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): Silencing the Critics
A2 Milk () shares soared after delivering another impressive first half result – contrary to some commentators who expressed concerns prior to the result. A2 Milk managed to lift revenue for the first half of the 2019 financial by +41% to $613.1m, driven by increased investment in marketing, brand awareness, market development and organisational capability across all key product segments and regions. This translated into a +55% jump in profit. The growth was particularly strong for infant formula in China which continues to increase its market share, as well as the US experiencing strong revenue growth due to an improved distribution network. We have always had a positive view towards A2 Milk as a high growth stock with strong macro-factors driving demand for their product (albeit at times expressed valuation concerns) and it was a very pleasing first half.
TELSTRA (TLS:AX) HOLD: Off the Bottom?
Shares of telecommunications giant Telstra (TLS) fell on after its 2019 interim result. Despite
weak numbers, the result was within guidance due to the continued roll out of nbn and
increased competitive pressure. The market was not pleased with a 27% dividend cut.
However, Telstra shares have made a sizeable recovery this year from its all-time lows,
largely due to TPG Telecoms’s announcement that will not run as a fourth mobile provider if
its merger with Vodafone was not to go through, making the Australian mobile market less
competitive. There is some optimism that TLS shares have bottomed out and things could
turn around, especially with more the half the nbn rollout completed and most of the costs
absorbed, as well as their aggressive cost cutting program. Added to this, the new proposed
5G network could provide upside. However, we remain on the side-lines with our HOLD
recommendation for now.
CSL LIMITED (CSL:AX) BUY: Still See a Healthy Outlook
CSL Limited (CSL) shares were lower following another solid interim result for the 2019 financial year. The global biotech giant announced sales revenue increased +11% to US$4,405m and a +10% increase in net profit after tax to $1,161m. CSL saw strong revenue growth from its core immunoglobulin blood products, its flu vaccine business Sequiris, and new products Haargarda and Hizentra. For the 2019 full year, CSL expects net profit after tax to be on the upper end of its $1,880m and $1,950m guidance. CSL has made it a habit to upgrade guidance in recent times, and given the market was anticipating a traditional earnings guidance upgrade is why CSL shares may have slipped on the result. We maintain our BUY rating on CSL and continue to hold it as a solid defensive healthcare holding.
PGG WRIGHTSON LIMTED (PGW:NZ) BUY: Closing in on the Deal
Shares in PGG Wrightson (PGW) have jumped after the Commerce commission approved the sale of the rural service firm’s seeds division to DLF Seeds for $434m in cash and assumed debt. This brings them a significant step closer to finalising the deal with DLF, with a few more conditions left. Interestingly, PGW shares fell (around Christmas) after announcing its Seed and Grain business would deliver a net loss for the first half of the 2019 financial year due to challenging conditions in Uruguay. Fortunately for PGW, the DLF Seeds transaction is based on the value of the business as at 30 June 2018, and the impact in South
America will not reduce the purchase price for the Seed and Grain business. The bear investment case is that the transaction makes PGW a much smaller and concentrated business focused solely in New Zealand, making the business more sensitive to industry specific risks and a smaller market capitalisation means its shares will be less closely followed by investors and trade with reduced liquidity. While acknowledging this, we continue to maintain a positive view. At the current share price we estimate PGW is trading at an attractive single digit price to earnings multiple when taking into account the remaining
businesses and distribution for shareholders from the proceeds of the sale.
Wellard (WLD:AX) HOLD: Chartering a Maiden Profit
Wellard (WLD) shares jumped after the business reported its first interim net profit after tax and second reporting period positive operating cashflow. During the first half of its 2019 financial year, Wellard reported revenue of $188.2m which was up +34% and a net profit after tax (NPAT) of $2.9m, compared to a -$7.4m loss in the same corresponding period last year. The improved trading performance was on the back of “Excellent vessel utilisation, profitable cattle trading from Australia to South East Asia and continued cost savings were the key drivers for the improved operational and financial results”. After assessing WLD’s net asset value and change in strategy, we stick with our view that the business will be able to turn itself around under the helm of new management. We remain quietly optimistic given net tangible assets per share are now at $0.183, three times what Wellard shares are currently trading at. However, there are still significant risks, given major customer Turkey has halted imports of live cattle, and there is large uncertainty around the impacts of recent floods in Queensland – in terms of supply levels, price, and planned voyages. While Wellard are heading in the right direction, it is still not smooth sailing ahead.