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
EBOS GROUP (EBO:NZ / EBO:AX) BUY: Funding Growth
EBOS have raised $175m in a capital raise, $25m more than they had been seeking with the
increase to accommodate strong demand from both existing and new institutional investors
in NZ, Australia and offshore. The funds will initially be used to pay down bank debt and
reduce gearing before being used for strategic acquisitions, organic growth initiatives and
general corporate purposes. EBOS has had a strong track record of achieving growth through
successful acquisitions and we remain confident this success will continue, while a significant
boost in earnings will be realised next year with the commencement of their supply agreement
with Chemist Warehouse at the start of 2020 financial year. At the current level of 21x price
to earnings the stock looks fairly priced as a healthcare play, especially in an expensive
market. We remain positive given our healthcare investment thematic and EBO’s track record
of delivering earnings growth year on year. In our opinion the valuation is justified with
earnings growth expected to accelerate over the medium term from further acquisitions and
organic growth initiatives.
SYDNEY AIRPORT (SYD:AX) BUY: Flying at All-Time Highs
SYD shares have been on a strong run since the start of the year as it attracted income
seeking investors in a low interest rate environment and after delivering a record result for
the 2018 financial year. Total revenue grew +6.8% from last year helped by solid international
passenger growth growing all core businesses. Operating earnings were also up +7.2% from
last year to $1,282.6m and SYD declared an attractive full year dividend of 37.5 cents per
share, which was up +8.7% from last year. In a low interest rate market SYD continues to
pay a healthy dividend of 5.1% which is expected to grow and once again is part of the reason
for its share price performing strongly of late. There is talk that the tourism boom may be over
after SYD released weak passenger numbers for the month of March. We continue to hold a
more upbeat outlook, viewing the weak passenger numbers as likely temporary, and believe
the tourism is likely to continue, albeit at possibly more modest levels. In saying that, we
caution investors to time their entry point given SYD shares are now trading at all-time highs.
Heartland Group (HGH:NZ / HGH:AX) HOLD: Wary of Default Risk
HGH shares have made a sizeable recovery since mid-Feb in line with the broader market
after delivering a disappointing 2019 interim result earlier this year. HGH net profit for the half
was $33.1m, up +6.5% from the same corresponding period last year. Despite a solid +11.9%
increase in its finance receivables (loan book) which has been a strong contributor to HGH
profit growth in the past, the result was offset by one-off corporate restructure costs, and a
boost in impairment expense largely due to a new accounting treatment for HGH’s portfolio
of loans. Due to the one-offs, HGH downgraded their full year net profit guidance down to
$73m to $75m which was below what the market was expecting.
The risks of a slowdown in the NZ economy (which could increase the bank’s bad debts even
further) and regulatory pressure, combined with their higher risk profile (due to the nature of
their loans) has seen us hold a more cautious view on the outlook for HGH and we remain
on HOLD.
Tesla (TSLA:NASDAQ) HOLD: Back in the Red
Shares in Tesla shares sunk to the lowest level in two years, rounding out a rough week that
included worse-than-expected quarterly results and a pitch by Chief Executive Elon Musk on
autonomous cars that failed to win over investors. Tesla has swung from a profit in its fourth
quarter of 2018 to a non-GAAP loss of $2.90 per share in its first quarter of 2019. The hit to
earnings came as Tesla’s first-quarter deliveries were lower than expected due to weaker
demand for its Model S and X vehicles. Despite reporting worse-than-expected first-quarter
deliveries and a significant quarterly loss, Tesla remains optimistic about the rest of the year.
Not only does Tesla expect second-quarter deliveries to increase about 50% sequentially
and more than double on a year-over-year basis, but management expects to narrow its loss
in the second quarter and return to profitability in the third quarter. Pointing to Tesla’s
guidance for demand to increase, several analysts believe this is unrealistic, and a number
of commentators think Tesla will try to raise capital this year. From a big picture point of view,
we have said that buyers of Tesla shares in essence need to believe in the Tesla story and
Elon Musk – as an industry disruptor.
CALTEX AUSTRALIA (CTX:AX) HOLD: Refining Margins Remain Weak
CTX shares were up when it released its 2018 full year result, and at the same time
management announced a $260m off market share buyback which was successfully completed in the middle of April. Since then Caltex shares slipped after a poorly received first quarter update citing challenging times ahead with weaker refining margins likely to remain and a dip in convenience retailing returns. The retail fuel market continues to be a very challenging industry, and it is commendable that CTX have been proactive in looking at ways to add value through their supply chain and have focussed on growing premium fuels and non-Fuel sales. However, we believe with the popularity of fuel efficient (hybrid vehicles) and with mass production and uptake of affordable electric vehicles just around the corner, there will be long-term unavoidable headwinds and uncertainties for the industry. Given the share
price movement over the last 15-months we are glad we have exited early.