Weekly, Aristocrat |A2| GEM| CCL| GXH

5 December 2018

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
Aristocrat Leisure Limited (ALL:AX) BUY: Platform for the Future
Aristocrat shares continue to slide with the Tech sell-off and after delivering a solid 2018 result, but one which missed market expectations. Aristocrat managed to grow operating revenue by +47.7%, but operating net profit after tax of $729.6m was up +34.3% from last year, missing expectations of $750-760m. This was partly due to the company experiencing higher contribution from lower margin digital social casual games as well as a +54% increase in design and development expense (D&D). That being said, Aristocrat will plough another $100m into acquiring users across its booming digital business in the next 12 months. It appears the market has reacted negatively towards this increased spend. However, we believe in the long-term growth prospects for Aristocrat and they should benefit from their increased D&D spend as a platform for future growth. We believe nothing has changed fundamentally for Aristocrat and we maintain our BUY rating.
A2 MILK (:NZ / A2M:AX) BUY (High-Risk): Growth Story Intact
A2 Milk shares are up since we upgraded our recommendation from a HOLD to a High-Risk BUY in October. A2 shares jumped after their latest AGM, as they announced a strong trading update for the first four-months of the 2019 financial year. Growth continued for A2 Milk, as revenue was up +58.5% and net profit after tax was up +64.5% from the same corresponding period last year. A2 also said it will meet China’s new cross-border e-commerce requirements affecting its sales of Platinum infant formula, as government officials extended the grace period to let foreign firms comply to March 31 next year. We have always had a positive view towards A2 Milk as a high growth stock with strong macro-factors driving demand for their product, and we think the current share price provides a much more reasonable entry point than it has in the recent past.
G8 EDUCATION (GEM:AX): BUY (High-Risk): Turning a Corner
G8 has rebounded after a period where the childcare operator struggled with low occupancy rates as the industry was oversupplied, blamed on over-zealous developers. G8 shares jumped as it announced occupancy rates for the group were improving at better than expected rates, as a number of struggling centres exited the market, as well as the impact of new government subsidies which encouraged families to use childcare centres. Further, G8 said they have 32 “underperforming” centres, and while some have the potential to be better performing, there are 8 centres they have identified as being too difficult to turn around, and as such GEM plan to sell these centres.
Coca-Cola Amatil (CCL:AX) HOLD: Oversold?
CCL shares have given back this year’s gains after a poorly received investor day. CCL warned shareholders 2019 would be another “transitional” year – suggesting another year of shrinking earnings. CCL has also decided to sell its struggling SPC fruit and vegetable processing business, abandoning its former plan to turn it around. CCL are looking to invest heavily into their Aussie business hoping to replicate the success experienced in New Zealand. While CCL is facing headwinds in its core Australian business, management are focussed on delivering medium term earnings growth – which could come later than expected. At current valuations we still believe CCL shares provide an attractive risk-return
proposition for income seeking investors.
GREEN CROSS HEALTH (GXH:NZ) HOLD: Healthcare Headache
GXH shares continue to slide post their 2019 interim result, delivering a net profit after tax of $8.1m, which was down -7.1% from last year, despite lifting revenue by +9%. Revenue growth was achieved by the addition of 10 new medical centres over the last 12 months, 5 pharmacy’s joining the network and increased government funding for support workers. However, only the medical centres operating profit improved over the last year. GXH’s pharmacy division faces a few external challenges, and we believe the main one going forward will be low-cost retail giant Chemist Warehouse’s entry into the NZ market, who now have five stores in Auckland. If the rollout continues towards other major centres, we believe this will be a major headwind for GXH’s largest business division. The community health division also struggled, with lifted government funding not enough to offset the increase in healthcare worker (nurses etc) pay. We struggle to see enough upside or catalysts to upgrade our recommendation on GXH at the current juncture, particularly given the headwinds facing two of its business divisions.

Weekly 5 Dec 18

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