Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
New Stock Reports
AIR NEW ZEALAND (AIR:NZ / AIZ:AX) BUY (High-Risk): Flying Against Headwinds
Air NZ released another solid result for their 2018 financial year with robust demand across
all markets, driving revenue growth up +7.4% from last year. However, this was partially offset
by a +19% increase in total fuel expense. Despite fuel prices remaining high, management
remain positive that demand will continue to remain strong although taking into account an
average jet fuel price of US$85 per barrel for 2019, they expect underlying earnings before
tax to be in the range of $425m to $525m. This excludes an estimated $30m to $40m impact
from scheduled changes/reductions prompted by global Rolls-Royce engine issues –
hopefully this is only a near term and one-off issue.
We still believe Air NZ is reasonably priced on a relatively low PE multiple and offers an
attractive 6.5% dividend yield (assuming a small dividend, and clearly fits well with our tourism
boom investment thematic. However, we caution that investors need to have an appetite for
risk considering the factors outside of AIR’s control.
QANTAS AIRWAYS (QAN:AX) BUY (High-Risk): Flying Against Headwinds
QAN released another record-breaking result for the 2018 financial year, with underlying
profit before tax of $1.6 billion, up +14% from last year. It was an impressive result driven by
strong performances from all sides of the airline business, considering increased competition
on international routes and as effective hedging offset the rise in jet fuel prices. QAN
continues to benefit from rising tourism into Australia and plans to increase its capacity in key
Asian routes and develop their network.
A major risk facing airliners is rising jet fuel prices, which QAN has managed to effectively
hedge against in their 2018 result but expect to see a significant rise in fuel costs for the 2019
financial year – where they are optimistic they can offset the costs through improved cost and
revenue efficiencies. QAN management have been disciplined and have kept shareholder
interests in mind – with its dividend on the rise and significant share buybacks improving returns for investors. As with Air NZ, we maintain our BUY rating with a high-risk caveat (given
factors outside of QAN’s control).
SYDNEY AIRPORT (SYD:AX) BUY: 2039 Masterplan
SYD shares were up post their 2018 interim result, with growing international passenger
numbers driving revenue up +7.9% to $770.8m. Operating earnings were also up +8% from
last year to $623.4m and management reaffirmed their 2018 full year dividend is expected to
be 37.5 cents. SYD also announced their 2039 masterplan, which is a major redevelopment
of the airport as they expect total (annual) passenger numbers to rise by +51% from 43.4m
in 2017, to 65.6m passengers over the next 20 years. To cater for this demand, SYD have a
five-year plan to improve ground traffic flows to and from the airport, and then increase
terminal and airfield capacity and efficiencies to cater to growing passenger numbers.
Significant growth is expected continue from China, India, South Korea and Vietnam,
reaffirming our rising Asian middleclass and tourism investment thematics.
SCALES CORPORATION (SCL:NZ) BUY: Awaiting the Next Move
SCL released a solid 2018 interim result as normal weather conditions improved trading
volumes with group revenue for the half up 24% from last year to $255.2m, with solid double-
digit revenue growth across all business divisions, particularly Food ingredients (up +34%).
Scales also announced the sale of their storage businesses – Liqueo in August, while
completing the sale of Polarcold as part of their strategy to be a pure agriculture play. Scales
share price has remained relatively flat for most of the year, and it appears the market is
awaiting news of what Scales will decide to acquire (with the funds from business sales) as
it looks to focus on driving exports and leverage off its relationships in China.
We believe SCL still offers an attractive risk reward opportunity to gain exposure to global
agricultural trends. The proposed transactions only back our view, as SCL can focus on
growing its export business.
HARVEY NORMAN (HVN:AX) SELL: Retail Price Slash
Shares in HVN have been hit hard, as its record-breaking profit run ended. The result was
driven by losses from its Coomboona Joint Venture and property revaluation gains being $53m lower than the previous year. The underlying result was almost flat from last year, with strong performance from offshore operations offset by weakening margins from their core Australian franchise operations.
The result is beginning to show signs the retailer is struggling in its core Australian retail
business. We believe the Australian and New Zealand housing market appears to have
peaked – which has been a major source of HVN’s growth over the last decade. The arrival
of Amazon and competition intensifying from JB Hi fi and Kogan, and at the same time a
weakening AUD (which will lead to higher cost of goods) will result in lower sales revenue
and weaker margins impacting profits going forward in their core markets, in our view.