Weekly, Bank Pick – ANZ| WBC |PGW| KMD| Visa

8 November 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
ANZ (ANZ:AX / ANZ:NZ) BUY: Still Our Favoured Aussie Bank
ANZ announced a better than expected full year cash profit from continued operations of $6.5
Bn, with cost savings and lower impairment charges partially offsetting weaker net interest
margins. ANZ CEO Shane Elliott said the simpler bank with less complex products will have
less complaints from customers and be in a better position to avoid the sorts of issues
exposed at the Royal Commission. ANZ’s simplification program has included the disposal
of 21 different businesses, the shrinking of the institutional bank, withdrawal from certain parts
of Asia and the introduction of agile work practices. The sale also helped strengthen ANZ’s
balance sheet while also improving shareholder returns, with $3 billion in share buy-backs
approved. ANZ has been our preferred pick of the big 4 Aussie Banks. This is in part because
of its strong capital position, restructuring initiatives lowering its risk profile, and the prospect
of return of capital to shareholders.

WESTPAC (WBC:AX / WBC:NZ) HOLD: Tough Operating Conditions Ahead
WBC shares experienced a small relief rally after posting a decent 2018 full year result given
a difficult operating backdrop. WBC has been hit with the remainder of the Aussie banking
sector since the royal commission enquiry. Despite provisions for customer refunds and
tough operating conditions, WBC managed to beat market expectations and deliver a flat
cash profit of $8,065m. Westpac’s cost saving programme and strong first half performance
offset the $281m provision resulting from the royal commission, as well as increased
competition and rising funding costs which tightened net interest margins in the second half.
If the second half is any indication for how things will play out, there are several headwinds
ahead for the Aussie banking industry. Limited credit growth over the medium term is possible
as the property market corrects, and banks will be competing intensely for existing loans
along with increasing funding costs which will likely further tighten net interest margins. WBC
also has a lower quality mortgage book, which could expose it to higher default risk in a falling
property market, as well as being the only big four bank to keep their wealth management
business – which makes it a riskier proposition to its big four counterparts.

PGG WRIGHTSON (PGW:NZ) BUY: Comfortable Owning a Smaller PGW
Shares in PGW have been on a downward trend as the market appears to disagree with the
merits of the sale of its seed group to Danish co-operative DLF Seeds. This is despite the
$434m consideration which significantly exceeds the carrying book value of the business and
is in the upper range of independent valuation by KordaMentha. The bear investment case
is that the transaction makes PGW a much smaller and concentrated business focused solely
in New Zealand, making the business more sensitive to industry specific risks and a smaller
market capitalisation means its shares will trade with reduced liquidity. We continue to
maintain a positive view, at the current share price we estimate PGW is trading at an attractive
single digit price to earnings multiple when taking into account the remaining businesses and
distribution for shareholders from the proceeds of the sale. PGW’s 2019 Guidance also
suggests the remaining businesses are expected to perform well. We remain BUY rated on
PGW as an attractively priced agri-culture play, although there are some inherent risks due
to its potentially smaller size and concentration.

KATHMANDU (KMD:NZ / KMD:AX) HOLD: Still Hesitant on Retail
KMD appear to be somewhat immune to retail pressure after delivering another solid result
for the 2018 financial year. KMD group sales grew +11.7% from last year to $497.4m, which
was driven by solid same store sales growth in Australia and the contribution from their Oboz
acquisition. The New Zealand market appears to have now been fully saturated, with sales
down slightly with limited growth potential looking forward. Improved cost controls and
widening margins delivered operating earnings and net profit after tax both up by high double
digits. It was no doubt a solid update, however we believe the strong share price has now
reflected the positive news. As a backdrop, we still see a challenging retail climate across
Australia & NZ (particularly with Amazon and other major retail players arriving into
Australia).

Visa (V:NYSE) BUY: Money in the Bank
Despite an extremely volatile October for global markets, Visa shares appear to have come
out relatively unscathed, with the market pleased with the payment processors fourth quarter
result. Visa reported solid revenue of $5.4 billion for the quarter up +11% year on year driven
by strong consumer confidence raising transaction numbers, and total transaction volumes.
Earnings benefitted from rising revenues and lower tax rates from the tax reform act. Visa also expect revenue to continue to increase through the 2019 financial year with widening
margins expected to raise earnings per share in the mid-teens. We rate Visa as a BUY as a
medium-term investment, as it benefits from rising online transactions and the gradual global
shift to a cashless society.


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