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
Kiwi Property Group (KPG:NZ) Hold (was BUY): Downgrade to Hold
Shares in NZ’s largest listed property vehicle Kiwi Property Group (KPG) have been on a strong run this year,
largely benefiting from falling interest rates which propped up the share price of stable dividend paying stocks
and help increase the value of KGP’s property portfolio .For the 2019 financial year, KPG reported a net profit
after tax of $138.1m, up +15% from last year due to larger gains on revaluations of $47.6m compared with
$26.5m in the previous year – benefitting from strong valuation gains on its office and mixed-use properties.
Funds from operations, which is KPG’s preferred measure of operating performance that strips out revaluation
gains and other fair value movements, fell -3.9% from last year down to $106.9m, reflecting the short-term
impact of selling two non-core assets and reinvesting the proceeds into superior development opportunities
at Sylvia Park in Auckland. While Sylvia Park has been a strong performer, enjoying a competitive advantage
over other nearby malls as a destination hub, it may come under pressure with the significant redevelopment
of Westfield 277 in Newmarket (located less than 10km from Sylvia Park and in closer proximity to more
affluent households). While we remain positive on KPG as our preferred New Zealand commercial property
exposure, we downgrade our rating from a BUY down to a HOLD given its valuation (now above net tangible
asset per share) and potential competition risk from Westfield 277 facing its largest property being Sylvia Park.
FLETCHER BUILDING (FBU:NZ / FBU:AX) BUY (High-Risk): Commercial Bay Delays
Shares in Fletcher Building have been under pressure after Precinct Property said the Commercial Bay
development which is being built by Fletcher’s will now take even longer and cost an extra $10m – largely due
to the delays. Fletcher have said the delays were accounted for within earlier provisions for the high profile
project, although we would think there are clear risks here (particularly given FBU’s recent track record).
Fletcher’s also readjusted its annual earnings guidance following the completion of its Formica Sale – which is
settling a month earlier than anticipated. As a result, Fletcher now expects underlying earnings (EBIT) to be
between $620m and $650m, down from its previous guidance of $650m to $700m. This is consistent with the
lower end of its original earnings guidance when adjusted for the $30 million Formica impact. FBU are a step
closer to being a multi-year turnaround play in our view, and its share price managed to hold steady with the
guidance not as bad as initially expected. In saying that, there are still considerable execution risks given the
slowdown in Australian construction activity and major unfinished projects such as Commercial Bay.
WiseTech Global (WTC:AX) HOLD: Far Too Expensive
Shares in logistics software as a service company WTC soared to new all-time highs after a well-received
investor conference. Several Aussie tech darling stocks such as Wistech are trading at very rich valuations post
an amazing share price run in recent times. Surprisingly, WTC only reaffirmed its previous guidance (expecting
revenue growth of 47% – 53% for 2019), suggesting the market may have anticipated a downgrade. WTC also
released solid customer acquisition metrics and the importance and benefits of an integrated platform has
over specialised fragmented software in the logistics industry. To improve and expand WTC’s product offering
it must continue to invest into its software as well as acquiring business to improve its products integration.
To continue to do this WTC has successfully raised $335.9m from both institutional and retail investors to
strengthen the balance sheet and allow funding for further product development and acquisitions – which in
return improves the product offering to its customers – growing revenue per customer and earnings. 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.
GREEN CROSS HEALTH (GXH:NZ) HOLD: Tough Pill to Swallow
GXH shares managed to recover some ground after delivering a somewhat neutral 2019 full year result in our
opinion. Group revenue rose +5.6% from last year to $567.2m, helped by solid organic growth as well as the
addition of 2 more medical centres joining GXH’s medical division network. The medical division was the
standout lifting operating revenue by +34% and operating profit by +20.4% as it added another 18,000 patients
to its enrolment over the year which now totals 255,000 patients. Unfortunately, operating profit for the group
fell -2.2% from last year to $29.4m, as the medical divisions profit growth was offset by a greater loss from
Pharmacy division which is facing weaker margins and a few external challenges with funding pressure facing
the community health division not enough to offset rising labour costs for aged and residential care workers.
GXH’s pharmacy division also faces a few external challenges, while the temporary infrastructure works can
be overlooked, we believe the main headwind going forward will be low-cost retail giant Chemist Warehouse’s
entry into the NZ market, who now have six stores in Auckland. As a result, they are starting to apply significant
pricing pressure on GXH. While an issue in Auckland now, if the rollout continues towards other major centres,
we believe this will be a major headwind for GXH’s largest business division.
Amazon AMZN:NASDAQ) HOLD: One Day Delivery
Amazon delivered another solid result for first quarter of the 2019 financial year, with revenue of $59.7 billion,
up +17% from last year in line with management guidance and market expectations as the e-commerce giant
starts to show signs of deceleration, with top line growth ‘moderating’. Fortunately, it doesn’t appear to be a
cause for concern as Amazon surprised the market significantly improving operating efficiencies across all
business segments, widening operating margins to deliver net earnings per share of $7.09 per share, smashing
market expectations by $2.41 per share and more than double the same corresponding period last year. A
highlight was strong growth in subscription revenue, and Amazon’s announcement to introduce free One-Day
shipping to prime members, to improve service offerings and promote more regular online purchases for
emergency daily products. This does come at a significant ramp up in investment which Amazon has been
planning in the past as it gradually improved its delivery times, guiding for weaker earnings per share for the
next quarter as Amazon focuses on overall growth. Because Amazon operates many businesses it is difficult
to grasp how to value it, and the stock is still priced for expansive growth.
Stock ratings
Given the dynamic nature of share prices ’s rating can become out of sync with the projected total return as the share price moves. The rating
must only be viewed as valid with respect to projected total return at the time of rating or target price changes.
Individual stock ratings are determined by the projected total return on a stock.
Based on a current 12 to 36- month view of total share-holder return (percentage change in share price from current price to projected target price
plus projected dividend yield), we recommend the following:
BUY: Based on a current 12 to 36-month view of total share-holder return, we recommend that investors buy the stock
SELL: Based on a current 12 to 36-month view of total share-holder return, we recommend that investors sell the stock
HOLD: We take a neutral view on the stock 12 to 36-months out and, based on this time horizon, do not recommend either a Buy or Sell
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