Weekly, EBOS | BHP | SPK | WTC | WES | IVC

2 March 2020

Weekly Report

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

EBOS Group (EBO:NZ / EBO:AX) BUY: Relative Value in Healthcare
EBOS shares traded higher after the health and animal care products delivered a solid result for the first of 2020 financial year, performing better than the market had anticipated. Net profit after tax for the first half of the 2020 financial year was $81.7m, up +21.8% from the same corresponding period last year driven by strong performance across most key segments. As expected, the Chemist Warehouse pharmaceutical wholesale contract which commenced 1st July 2019 contributed with solid growth as well as the medical device acquisition. Institutional Healthcare and Animal Care provided strong organic growth, with top line growth partially offset by margin pressure across some segments. At the current
level of ~24x price to earnings the stock looks fairly priced as a defensive healthcare play, and offers relative value versus other quality healthcare stocks, especially in an expensive market. Overall, we continue to remain positive given our healthcare investment thematic and EBOS’s track record of delivering earnings growth year on year.

BHP BILLITON (BHP:AX) BUY: Short Term Uncertainty
BHP shares have slipped on the back of lower iron prices due to economic slowdown uncertainty caused by the coronavirus impacting short-term demand for iron ore. BHP announced that there could be further commodity price pressure if containment procedures for coronavirus drag on longer than expected. This masked what was a somewhat solid first half result for the first half of the 2020 financial year, as BHP’s underlying net profit after tax rose +29% from last year to $5.2 billion, reflecting stable operating performance, higher iron ore prices and favourable exchange rate movements, all partially offset by lower volumes due to planned outages, petroleum natural field decline and copper grade decline. The result was strong but slightly below analysts’ expectations, while offering an attractive US$0.65 per
share interim dividend (was up +18% from last year) which was also modest as BHP want to take a conservative approach to their balance sheet and net debt, given possibility of near-term weakness. We continue to remain positive on BHP’s outlook (as we assume a return to normal economic activity after the coronavirus is fully contained), as their cash generative abilities remain strong – albeit there is the risk of near-term weakness. BHP still offer investors an attractive 5.5% dividend which should support the current share price and our BUY rating at current levels.

SPARK (SPK:NZ / SPK:AX) BUY: Defensive BUY
Spark shares continue to trend higher, after delivering a solid result for the first half of the 2020 financial year and given its defensive nature has come out relatively unscathed so far following the market-wide coronavirus sell-off to date. Spark reported operating revenue of $1,824m up +3.9% from last year reflecting strong performance across mobile, cloud security and service management, and broadband, offsetting further declines in voice revenue – which is now becoming a smaller part of Spark’s business. Net profit after tax rose +9.2% from last year to $167m, as the telecommunications company made inroads into the increasingly valuable mobile market and continued to benefit from its cost-cutting drive.
The major highlight being the mobile business gaining now with 40.1% market share, the highest since 2012. Spark will be paying an interim dividend of 12.5 cents per share and reaffirmed their 2020 full year dividend will remain unchanged at 25 cents per share, providing investors a dividend yield of 5.3% at current levels which is attractive in a low interest rate environment. On top of this, its more defensive nature as a utility provides some certainty as coronavirus fear continues to spread – creating uncertainty around the global economic outlook. The margin expansion and continual investment into growing core as well as entering into new markets have supported our confidence in Spark and helped offset the tailwind of weaker voice business. We maintain our BUY recommendation given the dividend yield and upside potential from their digital businesses and benefits from a more agile and low-cost business model, albeit there always some execution risks.

WiseTech Global (WTC:AX) HOLD: Sensitive Valuation
Logistics software as a service company WiseTech (WTC) plummeted after materially downgrading their earnings for the 2020 financial year due to the coronavirus outbreak looking set to slow down global trade in the second half, despite

reporting reasonably solid numbers for the first half. WTC now expects operating earnings (EBITDA) for 2020 full year to be between $114m and $132m, representing growth in the region of 5% to 22%, which is a fail mark for a stock trading with such extremely high growth expectations. For the first half of 2020 financial year WTC reported a +31% increase in revenue to $205.9m driven by both organic and growth from newly acquired customers. Operating earnings (EBITDA)
also grew strongly up +29% from last year to $62.5m and was trending on track to achieve initial earnings guidance growth of +34% to 42% for the full year. Under normal conditions, WTC were able to continue to deliver high quality growth reflecting the strength in the product as well as benefitting from their continual efforts to expand their offering and platform. Recent share price dynamics reinforce our concerns around the company’s expensive valuation. At current levels we now on the fence, hesitant on the premium still being paid (based on valuation metrics) however the overall business growth opportunity remains sound. We currently maintain our HOLD rating as there may be more room for
further share price slippage although the share price falls are making valuation look more reasonable.

WESFARMERS (WES:AX) HOLD: Cash to Spend
Retail conglomerate Wesfarmers (WES) slipped with the market due to the coronavirus fears plaguing markets. However, prior to that WES shares were trending upwards after releasing a solid first half result as well as announcing the sale of its 4.9% stake in Coles for ~$1.1 billion, bringing their total ownership down to 10.1%. Wesfarmers net profit after tax from continuing operations increased by +5.7% from last year to $1,142m. With the current portfolio of businesses reporting strong results and generating improved shareholder return following a successful repositioning of their portfolio. Group revenue rose +6% from last year to $15.25 billion driven by continual star performer Bunnings, which now contributes over half of Wesfarmers earnings, as well as positive contributions by Kmart and Officeworks. Group
operating earnings (EBIT) was down -0.5% from last year to $1,637m, as better sales performance was offset by weaker margins and increased investment in retail offering and weaker earnings performance from. Interest rate cuts have made WES dividend appear more attractive to income investors. We remain HOLD rated on WES based on its current valuation still faces some near-term market uncertainty as well as maintaining our pessimistic view on the retail sector given intense rivalry. We still continue to view the business more positively than rival Woolworths given the current portfolio of businesses, with additional funds to make an attractive acquisition.

INVOCARE (IVC:AX) BUY: Ramp up Rejuvenation Work
Funeral services company InvoCare (IVC) shares surged after reporting a solid result for the 2019 financial year, ignoring negative sentiment surrounding the coronavirus given its minimal exposure to the global economy. Australia’s biggest funerals group reported a net profit after tax of $59.2m, which jumped +54.6% from the previous year with death rates climbing by +2.9% returning back to long-term trend, after a 3.3% decline in 2018. After a tough 2018 for Invocare, which saw lower death volumes in Australia, 2019 saw a return back to more normalising levels. On top of that meaningful contributions from acquisitions made over the last year and completion of a number of rejuvenated sites all drove
revenue up +3.5% from last year to $494.1m, and operating earnings by +21.4% from last year to $144.4m. The result was partially offset by declines from unrenovated location and disruptions from remedial works – with benefits not fully realised due to disruptions. Given the success of the rejuvenated sites, IVC will be ramping up its upgrading works adding another 14 more sites to the 2020 pipeline, fuelling long-term growth but limiting or offsetting near-term growth.

01-Mar-20

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