Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
AIR NEW ZEALAND (AIR:NZ / AIZ:AX) HOLD (was High-Risk BUY): Short Term Turbulence
AIR shares have been descending further reaching multi-year lows now that that covid-19 outbreak has become global, with travel bans and restrictions in place to contain the virus. Air NZ withdrew their 2020 full-year guidance which was released only a couple of weeks ago, with the airliner stating demand continued to weaken further than initially anticipated. In response, Air NZ will be reducing overall capacity by approximately -10% across its whole network through till June, as well as various labour initiatives to mitigate the risks of drastically weaker demand. Prior to this Air NZ released a modest result for the first half of 2020 financial year (6 months to December 2019), which saw operating earnings before tax of $198m, down -8.8% from last year. Air NZ maintained their interim dividend of 11 cents per share,
but clearly the dividend will be cut going forward. Over the weekend the NZ Government has required travellers self-isolate for 2-weeks, and we think the next step will more likely than not be a full travel ban. It is very difficult to ascertain the impact on AIR earnings near term, although it will be significantly negative. As a result, we downgrade our rating to a HOLD, as it feels too late for existing shareholders to panic sell, and we expect a material negative share price reaction on Monday. The Government is also likely to step in with support measures for the tourism sector.
QANTAS AIRWAYS (QAN:AX) HOLD was BUY (High-Risk): Testing Times
Qantas shares have been hit hard now that that covid-19 outbreak has become global with travel bans and restrictions in place to contain the virus. Qantas has announced large capacity cuts in order to curb the effects of weak demand as well as cancelling their recent share buyback. Abating shareholder nerves with cost benefits from the significant fall in oil prices to help offset weak demand, while having a robust balance sheet and cash reserves to cater for weak short-term demand. In saying that, the situation is only getting worse, with Australia likely to widen its travel ban in coming days. Like Air NZ, Qantas also withdrew guidance which was released recently along with their 2020 first half result. Qantas
delivered a solid result for the first half of the 2020 financial year, and at the time announced a 13.5 cent per share interim dividend, with the dividend going forward likely to be cut. While trading at an attractive face value valuation under normal conditions, we anticipate there will be more market related volatility over the near-term and downgrade our recommendation, as we wait for covid-19 related risks to subside. As with AIR, we think it is too late for existing shareholders to panic sell, and on a medium term view there will be a buying opportunity in coming months.
Coca-Cola Amatil (CCL:AX) HOLD: Flu Flattening Future Fizz?
Shares in Coca-Cola Amatil Limited (CCL) were on a strong run and reached multi-year highs after delivering a solid set of numbers for the 2019 financial year. This comes after completing its two-year transitional period with the Australian business delivering its first year of revenue growth in seven years. Ongoing earnings (EBIT) which representing continual operations rose +0.8% from last year to $639.3m as earnings growth across most business divisions were offset by slightly lower earnings from the Australian business, which is showing signs of a turnaround Reported net profit after tax came
in at $374.4m up +34.2% from last year, as it included gain on sale of SPC business and the previous period included a larger trading loss from discontinued operations. Unfortunately, its shares have been brought down heavily by market wide sell off created by the covid-19 outbreak, which will put some pressure on CCL’s first half result and create some uncertainty on the economic outlook globally. While, CCL’s turnaround appears promising, at current valuation CCL shares appear to be fairly priced in our opinion under normal conditions reflecting a stable outlook. However, there is a lot of market volatility created by the covid-19 outbreak so there could be more near-term downside ahead before we see stability.
MYER HOLDINGS (MYR:AX) HOLD: Turnaround Knocked Off-Course
Myer’s share price slumped after reporting significantly weaker net profit after tax for the first half of the 2020 financial year, as retail operating environment becomes more challenging. On face value it appears quite bleak, as net sales fell -3.8% and net profit after tax came in at $24.4m, down -36% from the previous year. The result was weighed down due exit of unprofitable products (such as Apple and Country road), $15.2m of one-off implantation and significant items, and the adoption of new accounting standard for treating lease liabilities. However, looking at the underlying result, Myer made some moves into the right direction of simplifying their business to be more profitable, managing costs and
strengthening their balance sheet with further debt reductions. Comparable store sales were up +0.4% from last year (excluding apple and country road) and underlying net profit after tax of $41.5m, up +0.4% from last year, which excludes implementation costs and significant items which totalled $15.2m, as they make further progress to cut costs and improve margins. While the strategy appears to be showing signs of improvement, a turnaround may take longer than initially anticipated given challenging retail operating conditions. Now with the covid-19 spread there is huge uncertainty over near-term spending habits/lack of people visiting malls, as well as medium-term impact on Australian economy if it is dragged out longer than anticipated. For now, we maintain our HOLD rating on Myer given near-term market volatility
as well as uncertainty surrounding the covid-19 pandemic adding extra retail pressure over the near-term.
G8 Education (GEM:ASX) High-Risk BUY: More Sick Days Ahead?
G8 Education (GEM) shares have free-falled despite release a promising result for the 2019 financial year which showed occupancy rates improved in-line with recent guidance. The heavy sell off has been prompted largely due the coronavirus as GEM guided that occupancy levels for 2020 are tracking below the previous year as parents are less inclined send their kids to childcare centres. For the 2019 financial year GEM’s underlying profit after tax came in at $76.4m, down -3.9% from last year as revenue growth was offset by higher operating costs as well as increased investment it made in to improve the quality of its centres and ramp-up its greenfield portfolio. Earnings came in within guidance as existing centres performed well with group occupancy rates improving by +1.1% and fee growth. This was offset by disposal and closure of poor performing centres and opening of new centres and rejuvenation works on 70 other existing centres. Given GEM’s heavy pull back it appears attractively priced under normal conditions, traditionally we would ‘buy the dip’ given their turnaround potential. However, in this case there is a possibility for further downside risk over the near term, and would prefer to buy at higher valuations with greater certainty on the outlook. We maintain our High risk BUY recommendation – given the potential for a turnaround ‘under normal conditions’ once the coronavirus risks have subsided. But would advise investors to not jump in too early given near-term downside risk and elevated levels of
uncertainty.