Stock in Focus: Pushpay (PPH.NZX)
We are cashing out our PushPay position from our NZ portfolio given the current takeover offer, with the funds moving into cash moving towards a defensive stance over the 6-12months.
The NZ portfolio now has 20% cash which we aim to deploy later in the year, following market weakness. It’s a good time to “hold some dry powder”.
New Zealand
The New Zealand market (NZX50, +0.5%) was up yesterday, on a relatively quiet day of trade.
Fletcher Building shares were down -1.5% after telling the market that its subsidiary company Iplex was being investigated by the Western Australian building regulator for leaky pipes, and has increased its provision for losses from A$2m to A$15m. Buy Fletcher at the bottom of the cycle and “close your eyes” for the next couple of years?
Locally inflation doesn’t seem to be slowing down as quickly as it has overseas, Stats NZ said grocery food prices rose a seasonally adjusted 2.1% in March, an increase of 12.1% year-on-year. Will the RBNZ’s moves curb this? Nobody can accuse Orr of going soft.
It might well be the winter of discontent for Rakon – we see Mike Daniel (ex-sharebroker, 5.7% owner of Rakon) continues to agitate for change at the company – Daniel is proposing a dividend of 20% of net earnings (this would mean about $4M this year in dividends). It doesn’t seem unrealistic to us – the company has strong earnings, little debt (unusual for a growth company) and its plant project in in India is nearly complete – not paying a dividend scares the market while paying a dividend will reassure confidence. We think there’s an opportunity for speculative investors to pick up a few shares here – Rakon worth +$1.00 given its earnings – but note there’s a lot of uncertainty – this whole thing hinges on the dividend.
US
Schwab beats big on earnings
Charles Schwab beat expectations, growing revenues 10% and EPS 14% – the street was looking for a bearish result on the back of deposit flight. The result was quite different: revenues of $5.16B and net income of $1.7B – that’s a pre-tax profit margin of an astonishing 45.8%. We’re reminded of the great writer Mark Twain’s quote – “reports of my death are greatly exaggerated”.
Deposit flight is an issue certainly – the brokerage saw bank deposits shrink by 11% – note the group funded these outflows perfectly well, unlike the small regional banks. However, net interest margin expanded by 81 bps meaning net interest income (the same metric JP Morgan and every other bank under the sun uses) by 27%. This does not sound like a group on the wane to us. It’s a strong beat which blows the bear case out of the water, albeit in a tightening environment.
JNJ, Netflix and Goldman Sachs
Big slate of earnings next week – JNJ, Netflix, Goldman Sachs are all of interest to us – we’re looking at Goldman’s trading revenue and M&A revenue – as well as the continued write-offs involved with the bank’s bombed consumer banking division. Netflix may have some upside – our main questions are i) how many subscribers were added and ii) how is the ad-supported tier going. Netflix still looks expensive – 23x fwd earnings vs. 13x for Paramount, 18x for Disney, etc. Hard to justify a valuation like that when you don’t have a cruise line and parks division (or a sports network, etc). We’re waiting with bated breath for JNJ – it’s a spinoff play at the point – its valuation has come down enough in the last couple of months – enough for us to justify it as a BUY again. The big thing here isn’t a JNJ company at all, it’s Haleon, the spinoff consumer healthcare company of GSK – it’s done well, and assumes JNJ’s consumer goods company spinoff can trade in the mid-20x earnings (you pay for that stability).
The whole Manchester United thing
Manchester United feel ~10% as rumors spread that the Glazers might keep the football team. We think this is highly unlikely and rumors are just that – rumors. We’ve talked about why we think this is the case before but will reiterate: i) the Glazers are so leveraged that they cannot afford to keep the club – they borrowed 40M quid last year to pay 30M in dividends (the bulk of which they got themselves). ii) Elliot Management is unlikely to back brothers who have failed to unlock value for over a decade. Elliot demands results – founder Paul Singer is known as the vulture of Wall St for a reason – why lend money to such poor managers? Any investment will be with the view for an exit – we don’t see an exit happening with the Glazers. More likely this is a game of brinkmanship with the Qataris – we added our position in the US model portfolio to 5% from 4% on the stock’s weakness.
Australia
The Australian market (ASX200, +0.3%) on a mixed day of trade. Real Estate and Consumer Discretionary stocks performed well while gold and energy stocks were the laggard. The fall in gold stocks was sparked by Regis Resources which plunged -11.2% after cutting its production guidance and lifted its cost estimates. The major banks also performed well, following strong bank earnings on Wall Street over the weekend.
We saw a note from Morgan Stanley’s Mike Wilson which anticipates revenue growth being the “next shoe to drop”. Of course, consumers keep spending — only on debit. We’re all on tenterhooks waiting for that revenue slowdown — likely will see this with those consumer discretionary stocks — Briscoes, Harvey Norman, etc.
