Weekly, BUY on Spark |Sky TV |FBU |WTC |WOW

28 February 2019

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
SPARK (SPK:NZ / SPK:AX) BUY: Not Enough Sports…
SPK shares fell sharply after its 2019 first half result, which didn’t contain enough negatives
to warrant a fall of this level, in our view. One disappointment that we can point out is that the
content currently available on the Spark Sport service may not be enough excite the average
New Zealand viewer in our opinion, as the base content excludes Rugby Union (outside of
the Rugby World Cup), NRL, or Cricket. In term of the 2019 first half result, SPK saw a slight
revenue decline of -0.4% from last year due to heavy declines in legacy voice and managed
data. Fortunately, operating earnings were up +7.2% due to improved margins in key
business areas and benefits from Spark’s digitisation and automation initiatives.
Unfortunately, net profit after tax was down -5.6% due to a $28m decline in Southern Cross
dividend. Spark remain ambitious about rolling out 5G technology while the Huawei issue has
been a minor setback. The margin expansion and cost saving benefits being realised have
also increased our confidence in Spark. While there are execution risks, SPK have been agile
and at the current share price investors also receive an attractive 6.6% dividend yield. We
reiterate our buy rating for medium term investors.

SKY NETWORK TELEVISION (SKT:NZ / SKT:AX) SELL: New Sport Competition
Sky TV shares have fallen to new all-time lows after delivering their 2019 interim result, with
the pay TV operator reporting a net profit after tax of $53.6m, which was down -19.6% from
last year. The result was driven by continuous subscriber loss and falling revenues as they
struggle against increased competition. While Sky TV’s attempts to stem the bleeding by
cutting prices did result in fewer subscribers leaving their service, it did little to help their
cause. Operating earnings were down only -16.4% as cost cutting efforts partially offset the
reduction in revenue, however their major fixed cost programming rights remained flat and
are likely set to increase as competition for quality content intensifies from other distributors.
We believe Sky TV can only cut costs so far and if subscribers keep falling revenues and
earnings will continue to trend lower. With Spark Sport coming around the corner in time for
the Rugby World Cup, SKT are now entering into new territory where it could lose its
monopoly power over sport broadcasting as the battle for content heats up.

Fletcher Building (FBU:NZ / FBU:AX) BUY (High-/Risk): Return of the Dividend
Fletcher Building dropped despite posting a smaller decline in first-half earnings than
predicted, with a small upgrade to forward guidance. There are growing concerns around the
extent of the property market slowdown across Australia & NZ, and some investors were also
disappointed that Fletcher didn’t signal a capital return from the sale of its Formica unit.
Fletcher posted a net profit after tax of $89m for the first half of the 2019 financial year
compared to the -$273m loss reported last year due to the problematic cost blowouts from
its construction divisions. The return to profitably has facilitated the reinstatement of an
interim dividend of 10 cents per share – with a larger final dividend with the proceeds of the
sale of its Formica business. This was a promising but largely expected result from Fletchers.
While there are challenging times ahead, FBU are a step closer to being a multi-year
turnaround play in our view. We maintain our BUY rating for medium term investors with the
caveat that there are still considerable risks – given the likely backdrop of a property market
slowdown both in Australia and New Zealand.

WiseTech Global (WTC:AX) HOLD: Still Priced for Perfection
Shares in logistics software as a service company Wisetech Global have slipped after
releasing their 2019 first result, despite delivering a solid result with revenue of $156.7m and
net profit after tax of $23.1m which were both up +68% and 48% respectively. The solid result
was due to continual investment in its software platform and further acquisitions driving
revenue growth and maintaining impressive customer retention figures. The shares fell due
to management maintaining their revenue and earnings guidance for the 2019 financial year,
with the market anticipating another guidance upgrade. A week later, WTC shares slipped
again, as they downgraded earnings guidance for the 2019 full year, following the acquisition
of Containerchain, but upgraded revenue guidance. The extreme moves experienced by
WTC shares this year reinforce our concerns around the company’s expensive valuation,
with the market pricing in a tremendous amount of growth. WTC is a quality company,
however performance may miss the market expectations with the bar set high. Hence, we
remain HOLD rated.

WOOLWORTHS (WOW:AX) SELL: Outlook Remains Bleak
Shares in retail giant WOW fell sharply after their 2019 first half result failed to meet
managements ambitious targets, given their recent efforts to improve the business. Group sales from continuing operations for the half were up +2.3% from last year to $30.6 billion,
driven by their largest business division, Australian food. Australian food and Big W
experienced modest improvements, but were limited by tough trading conditions with
increased competitor activity, as well as poor weather which also severely impacting earnings
for its Endeavour drinks business. While WOW is currently doing well, delivering some
earnings growth in a challenging industry, we think it is only a matter of time before
competition begins to intensify and we begin to see weaker margins and earnings fall. Not
only that, we are more sceptical than WOW who are adamant on a recovery of their Big W
businesses, which is finding it difficult to pull a profit against the likes of K mart and Target.

weekly 27 Feb 19

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