown
Shares in retail giant WOW have pulled back – despite delivering a sound 2018 full year result,
the markets optimism towards WOW’s Australian supermarket chain has quickly changed,
which is highly influential on WOW’s share price given it contributes 69% of group earnings.
While WOW has done well to improve its business by revitalising their stores and growing
online sales, eventually we believe WOW will succumb to greater industry pressure. As a
result, we remain cautious on the retailers, in particular supermarket retailers, and remain
SELL rated.