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
BOOKING HOLDINGS (BKNG:NASDAQ) BUY: Initiation of Coverage
Booking Holdings primary activity is to provide online booking services with a focus on travel
related and specifically hotel booking services. Chances are that if you have done any travel
or ever booked a hotel room then you are familiar with the company and its brand. The most
popular and significant of these brands is Booking.com. In this sense it fits with our tourism
boom investment theme.
It is when you look at the numbers that you realise how good this company truly is. When
you look at the historic revenue growth you can see the winds that are blowing at the back of
the company, with revenue almost doubling from 2013 to $14.5bn in 2018 this had more than
doubled to $14.5 billion. Further, the company has been able to maintain and expand its
operating margins. The company has a strong balance sheet with $6.2 billion sitting in cash
and equivalents. The company has also started heavily buying back shares. Booking
Holdings generates an amazing return on capital, and is reasonably valued at 18x earnings.
A key risk to consider, particularly in the online space as always is competition.
GENESIS ENERGY (GNE:NZ / GNE:AX) HOLD: Downgrade to HOLD on Valuation
GNE and other NZ energy stocks have been on a strong rally recently as the prospects of
lower interest rates makes more defensive companies that pay a stable dividend a more
desirable place to park your money. Genesis Energy remains our top pick in the sector –
primarily due to its diverse production base. But given its strong share price run it is now only
paying a relatively modest dividend yield of 5.4% – and we are downgrading our
recommendation to HOLD on valuation grounds. Genesis also delivered a better than
expected result for the first half of the 2019 financial year delivering operating earnings of
$196m, which were down -2% despite lower electricity generation volumes due to outages
and constrained gas production.
LYNAS CORP (LYC:AX) BUY (High-Risk): Takeover Target
LYC shares surged on the back of a takeover offer from conglomerate Wesfarmers who had
made a conditional offer to acquire the company for $2.25 per share. The offer was at +44% premium to the prior trading price, but has been swiftly rejected by Lynas who see greater upside potential. It appears to be an opportunistic bid from Wesfarmers given its share price had been hit due to regulatory uncertainty in Malaysia over getting its operating license extended. Lynas also released their 2019 first half result which delivered a much weaker net profit after tax of $19.1m, due to significantly lower sale prices of NdPr, and higher costs associated with the increased production. In our view, Lynas provides an attractive investment for those wanting to gain indirect exposure to electric vehicle theme – which is a
strong multi-year tailwind. However, it is exposed to pricing risk, and the hazardous nature of processing the rare earths means it is also prone to regulatory risk.
KATHMANDU (KMD:NZ / KMD:AX) HOLD: Consumer Confidence Down
KMD shares fell on its 2019 interim result, despite lifting its net profit after tax +13.8% from
last year to $14m, which was driven by improved margins, the Oboz acquisition and a one-
off tax refund of $1.1m pre-tax. Unfortunately, its core Australia and New Zealand business
failed to deliver with weak trading over the Christmas period. Potentially these are early signs
the strong run for Kathmandu is over, as it benefited from strong macro-tailwinds in the recent
past. we think consumer spending particularly on discretionary items (such as the products
Kathmandu sells) will be under the most pressure over the near term as the Australian and
New Zealand economies see falling house prices and tightening credit. We believe the share
price reflects the difficult times ahead to some extent, although we do not see much upside
potential at the current juncture.
WESFARMERS LIMITED (WES:AX) HOLD: Cash to Spend
Following a successful repositioning of its portfolio, Wesfarmer shareholders weren’t pleased
with their announcement to make a conditional offer to acquire rare earths miner Lynas Corp
for $1.5 billion. Fortunately for Wesfarmers, Lynas swiftly rejected the offer and their shares
quickly bounced back. Wesfarmers also delivered a sound result for the first half of the 2019
financial year, the stand out being the $1 per share special dividend on top of the ordinary
interim dividend of $1 per share. This was due to disposal of a number of businesses and the
demerger of Coles supermarket creating a one-off gain of $3,059m. The disposal of
businesses frees up a lot of capital for Wesfarmers to pay down debt, offer special dividends,
and allow additional funds to invest and drive growth in their existing portfolio of businesses,
as well as making relevant value add acquisitions.