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
AIR NEW ZEALAND (AIR:NZ / AIZ:AX) BUY (High-Risk): Decent Dividend
AIR shares have been volatile after confirming a lacklustre result for the first half of 2019
financial year. Air NZ’s recent recovery is attributed to its business review, as it announced it
will defer capital expenditure and implement significant cost cutting to help weather slowing
demand and rising fuel prices. While a disappointing result, the challenges facing the airliner
should not have come as a huge surprise as they were outlined earlier in the year with a
spike in fuel prices, slightly softer tourism numbers, and disruptions due to issues with Rolls-
Royce engines. One thing in Air NZ’s favour is it offers an attractive 7.7% dividend yield for
the year ahead (assuming a small dividend cut). AIR also clearly fits well with our tourism
boom investment thematic. However, we would continue to caution that investors need to
have an appetite for risk considering the competitive airline industry and the impact that
volatile jet fuel prices can have on future profits.
BHP BILLITON (BHP:AX) BUY: Commodity Cash Cow
BHP shares have been on a strong run thanks to favourable price movements across its
major commodities – particularly iron ore which contributes 41% of BHP’s earnings. Iron ore
prices rallied strongly following a mining disaster in Brazil (January 2019) where a collapsed
dam has cost 60 lives. Since then, Iron ore has maintained higher levels following stronger
than expected demand from China and supply constraints pushing the commodity price even
further. BHP managed to deliver a better than expected result for the first half of the 2019
financial year, with the result highlight being that BHP managed to lower debt to below their
target range of $10 billion to $15 billion & announced a US 55 cent per share interim dividend.
We continue to remain positive on BHP’s outlook as our core mining holding. However, given
its recent share price surge we would suggest early shareholders holders may want to trim
holdings & take some profit.
SUMMERSET GROUP (SUM:NZ / SNZ:AX) HOLD: Cooling Property Market
SUM shares have been hit hard after they announced their 2019 first quarter sales were down
-4.2% from last year with settlement times increasing, as the retirement village begins to feel the impact of a slowing property market in Auckland and Christchurch. Earlier, Summerset reported their 2018 full year result, and have been achieving record development margins and a record number of units were built within the year, as well as strong resale gains on existing units. Having achieved substantial growth in the past, Summerset’s tailwind of rising property prices is likely going to become a headwind over the medium-term and the market is clearly worried given the sharp share price fall of late. Weakness in the property market will weigh on operating profit growth over the near term, tightening margins on both new builds and resales.
WESTPAC (WBC:AX / WBC:NZ) HOLD: Heightened Property Risk
WBC shares have recovered somewhat after a difficult 2018, coming out relatively unscathed
from the banking royal commission lifting a lot of negative sentiment – as the market
anticipated the possibility of heavy regulatory costs and limitations being imposed on the
banks. Westpac shares have remained volatile, largely influenced by falling house prices in
Sydney and Melbourne, as well as speculation of a recession facing Australia given weak
GDP data on a per capita basis, as well as increasing risks of loan delinquencies which has
been evident in their most recent quarterly update. In other news, Westpac announced a
$260m provision will be realised in the first half of its 2019 financial year arising from further
work on its customer remediation programs to refund customers for fees charged for financial
advice not given. WBC shares appears to be trading at a cheap valuation compared to the
past, while offering an attractive dividend. However, we believe the Australian banking
industry is set to face a number of headwinds and would prefer ANZ over WBC as a lower
risk proposition for investors seeking Bank exposure.
NIKE (NKE:NYSE) BUY: Shareholders Wanted More
Nike shares fell on its 2019 third quarter result, despite in our opinion deveining a sound
result. Heading into the result the market had anticipated solid growth rates for North America
to continue from the previous quarter, and viewed their fourth quarter guidance as weaker
than expected. Nike’s 2019 third quarter revenue came in slightly ahead of expectations at
$9.61 billion up +7% from last year thanks to strong continuous growth from China and further
gross margin expansion, which delivered earnings per share of $0.68 cents per share, $0.03
above market expectations. We maintain our BUY rating on the back of Nike’s drive to deliver
new and innovative products consumers want, driving growth in China and North America –
whilst further expanding margins.