Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
New Stock Reports
A2 MILK (:NZ / A2M:AX) BUY (High-Risk): Back into the Portfolio
A2 Milk shares have fallen sharply after chief executive Jayne Hrdlicka sold all of her shares,
and soon after director Peter Hinton sold a small portion of his holdings. The sales have been
negatively received by the market and were poorly communicated. However, the fall does not
represent anything fundamentally concerning in terms of A2 Milk’s business, in our view. We
have always said that we had a positive view towards A2 Milk, but maintained our HOLD
recommendation due to valuation. With a forward price to earnings multiple of 27x we now
believe A2 Milk is attractively priced as a high growth stock. We change our rating to a BUY
(High-Risk) and add A2 to our NZ Model Portfolio at a 5.0% weight.
TEGEL (TGH:NZ / TGH:AX) BUY: Delisting – Takeover Approved
Bounty’s Takeover bid of Tegel has been approved by the Overseas Investment Office and
its shares will be delisted on the on the 23 October 2018. Bounty will be able to acquire
remaining shares at the offer price of $1.23. We have removed Tegel from our NZ Model
Portfolio.
INFRATIL (IFT:NZ / IFT:AX) BUY: Renewable Future
Shares in IFT have continued to trend higher as they upgradedr earnings guidance for the
year end March 2019 from $500m-$540m, to $540m- 580m on the back of performance
strong from the Longroad Energy business in the US. The other news in the headlines to
watch is the takeover bid by Infratil and Mercury NZ for Tilt Renewables, as Tilt’s independent
directors have said they “strongly” recommended shareholders reject the offer which they
believe undervalues Tilt significantly. In summary, we maintain our BUY rating on IFT as we
believe there are strong tailwinds and growth potential for many of IFT’s businesses.
BANK OF QUEENSLAND (BOQ:AX) HOLD: Headwinds Avoided… So Far
BOQ’s share price jumped as it managed to deliver a cash profit of $372m, which was down
-2% from last year but beat market expectations. BOQ’s underlying performance was driven
by increased lending and a widening net interest margin by 5 basis points to 1.98%, avoiding
significant fallout from the Banking Royal Commission and market related challenges in their
current result. There has been negative sentiment from brokers as BOQ (and the other major
banks) are expected to face several market related challenges including limited credit growth,
rising costs and potential regulatory compliance from the royal commission, all while intense
competition squeezes margins. At the current juncture, BOQ offers an attractive dividend
yield of over 7% which should support the share price, in our view.
Coca-Cola Amatil (CCL:AX) HOLD: Relief Rally
CCL shares have made a steady recovery over the last few months, jumping on their 2018
half year result, relieving some of the negatively due to challenges in their core Australian
business. CCL’s total revenue was virtually flat from last year at $2,417m, while underlying
net profit after tax fell -6% from last year to $178.8, due to better performance from New
Zealand & Fiji, and Alcohol & Coffee offsetting challenges faced in the Australian market.
CCL shares also rallied on the possibility they could buy Kirin’s Lion Dairy & Drinks business,
as it follows with the direction taken from its US-listed counterpart to expand its non-sparkling
offering to grow earnings in Australia. We believe CCL is still an attractive option for income
investors.
CALTEX AUSTRALIA (CTX:AX) HOLD: Trying to Stay Alive
CTX shares slumped after delivering 2018 interim net profit after tax of $296m (under replacement cost method) which marginally made the bottom of their guidance. The result was negatively impacted by lower margins CRM (Caltex Refining margins) and the costs of buying back franchise stores to turn them into company owned stores. The market was not pleased with the 3 cent per share dividend cut, and lack of near-term growth opportunities given their decision not sell and leaseback their convenience retail properties, but instead seek partnership opportunities to extract value from its retail outlets. The retail fuel market continues to be a very challenging industry, and we believe with the popularity of fuel efficient (hybrid vehicles) and with mass production and uptake of cheap electric vehicles just around
the corner, there will be long-term unavoidable headwinds and uncertainties for the industry.
