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
COSTA GROUP (CGC:AX) Buy the Dip
CGC shares tumbled as the former market darling announced its second profit downgrade in the
space of five months. Costa expects 2019 calendar (and new financial year) profit to be between
$57m and $66m, down from its previous guidance of $73.6 million. This will represent an increase of
0.7% and +16.6% from last year, well short of its previous guidance of “atleast +30%” net profit after
tax growth guidance announced in February. The reason for the downgrade has been due to a
number of unfortunate (but likely cyclical) events – with management citing difficult trading conditon
in Morocco, weak demand for mushrooms, discovery of a fruit fly, and water shortages to name a
few. The large fall has seen a valuation reversal as the shares had traditionally traded at a strong
premium due to the company’s ability to deliver continuously unencumbered double-digit earnings
growth figures. This highlights that companies like Costa, despite their risk mitigating efforts, aren’t
immune to shorter-term agricultural and seasonal risks. Our BUY rating remains very much intact as
nothing fundamentally has changed, with the share price fall being overplayed in our opinion,
providing an attractive entry point for medium-term investors in search of a top quality exposure to
global food & healthy eating trends.
TOURISM HOLDINGS (THL:NZ) BUY: Supportive Dividend
THL shares sank after announcing vehicle sales in the US have continued to deteriorate resulting in
new and substantially lower earnings guidance for the 2019 financial year. THL expect 2019 full year
net profit to be between $25m and $28m, down (-18% at the mid-point) from previously downgraded
guidance of around $32m. Aussie peer Apollo Tourism also announced a large profit downgrade,
further hitting investor sentiment. Accordingly, THL will be reducing capital expenditure, reducing
its fleet size and cutting operating costs in response to the weaker US market – where THL has
aggressively expanded into. Despite the significantly lower profit THL announced it will keep their
2019 full year dividend flat with the previous year, implying THL is currently trading at a healthy
dividend yield of 7.2%.
LYNAS (LYC:AX) BUY (High-Risk) News Flow Rally
Shares in rare earth miner LYC soared higher after a string of positive events and news flow helped
relieve some share price negativity and support a more positive outlook for the miner. The major
news being the escalation in the trade war between China and US, with China retaliating with a
potential ban of its exports of rare earths into the US. The outcome is being seen as a positive for
Lynas – given it is the largest producer or rare earths outside of China. The Malaysian government
also appears more likely to allow the miner to continue operating its processing plant in their country
after halting the process for renewing its licence because of waste disposal concerns. The change in
decision is partially due to the importance of Lynas’ Malaysian processing plant in the global supply
chain for rare earths, as well as LYC’s announcement to move its cracking and leaching operations
from Malaysia to Western Australia. In our view, Lynas provides an attractive investment for those
wanting to gain indirect exposure to electric vehicle theme, with the recent rally reflecting a
significant reduction in regulatory and potential market risks that have been weighing down on LYC’s
share price.
FONTERRA (FSF:NZ / FSF:AX) HOLD: All Time Lows
Shares in dairy giant FSF continue to slide, reaching all times lows after further cutting earnings
guidance for the 2019 financial year. Due to difficult trading conditions particularly in Australia and
unfavourable pricing (weakening margins) Fonterra announced a further downgrade to its earnings
forecast for the 2019 financial year down to 10 to 15 cents per share, from its previous downgrade
of 15-25 cents per share. Fonterra has narrowed its 2018/2019 forecast Farmgate milk price range
from $6.30 – $6.60 per kgMS to $6.30 to $6.40 per kgMS. On a positive note, Fonterra remains on
track with its goal to reduce debt by $800m by the end of the year as it continues to review its
portfolio, selling non-core businesses. The recent sale of Tip Top for $380m ($100m above book
value) helps in this regard and other businesses are up for review – such as Fonterra’s joint venture
with Nestle in Brazil and two wholly-owned farm-hubs in China. We have lost confidence in the
company due to their inability to execute on their strategy, and we do not believe they will be able
to deliver a meaningful return to shareholders (adding to the inherent issues with the company’s
structure). We will continue to watch how its portfolio review & potential restructure plays out from
the side lines.