Weekly, EBOS | TWE | FPH | WOW | JPM

19 October 2019

Weekly Report

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

EBOS (EBO:NZ / EBO:AX) BUY: Moving into Medical Devices
EBOS shares traded higher after the health and animal care products maker announced at their AGM that they
will be expanding into the medical devices sector with an A$34m acquisition. EBOS announced the acquisition
of two Australian medical device businesses for $34m – LMT (“Life. Movement. Technology”) and National
Surgical. The two businesses provide medical devices and services for orthopaedic, spine, neuro, plastics and
sports medicines and generate combined revenue of ~$40m. While no material impact on earnings is expected
in the near term, it illustrates that EBO is willing to extend its reach into adjacent sectors, and we back
management who have a great track record of bolt-on acquisitions. At the current level of 23x 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. We do note that organic growth could slow down from
2020, so the current head room of funds (~$300m) should be well invested to provide investors with required
returns to justify EBOS’ current share price. Overall, we continue to remain positive given our healthcare
investment thematic and EBOS’s track record of delivering earnings growth year on year.

TREASURY WINE ESTATES (TWE:AX) BUY (High-Risk): Delivering Double Digits
TWE shares jumped as the winemaker reaffirmed their guidance for the 2020 financial year, stating they are
on track to achieve +15% to +20% earnings (EBIT) growth. Chief executive officer Michael Clarke told investors
he was “pleased’ with performance over the first quarter but declined to provide specific details. The AGM
also touched on the 2019 result, thanking the success of their premiumisation strategy for driving revenue
and earnings growth – which is expected to continue to drive future earnings growth as popularity amongst
TWE’s higher valued, higher margin, Penfolds and other brands continues to grow. We continue to maintain a
positive view on TWE and believe they will continue to benefit from demand as the Chinese consumer pallet
evolves, as part of our dining boom investment theme and as a beneficiary of a weaker Aussie dollar. Albeit
the investment comes with some political risks given the recent trade tension between the US and China and
other allegations by some analysts surrounding questionable sales tactics and aggressive accounting, which
have yet to be proven true. Hence, we maintain our High-Risk BUY recommendation.

FPH shares continue to surge to all time high’s after announcing another earnings upgrade for the 2020
financial year, with both less than two-months apart. The previous upgrade in August was due to favourable
currency movements (for FPH), as at the time FPH expected the average USD:NZD to be 64 cents per share for
the remainder of the 2020 financial year. The recent guidance has FPH upgrade its 2020 full year revenue to
$1.19 billion, ($20m higher than the August guidance) and net profit after tax expected to be between $255m
to $265m ($10m higher than the August guidance) and up +24.2% from the 2019 full year result. The upgrade
is largely due to FPH receiving regulatory clearance to sell its Vitera breathing mask in the US a lot earlier than
anticipated. The Vitera breathing mask has been performing well in Australia, Canada, New Zealand and
Europe, which is an example that FPH are able to deliver on their research and development expenditure to
create new products and generate future revenue growth – maintaining strong market share in a growing
industry. Taking a bigger picture view, FPH continues to experience strong market share gain and there
remains growth potential looking forward given the tailwinds of an ageing population and our expectations
around the NZ dollar to remain relatively weak. We remain positive on the medium term outlook for FPH as a

solid defensive healthcare holding, although new investors may want to be selective on their entry point as
FPH shares are fairly valued given their recent run.

WOOLWORTHS (WOW:AX) SELL: Supermarket Focussed Growth
WOW shares continue to buck the retail trend and edged higher after delivering a surprisingly solid result for
the 2019 financial year. Reported net profit after tax jumped +56% from last year to $2,693m, boosted by the
one-off gain of $1,088m from the sale of their petrol business. Operating earnings (EBIT) from continuing
operations was down -9.6% from last due to a one off $371m write off against Big W business which is
continuing to struggle – relating to the closure of ~30 stores and 2 distribution centres. Normalised net profit
after tax from continuing operations (excluding significant items) came in +7.2% higher year on year at $1,752
million with strong earnings improvement across the core food business with all business units and Big W
reporting a lower operating loss than in the previous year. While WOW shares have done well this year with
proactive portfolio changes being well received, including the sale of its petrol business and the demerger of
its Endeavor Drinks and ALH group to focus on core operations to achieve growth. Interest rate cuts have made
WOW’s reliable dividend appear more attractive to risk adverse investors, especially as the core business
becomes more focused on food and everyday needs – which appears less volatile in the event of an economic
slowdown. We continue to believe WOW core business will succumb to greater industry pressure, especially
as supermarket industry becomes more competitive. We believe the market may have become too optimistic
and overvalued the company with a price to earnings multiple of 26x which is expensive for a company with
low growth potential in our opinion and many headwinds on the horizon.

JP Morgan Chase (JPM:NYSE) HOLD: Another Earnings Beat
JP Morgan (JPM) shares jumped on their 2019 third quarter result after beating expectations both on the top
and bottom line, demonstrating their financial strength even in challenging conditions – as performance was
supported by better consumer confidence in the US. Revenue for the quarter was a record $30.06 billion,
which was up +8.1% on the same corresponding period last year and more importantly beat market
expectations by $1.7 billion, on the back of strong non-interest revenue growth of +14% offsetting the
expected slowdown of net interest income due to tightening net interest margins. Net income for the quarter
was $9.080 billion, up +8% from the same corresponding quarter last year on stronger revenue growth whilst
being held back by higher provisions. Earnings per share were $2.68, beating market expectations by 23 cents
per share, and up +15% from last year. Previously we had anticipated interest rates in the US would steadily
rise. However, the US Federal Reserve is now likely on an easing path. This will limit JPM’s net interest revenue
growth, accordingly JPM has lowered guidance for net interest revenue for 2019 down to below $57.5 billion
and expects this could potentially be lower if the cuts are more aggressive than the market anticipates. While
JPM is still our performed US Banking exposure – given their ability to deliver, our rating is still a HOLD given
the lack of upside potential in a low interest rate environment and potentially slowing US economy.

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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their financial planner or advisor, the merits of each recommendation for their own specific circumstances.
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