Weekly, AIA | QBE | FPH | SCL | MYR

20 March 2019

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
AIA shares have experienced a strong run of late, with the market reacting positively towards
their 2019 interim result. Moderating passenger growth as well as the completion of a number
of retail offerings and investment properties lifted revenue +11.5% from last year to $370.6m,
and underlying profit (which excludes revaluation gains) was up +2.9% from last year to
$137.7m, which was slightly ahead of expectations. We see AIA as a key beneficiary of the
tourism boom as they continue to report growing passenger numbers. However, we still see
AIA as fully-priced especially given the recent run, trading on a valuation of 32.5x earnings
and a dividend yield of 3.9%. Further, it needs to be kept in mind that significant infrastructure
spend is planned and it is likely AIA will be taking on more debt with the possibility of an
equity raise to fund expansion around the corner, if expansion cannot be funded from free
cash-flow. Accordingly, we believe there are better value investments to focus on in order to
gain exposure to the tourism theme.
QBE INSURANCE (QBE:AX) BUY: The Long-Awaited Turnaround
Insurance company QBE shares have experienced a turnaround in 2019 (up over +25% this
year) after delivering their 2018 full year result which surprised the market and met guidance.
QBE reported net profit after tax for the 2018 financial year of $390m, a big turnaround from
last years loss of -$1,249m, a year plagued by a number of significant weather catastrophes.
This resulted in a better group operating ratio for the year, partially offset by weaker
investment return. Given the benefits of QBE’s simplified business and macro-factors moving
in favour of QBE’s investment program, QBE provided upbeat guidance for the 2019 financial
year – with a further improvement in the group operating ratio from its cost reduction program
and lower risk profile, as well as expectations of higher investment return given higher interest
rates. QBE also benefits from a falling Aussie Dollar. We remain positive on QBE as a
turnaround story led by its new CEO to run a more efficient and simpler operation.

FPH shareholders can breathe a sigh of relief as the costly and lengthy patent dispute with
rival ResMed is over, for now. FPH shares are back at close to all-time highs after the news,
shedding the litigation driven negative sentiment that had weighed on the share price. Taking
a bigger picture view, FPH has experienced strong market share and there remains growth
potential looking forward given the tailwinds of an ageing population and our expectations
around the NZ dollar. We remain positive on FPH as a solid defensive healthcare holding,
although new investors may want to wait for some share price consolidation post the strong
run year to date.
SCALES CORPORATION (SCL:NZ) BUY: Expanding Food Ingredients
SCL shares were up after releasing a solid 2018 result which met management expectations,
with all business divisions performing well. Underlying operating earnings of $64.7m was up
+8% from last year, achieving the top end of guidance set in December for $59m to $65m.
Scales announced the sale of their storage businesses Liqueo last year, while completing the
sale of Polarcold as part of their strategy to be a pure agriculture play, and are awaiting
approval from the Overseas Investment Office to allow the sale of its Polarcold business. Part
of the proceeds are being used to expand their Food Ingredients division, by acquiring a 60%
share in US based Shelby, with the goal to offset the earnings drop from the sale of their
coldstore business. While agribusinesses do come with associated risks – such as impacts
from weather, currency moves, and commodity prices, we believe Scales offers an attractive
risk reward opportunity to gain exposure to global agricultural trends.
Shares in retailer Myer surged higher after proving the market wrong, with many investors
anticipating its net profit would fall due to soft consumer spending and weaker sales data.
While Myer’s sales did dip another -2.8%, the retailer delivered an underlying net profit after
tax of $41.3m, up +3.1% from last year (ignoring restructuring and significant items). This
was the first-time operating earnings rose since 2011. The performance was a result of Mr
King’s initiative to focus on their Customer First Plan and drive profit growth as his new team
slashed costs, curtailed discounting, exited unprofitable products such as furniture, shut two
stores, and closed dozens of concessions. While the strategy appears to being to be showing
signs of improvement, a full turnaround is likely to be a medium-term play with some

execution risk. Not only is the retail environment extremely competitive, the industry faces
near-term headwinds with consumer spending expected to remain weak given unfavourable
macro-economic conditions in Australia. For now, we maintain our HOLD rating on Myer
although believe there is hope for current holders with a possible turnaround on the cards led
by new CEO John King

Stock ratings
Given the dynamic nature of share prices ’s rating can become out of sync with the projected total return as the share price moves. The rating
must only be viewed as valid with respect to projected total return at the time of rating or target price changes.
Individual stock ratings are determined by the projected total return on a stock.
Based on a current 12 to 36- month view of total share-holder return (percentage change in share price from current price to projected target price
plus projected dividend yield), we recommend the following:
BUY: Based on a current 12 to 36-month view of total share-holder return, we recommend that investors buy the stock
SELL: Based on a current 12 to 36-month view of total share-holder return, we recommend that investors sell the stock
HOLD: We take a neutral view on the stock 12 to 36-months out and, based on this time horizon, do not recommend either a Buy or Sell
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weekly 20 mar 19

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