Weekly, Buy the Dip? A2 Milk, Treasury Wines |IFT|PPH|MYR|ALRM

24 May 2018

Weekly Report

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

New Stock Reports
A2 MILK (:NZ / A2M:AX) HOLD: Priced for Perfection
Shares in market darling A2 Milk plummeted on the back of its 2018 third quarter trading
update. Management provided full year revenue guidance of between $900 million and $920
million, which is a +64 to +67% increase on 2017 full year revenue figures. While these
numbers look impressive, the market was looking for more with consensus expectations at
$950 million revenue for the 2018 full year. A2’s new guidance implies approximately +50%
revenue growth in the 4th quarter and is a substantial slowdown from the phenomenal growth
rates achieved recently. We have been HOLD rated on A2 for the very reason that the market
may “get ahead of itself”, and at some point A2 is likely to hit a speedbump and miss the high
bar set by the market.
There is no doubt we are positive on the A2 story given how it fits with our “dining boom”
investment theme, and we are watching share price action closely – as at some point we
believe the share price consolidation will mean A2 shares are attractively priced to an extent
to warrant a BUY rating (we now forecast A2 is trading at a price earnings multiple of 32x).

TREASURY WINE ESTATES (TWE:AX) BUY: Buy the Dip?
TWE shares fell after media reports that a few large wholesalers in China are struggling to
sell some of TWE’s less desirable brands which has resulted in significant discounting as
wholesaler’s struggle to sell with two to three years’ worth of stock sitting in warehouses. The
issue arises when Chinese wholesalers are forced to buy less desirable brands in-order to
gain access to their popular Penfold’s brand, which is one of the best-known wine brands on
the mainland. TWE stated they are “comfortable with sustainability of its operating model in
China, to build a portfolio of brands… and its disciplined approach to managing inventory
levels with its customers”. TWE also cautioned against reliance on feedback from selected
customers in China.
We think the news from China has to be taken with a grain of salt, and it is hard to tell if the
reports are either exaggerated or coming from a disgruntled distributor for example. While
China is a key market for TWE, they are also making significant inroads into the US and
momentum looks strong across Europe, Australia & NZ. Clearly the news has come as a
shock for this recent market darling which has seen a sharp share price fall. We reiterate our
BUY rating for medium term investors.

PUSHPAY (PPH:NZ / PPH:AX) BUY (High-Risk): Over-reaction
Shares in PPH were volatile after releasing their 2018 full year result dropping as much as –
10% before ending the day down -5% (before now recovering to back above $4). The result
follows on from last month’s quarterly trading update, which was also initially received
negatively by the market. As with the quarterly update, we were surprised to see such a sharp
drop given most of the key numbers and issues were well flagged in the quarterly update
(although clearly the announcement disappointed some investors in the market). One things
which did stand out to us is the third-party processing fees, which represented a high
proportion of processing revenue at 58%.

Pushpay operates with significant fundamental tailwinds as societal mobile adoption
becomes entrenched and as established economies accelerate towards a cashless
society. The company is quickly becoming a dominant player in a niche that until very
recently has been under appreciated by the market in terms of size and scale. We see no
change to our investment thesis post the announcement and reiterate our BUY.

INFRATIL (IFT:NZ / IFT:AX) BUY: Another Upgrade
Infrastructure investment company IFT shares rallied after announcing their 2018 full year
result which outperformed earlier earnings guidance. Underlying operating earnings
(EBITDAF) rose +6.3% from last year to $552.4m and above prior forecast guidance of
$510m to $525m due to strong performance from Trustpower, Wellington Airport and
Canberra Data Centres. Infratil paid a final dividend of 10.75 cents per share, as it continues
to pay a growing dividend. We highlight that management have had a long track record of
delivering strong performance. In a relatively expensive market, in our view IFT offers a solid
dividend and compelling value for long term investors.

MYER HOLDINGS LIMITED (MYR:AX) HOLD: New CEO, New Myer?
MYR shares appear to be finding a base after the struggling retailer’s share price almost
halved since the start of the year. Myer has announced John King will be their new and more
experienced CEO and Managing director. King appears to have received some confidence
in his ability to turn things around, with three company directors making sizeable purchases
for Myer shares. Last week, Myer released their third quarter trading update which was not
impressive, but the share price jumped as the market had expected worse. This was
interesting as in recent memory updates have only been negatively received.

AlarmCom (ALRM:Nasdaq) Buy (High-Risk):
ALRM delivered a solid first quarter result for the 2018 financial year with revenue of $92.8m
up +25% from last year. The growth came from the SaaS and license revenue, with the
acquisition of Icontrol Networks last year adding an additional $7.6m from the same
corresponding period last year. Due to the high margin nature of Alarm.com’s SaaS and
license revenue, net income after tax was up +163% from the same corresponding period
last year to $10.5m. Alarm.com expects its revenue growth rate to slow now that that
acquisition is lapped. Alarm.com still expects its adjusted earnings to soar this year, though,
and investors got a preview of that in the company’s first-quarter report.

Weekly 24 May 2018

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