Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
COSTA GROUP (CGC:AX) BUY: 2019 – a Bad Batch
CGC shares tumbled further on their 2019 first half result as the fruit grower continues to have a troublesome year. Costa released a weak 2019 first result which was on the lower end of its previously downgraded guidance which was impacted by a number of unfortunate events, lowering first half net profit after tax by -15% from last year to $41.1m. Costa managed to lift revenue by +11.8% from last year to $573m, helped by doubling their harvest hectares in China and the acquisition of Coligan Farm. What has the market worried is management have highlighted potential downside risks, which they aim to mitigate in the 2nd half – “trading forecasting remains challenging with the potential for further downside risk”.
Costa are adamant around their medium-term growth plan and we believe many of the issues impacting the 2019, should improve. While commodity pricing for agri-businesses is notoriously difficult to predict, we believe a number of issues facing Costa will improve heading into 2020 including Morocco harvest timing, raspberry crumble elimination, and Citrus fruit fly issues. 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. We remain positive despite shorter term challenges and see Costa as set to benefit from the multi-year demand backdrop for food globally as well as being attractive to health conscience consumers & remain BUY rated.
A2 MILK (:NZ / A2M:AX) BUY (High-Risk): Getting the Job Done
A2 Milk shares dropped despite delivering another solid result for the 2019 financial year, where the milk
marketing company reported revenue of $1,304.5m and net profit after tax of $287.7m, both up +41% and +47% respectively from last year. The strong growth which was underpinned by continual brand awareness, expanding product distribution and strengthening in-market execution in their two important (growth) regions of Greater China and the US across all key product segments. In particular infant formula milk (infant nutrition) experienced strong share gain in China and Australia. A2 Milk also announced it will be exiting its UK liquid milk operations as it looks to focus on its core China and US markets for growth. The market had high expectations and while it was an impressive result, investors weren’t pleased with the weaker operating earnings margins. We are not so concerned by this – as A2 milk continue to invest heavily into marketing and capability to continue to achieve its impressive revenue growth. The recent dip now provides an attractive entry point for medium-term investors in our opinion.
WiseTech Global (WTC:AX) HOLD: Premium SaaS, Premium Price
Logistics software as a service company WTC shares soared to new record highs after delivering another
impressive result for the 2019 financial year, with revenue up +57% from last year to $348.3m, and operating earnings (EBITDA) of $108.1m up +39% from last year, both ahead of guidance provided a few months earlier at WTC’s investor conference. From a product perspective, WTC manages to ensure minimal churn of less than 1% across its CargoWise One global platform, with 99% of the revenue from this key product recurring making it one of the stickiest and best performing SaaS businesses. WTC is also renowned for its aggressive acquisition strategy in fuelling rapid international expansion, which makes total sense for a company that is acutely cash rich. Also boosting shareholders hopes for WiseTech was the announcement that it plans to expand its operations with further international operations on the horizon. Pleasingly, management expects another strong result in the 2020 financial year – with guidance for revenue growth of 26% to 32% and operating earnings growth of 34% to 42%, albeit at a slower rate than in previous years. WTC is a quality company, however we are cautious around its valuation with the market pricing in a tremendous amount of growth as one of the most expensive tech companies in the world.
EBOS GROUP (EBO:NZ / EBO:AX) BUY: 2020 Boost
Shares in EBO hit a new record high after it indicated “a significant increase” in earnings this year following a flat result for the year ended June. Net profit after tax for the year was $137.7m, flat from last year as group revenue fell -0.8% from last year to $6.93 billion, due to significantly lower hepatitis C medicine sales in Australia and the impact of reform of Australia’s pharmaceutical benefits (both reducing revenue by $425m). EBOS spent $93.6m on acquisitions and raised $175m in fresh capital during the year, with $300m to $350m available for further acquisitions while still keeping manageable debt levels. The Chemist Warehouse Group contract, which will add about $1 billion to sales, kicked in from July 1 (2019) and EBOS says the “big bang” start to supply the group’s more than 450 stores across Australia has transitioned smoothly. EBOS have an impressive track record of value accretive acquisitions in the past and we expect this to continue going forward.
At the current level of 22x price to earnings the stock looks fairly priced as a defensive healthcare play,
especially in an expensive market. In our opinion the valuation is justified with earnings growth expected to accelerate over the near-term with further upside from additional acquisitions with its excess capital.
Ooh! Media (OML:AX) BUY (High-Risk): Risks Emerge
OML shares slumped to a five-year low after the outdoor advertiser blamed poor media advertising spend in the third quarter for a cut to its 2019 full-year earnings guidance down -18% to be between $125m to $135m. The downgrade has been revenue driven by a reportedly wider drop-off in the advertising market, with large roadside billboards causing the decline on the back of lower spend from the financial and auto sector, with the weakness largely being felt by OML’s large stock of non-digital signs. Soon after, OML released their 2019 first half result, which managed to deliver a sound result for the first half of the 2019 financial year, with pro-forma (adjusting for acquisition) revenue +5% from last year to $304.9m. Growth was driven by OML’s newest and largest category Commute which lifted revenue up +13%, offsetting weakness in the Road category. While the outlook for the remainder of the year remains positive with bookings in September strengthening and fourth quarter pacing well for +6% growth.
While with any industry, advertising industry revenue is underpinned by general economic conditions
remaining stable, and a significant slowdown in the Australian economy creates a potential risk advertising spending on OOH could fall – especially non-digital signs, which it has experienced recently. With property prices now bottoming out and recent interest rates cut further down to new all-time lows and expected to remain low for longer, consumer sentiment could remain supportive. We still believe OML as set to benefit from growing spend on OOH advertising (particular digital) with advertisers shifting spend away from traditional formats over the long-term given their significant share of the overall OOH market in Australia and New Zealand. However, with a large number of non-digital signs yet to be converted means they are prone to downside risk if overall advertising spending were to fall as experienced. Given its now relatively cheaper valuation, we maintain our BUY rating but with an added high-risk caveat – taking into account weakness across their large number of non-digital signs.
AUCKLAND AIRPORT (AIA:NZ / AIA:AX) HOLD: Sky-High Valuation
Shares in AIA were lower despite releasing a sound result for the 2019 financial year, as it lifted underlying net profit after tax by +4.4% from last year to $274.7m following another record year for passenger numbers, albeit growth rates have started to weaken compared to recent years. AIA projects earnings to be flat for the coming year, as it continues to invest heavily on its infrastructure as part of its 30-year plan with passenger growth forecasted to soften over the near-term and medium-term aeronautical fees being discounted due to regulation.
We see AIA as a key beneficiary of the growing tourism industry especially over the long-term. However, we still see AIA as very expensive especially given the recent run which has been propped by income investors as opposed to business fundamentals, trading on a valuation of 41x earnings and a dividend yield of 2.4% which is now far from attractive. We see very limited upside potential given the inability to raise charges against airlines, slower passenger growth over the medium-term, as well as the significant infrastructure spend being planned which is likely to be funded by taking on more debt – with the possibility of an equity raise to fund
expansion around the corner, if expansion cannot be funded from free cash-flow.