Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
FLETCHER BUILDING (FBU:NZ / FBU:AX) BUY (High-Risk): Aussie Struggles
Shares in FBU fell after their investor day briefing despite announcing a capital return to investors in
the form of a $300m share buy-back following the sale of their Formica business. FBU affirmed its
annual earnings and dividend, and said it doesn’t expect to lift its provisioning for the troubled
Building + Interiors (commercial construction) division that experienced a cost blow-out in recent
years. FBU also said that Australian conditions are expected to remain tough over the near-term –
following a heavy fall in residential construction activity which contributes more than half of
Fletcher’s Australian revenue. While the recent downturn is not new news, the steeper than expected
slump over the next financial year and slower recovery does make the recovery lengthier and more
challenging for FBU. The outlook in New Zealand remains stable, despite house prices easing
residential construction activity remains supportive to cater to the housing shortage. Our view
remains largely unchanged, in that FBU look like a multi-year turnaround play, although there are
still considerable execution risks given the slowdown in Australian construction activity and major
unfinished projects such as Commercial Bay.
TOURISM HOLDINGS (THL:NZ) BUY: Extra Fuel in the Tank
THL shares remained under pressure after it announced an $80m capital raise designed to provide
balance sheet headroom and flexibility to pursue any bolt-on acquisitions that can best capture
growth opportunities in its existing markets as well as regions where it does not operate. $30m is
allocated to Citic Capital who will receive a seat on THL’s board and will help explore opportunities
to expand THL’s operations into China – without requiring to invest large amounts of capital given
their wealth of global tourism experience. At the same time, THL updated their profit guidance for
the 2019 financial year to be between $25m–27m (trimming the top end of its previous guidance of
$25-28m) while reaffirming their intention to declare a 2019 final dividend of 14 cents per share,
keeping the full year dividend in line with the 27 cents per share paid in 2018, implying THL is
currently trading at a healthy dividend yield of 7%. We continue to see the THL business as a whole
as set to benefit from stable tourism growth across New Zealand and Australia – while the additional
funds from the capital raise allow them to seek more attractive growth opportunities as they trim
capital expenditure away from the US to mitigate the near-term weakness. At the current juncture THL looks to be attractively priced and we maintain our BUY rating as a tourism play and feel that
risks from their struggling US division have been reflected in price moves.
CSL LIMITED (CSL:AX) BUY: Still a Healthy Outlook
CSL shares have experienced a solid run this year, however pulled back slightly after announcing the
first-year financial impact of transitioning to its own GSP (Goods Supply Practice) licence in China.
The license enables CSL to own and sell its products in the domestic Chinese market – over the last
30 years CSL had been importing albumin into China, which is then distributed via a third party. CSL
had already advised on the transition but have now provided an update on the process and the
estimate of one-off financial impact from the transition which was much larger than earlier
anticipated. The impact being a delay in how sales revenue will be recognition (later in the supply-
chain as opposed experiencing a ‘actual’ reduction in sales) – with the “one off” nature being not as
bad how the market may have interpreted it in our opinion. With 2021 reported sales expected to
return back to more normalised levels this doesn’t change our positive view on CSL’s underlying
business. CSL has proven to be a solid performer continuing to deliver growth as a defensive
healthcare business.
Johnson & Johnson (JNJ:NYSE) HOLD: Legal Woes
Shares of Johnson & Johnson (JNJ) have had a challenging time, after losing $40 billion in market cap
late last year due to allegations of its talc powder containing cancer causing asbestos, and more
recently took another hit after a lawsuit around JNJ’s alleged role in the opioid crisis in the state of
Oklahoma. Fortunately for JNJ, its shares quickly rebounded with the latest legal case likely to be
hugely ‘overblown’. Despite the legal headwinds, JNJ continue to deliver solid quarter results, with
the first quarter of the 2019 year outperforming market expectations. JNJ delivered flat revenue of
$20 billion, with operational growth offset by unfavourable currency movements, beating market
expectations by $470m. Adjusted earnings per share came in at $2.10 per share, up +1.9% from last
year more importantly beat market expectations by $0.06 per share. It remains to be seen what the
financial and reputational damage will be for JNJ in what are likely to be long and drawn out court
process. While JNJ seems to be constantly hit be legal claims, JNJ sales have not been hugely affected
which shows there is still trust towards the brand.
