Weekly – ASX Portfolio Re-weight | SCL | SKC | AIR| GEM |HSO

23 June 2019

Weekly Report

Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.

Following the de-listing of Healthscope (HSO), we have removed it from our Aussie Model
portfolio and up-weighted Costa Group (CGC), ANZ, and Next DC NXT) by 1% each.
Scales Corp (SCL:NZ) BUY: Cash to Spend
SCL shares were unmoved following their AGM as they reaffirmed their earnings guidance for the
2019 financial year – which was announced a month earlier. What we found promising is the ample
cash Scales has following the sale of its Liqueo and Polarcold businesses, giving them the ability to fill
the earnings gap left from the disposal by investing into new agribusiness exposures. Pleasingly,
management do not appear to be in a rush and are waiting for the right opportunity. While
agribusinesses do come with associated risks – such as impacts from weather, currency moves, and
commodity prices, we believe Scales still offers an attractive risk reward opportunity to gain exposure
to global agricultural trends. We remain confident in SCL’s ability to growth their earnings both
organically and via strategic acquisitions.
Despite a strong start to the year, SkyCity shares have been under pressure, largely due to an earnings
downgrade as trading conditions in the second half appear to be less upbeat than previously
anticipated. SKC expects its normalised operating earnings for the 2019 financial year to be flat on
last year, as opposed to up slightly or ‘modest’ growth guidance announced during their 2019 first
half result. SKC shares have also been weighed down by negative sentiment surrounding the industry
with a weaker outlook across the tourism sector as well as a weak trading update from Australian
casino operator Star Entertainment. Following the sale of its Darwin property and Hobson street
carpark, SKC have received regulatory consent to purchase a 1.01 hectare site in Queenstown which
is plans to develop into a 5-star hotel to cater for strong international demand as the area struggles
with hotel bed shortage. Further, SKC have announced they are looking to enter the online gambling
arena. We have been vocal supporters and continue to believe SKC shares are attractively priced in
a relatively expensive market, paying an attractive 5% dividend yield.

AIR NEW ZEALAND (AIR:NZ / AIZ:AX) BUY (High-Risk): Feeling the Jet Fuel Pinch
AIR shares have slipped further after downgrading 2019 annual operating earnings to exceed $340
million (down from previous of between $340m to $400m) due to jet fuel prices remaining more
expensive than initially anticipated, and slightly weaker demand (which was already accounted for).
As announced earlier in response to the above, Air NZ will defer capital expenditure and implement
significant cost cutting to help weather headwinds – in order to maintain a strong balance and
maintain a stable dividend payout. Air NZ also announced a multi-billion dollar investment for eight
(and up to 20) new Boeing planes with investment and delivery to commence from 2022 through to
2027. The newer aircrafts will be larger and 25% more fuel efficient than the aircrafts they are
replacing with the average annual capital spend over the period being less than half of what was
spent over the previous five years. One thing in Air NZ’s favour is it offers an attractive 8.1% dividend
yield for the year ahead. However, we would continue to caution that investors need to have an
appetite for risk considering the highly competitive airline industry and the impact of volatile jet fuel
prices can have on future profits.
G8 EDUCATION (GEM:AX) BUY (High-Risk): Election Swings
GEM shares have had a volatile ride in recent times, as earlier this year the childcare centre operator
announced 2018 net profit after tax fell -10.8% from last year, despite lifting revenues by +7.7%,
while most of the year GEM struggled with lower occupancy rates. A lot of the recent volatility has
been attributed to the Australian election, as the Labour government who were favourites
announced they would make early childcare education free for low-income households, with G8
shares sinking after the surprise National government victory. G8’s AGM was also not so positively
received – and despite being on track with a recovery with the worst appearing to be behind them,
the path back to growth appears to be slower than the market had anticipated. With the worst over
and costs likely to remain relatively fixed, earnings should improve from here if market dynamics
continue to act in GEM’s favour with an expected lift in occupancy rates.

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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comprises general securities information only, and has not been prepared taking into account the particular investment objectives, financial situation
and needs of any particular person. Individuals should therefore assess whether it is appropriate in light of individual circumstances, or discuss, with
their financial planner or advisor, the merits of each recommendation for their own specific circumstances.
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