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
SKYCITY ENTERTAINMENT (SKC:NZ / SKC:AX) BUY: Important IB Recovery
SkyCity shares have started the year strong, and rallied after raising their guidance for 2019 first half earnings, which have been better than expected due to strong performance from their core Auckland operations and International Business (VIP) making a healthy recovery. With SKC’s core businesses performing better and the recent disposal of their struggling Darwin casino, SKC are expecting a better result for the 2019 financial year. We have been vocal supporters and continue to believe SKC shares are attractively priced in a relatively expensive market, paying an attractive 5.3% dividend yield. We also see a continued tourism tailwind and major growth projects supporting medium term growth.
Z ENERGY (ZEL:NZ / ZEL:AX) HOLD: Relief at the Margins
There was finally something to cheer about for Z Energy investors, as the company increased
its full-year earnings guidance by more than $15 million due to improved margins following
the sharp drop in oil prices late last year. This will enable ZEL to deliver operating earnings
of between $420m and $450m for the year ending March 31. Keep in mind that while earnings
have been upgraded, figures are still likely to fall short of the $449m operating earnings
delivered in 2018. To add to this, there is government scrutiny & regulatory uncertainty, with
the Commerce Commission into fuel prices making last year very difficult for Z Energy
shareholders. While the news has been a welcome surprise for shareholders with some near-
term margin relief, once again, thinking longer term we also believe there is a huge
uncertainty around the company imposed by the potential proliferation of electric vehicles.
LYNAS (LYC:AX) BUY (High-Risk): Regulatory Bet
Lynas shares have taken a hit since we initiated research coverage, after the Malaysian government ordered it must remove the radioactive waste that it had accumulated due to its activities over the past six years if it wants to continue operating in this country and extend its license. Lynas will also need to construct a permanent waste disposal facility or export the waste if an adequate site cannot be found. 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, as a miner of a commodity it is exposed to pricing risk, and the hazardous nature of processing the rare earths means it is also prone to regulatory
risk. Unfortunately, regulatory risk at its LAMP appears to be the largest risk facing Lynas at the moment, as the demands by the Malaysian government have weighed down heavily on the share price recently. Management appear confident they can appeal the conditions imposed by the government, as well as having some support from the Japanese government. For these reasons we maintain our recommendation of Lynas with a High-Risk BUY, with potential upside if they are able to sway the Malaysian government towards their favour.
CALTEX AUSTRALIA (CTX:AX) HOLD: Pressure at the Pump
Caltex shares slumped after announcing weaker than expected earnings guidance for the
2018 financial year. Caltex expects 2018 replacement cost net profit to be between $533m
and $553m, down -15% from last year. The downgrade was driven by weaker refining
margins, resulting in Lytton refining operating earnings that were half of last year, offsetting
gains made by increased volume from its Fuels and infrastructure business. Food and
Convenience operating earnings (EBIT) are also expected to be -10% lower than last year
due to overall rising crude oil prices for most of the year impacting volumes and margins, as
well as the ongoing site transitions from franchise operations. The retail fuel market continues
to be a very challenging industry facing medium term headwinds (similar to Z Energy) , and
we are glad we have exited early.
TPG TELECOM (TPM:AX) HOLD: Reducing Regulatory Risk
TPG shares jumped after announcing it would no longer be rolling out its own mobile network
in Australia. The market has viewed this as potentially swaying the ACCC decision towards
approving TPG’s merger with Vodafone, as the merger would have less effect on reducing
the competitive landscape of the Australian mobile industry as there is no longer a fourth
player entering the market. TPG have said the decision was made simply due to external
factors outside of TPM’s control, due to the ban of Huawei’s equipment – although there is
scepticism the decision was made to pressure the ACCC. We believe there are still risks and
TPM’s share price could swing either way based on ACCC’s decision in March. For that
reason, we maintain our HOLD rating.