Weekly, A2 Re-Weight | Metlifecare | NXT | THL | BHP | FBU | EA

8 September 2019

Weekly Report

Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.

NZ Model Portfolio Change – we are up-weighting A2 Milk from 5% to 9%
METLIFECARE (MET:NZ) BUY: Prudent Approach
MET shares fell after a mixed result, as smaller revaluation gains resulted in a reported net profit after tax of $39.2m, down -68% from the same corresponding period last year. MET’s underlying result (which excludes unrealised gains on asset valuations) fared a bit better, & delivered an underlying net profit after tax of $90.5m, which was up +4% from last year due to increased sales volumes and strong resale margins which were offset by higher construction costs weakening development (new sales) margins.
While margins for development (new sales) are expected to remain challenging due to the property market in Auckland and construction costs at all-time highs, MET announced a significant reduction in development activity over the near-term delaying projects until costs and margins become more favourable. Whilst a prudent approach this was negatively received by the market resulting in no near-term upside for MET as it continues to trade well below its net tangible asset (NTA) per share of $6.96. This makes it more attractively priced than peers, and being heavily discounted due to its lack of near-term growth and intensive construction activity, and heavier exposure to the more challenging Auckland property market. believes the longer- term outlook remains robust for MET, and we have a positive view on the retirement industry given the theme of an aging population as the baby boomers enter retirement. We expect MET to trade closer to NTA over the medium-term once they lift construction levels further utilising their land-bank, whilst the share price remains deflated largely due to a lack of near-term upside.
NEXT DC (NXT:AX) BUY: Double Down on Data
Shares in data centre operator Next DC fell after releasing its 2019 full year result, which failed to inspire the market as it reported a net loss after tax despite lifting revenue. NEXTDC managed to lift revenue by +15% from last to $179.3m and underlying operating earnings by +13% to $85.1 million as it continues to expand its data storage capacity and grow customer numbers. Net profit after tax ended up becoming a -$9.8m loss, largely due the acquisition of the property trust Asia Pacific Data Centre Group and rapid expansion in capital expenditure in recent years, both contributing to higher interest and depreciation expenses, along with one-off costs associated with the above acquisition.
Next DC also has its eyes on the Asian market and has opened up offices in both Singapore and Japan. It has been evaluating opportunities in both markets, though activities are on hold in Singapore pending a
government review into the data centre industry. Guidance remains positive on the top end as Next DC expects to achieve double-digit revenue and underlying operating earnings (EBITDA) growth for the 2020, whilst lowering capital expenditure spending from $378m (in 2019) down to $280m to $300. We remain positive on NXT given its exposure to the “explosion of data” investment theme – with data expected to double every two-years. Despite continuing to delivering solid top-line growth, investors would need to be patient as Next DC is still a growth company and it will take time to develop enough capacity to benefit from operating leverage and start delivering significant profits. The recent slump might be overplayed given the long-term
growth potential creating an attractive entry point.
TOURISM HOLDINGS (THL:NZ) BUY: 7% Dividend
Tourism Holdings (THL) shares made a slight recovery after being under pressure for most of the year as the rental RV operator confirmed small annual earnings beat versus guidance and said the outlook for its New Zealand and Australian businesses remained positive. Ignoring non-recurring items net profit after tax for the 2019 financial year came in at $27.9m, down -26% from last year largely due to higher losses incurred from heavy investments into the Togo Group (previously known as TH2) joint venture and weaker trading performance in USA rental business, both offsetting a stronger performance from their core Australasian business, particularly NZ which lifted earnings (EBIT) by +23% from last year on the back strong rental and sales growth.
Following the capital raise, debt levels remain at acceptable levels allowing THL flexibility to pursue growth initiatives and acquisitions if an opportunity were to arise. THL also maintained a full year dividend of 27 cents per share, which appears likely to remain stable over the near-term implying THL is currently trading at a healthy dividend yield of 7.2%, which appears attractive in a low-interest rate market. 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 overplayed in price moves.
BHP BILLITON (BHP:AX) BUY: Mining Dividends
BHP shares have been under selling pressure lately following a steep but likely healthy decline in iron ore
prices, which at one point traded at $123/MT representing a +77% rise since the start of the year. BHP shares also fell when it released its 2019 full year result where it delivered a US$9.1 billion underlying profit which was up only +2% from last year and ended up falling short of most analyst expectations.
Despite benefitting from overall higher prices for BHP’s major commodities and favourable exchange rate
movements, this was offset by the impact of resource headwinds (copper grade decline, and higher coal
stripping costs), unplanned production outages, increased input costs and adverse weather events limiting what could have been an amazing result. Strong operating cash generation meant BHP paid an ordinary full year dividend of US$2.35 per share which was up +13%, taking into account the special dividend share buy-back from the proceeds of the sale of their offshore assets BHP returned a record ~$17.1 billion back to shareholders in 2019.
We continue to remain positive on BHP’s outlook, as their cash generative abilities remain strong with
commodity prices likely to remain supportive. We view the recent share fall as a healthy pull-back as it was trading at elevated levels due to unsustainably high iron ore prices, and is now priced at a more attractive entry point for medium-term investors.
FLETCHER BUILDING (FBU:NZ / FBU:AX) Buy (High-Risk): Attractively Priced
Shares in Fletcher Building (FBU) continue to slip after delivering their 2019 full year result which showed a return to profitability, however highlighted the challenging environment FBU faces both in NZ and especially in Australia – despite being well flagged earlier. FBU reported a net profit after tax of $164m for the 2019 financial year, a turnaround from last year’s loss of -$190m, and accordingly recommenced their dividend with shareholders receiving a 23 cents per share full year dividend for the 2019 financial year.
Ignoring the B+I (construction) loss last year, operating earnings fell -12% from last year down to $631m. This is unfortunate considering the New Zealand business is operating within a construction boom (however activity has been constrained by lack of capacity), as a result the market continues to remain challenging to navigate as competition remains and higher input costs have weighed down on earnings which fell -7.2% from last year. In Australia where residential construction activity has weakened considerably it is creating tough market conditions and earnings (EBIT) have halved – which is not new news. Given the slowdown in Australian construction activity acting as a near-term headwind and operations in New Zealand continue to remain challenging, despite supportive levels of building activity (which we expect to remain stable), our view remains largely unchanged. FBU look like a multi-year turnaround play especially given its relatively cheap valuation
there is potential upside albeit there is still considerable execution and cyclical risks, which appear to be mostly
priced in at current share price levels.

Electronic Arts (EA:NASDAQ) BUY:
EA shares jumped on its 2020 first quarter result. Despite growth rates remaining weak due to a light release of games this year, the growing popularity and engagement amongst existing games was enough to deliver a sound result pleasing investors. Total revenue for the 2020 fiscal year first quarter came in a $1.21 billion, which was up +6% from last year but more importantly ahead of market expectations. EA also delivered a solid operating profit of $415m, which was up +38.3% from last year. We continue to maintain our medium-term view that growth will remain strong for EA, and that the outlook remains positive with potential blockbuster game releases around the corner and continued strong performance from its sport titles and with Esport viewership on the rise – adding another stable growth stream. Given negative sentiment surrounding the industry EA shares appear reasonably priced at a 23x price to forward earnings multiple.

weekly 8 sep 19

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