Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
ELDERS LIMITED (ELD:AX) BUY: Another Acquisition
ELD shares went into a trading halt as it announced it will undertake an equity raise to fund the
acquisition of Australian Independent Rural Retailers (AIRR), a member-based buying and marketing
company for independent rural merchandise and pet and produce stores for $157m. The rationale
for the acquisition is that AIRR is large scale wholesale business, with a strong track record that can
supplement and enhance Elder’s existing distribution and logistics network and coverage. At the
same time Elders will be able to benefit from approximately ~$8m of net synergies and provide low
double-digit earnings per share accretion (post synergy). Approximately $137m will be raised, $97m
for a 1 to 6.70 pro-rata entitlement offer from existing shareholders and a $40m institutional
placement to cover the purchase price, transaction costs and repayment of debt. All shares are issued
at $5.55, representing a -9.5% discount to Elders last close price of $6.13. We would suggest Elders
shareholders to take up the entitlement offer. The addition of AIRR will help further diversify Elder’s
business allowing them to partially offset or mitigate the effects of one-off industry specific risks
which would have been worse for other specialised agriculture suppliers, while adding value to
existing Elders shareholders. We continue to see Elder’s as a key benefactor of our ‘dining boom’
investment thematic (we see multi-year demand for food from a growing Asian middle class) given
its diverse agribusiness portfolio and strategic plan to seek further growth both organically and via
acquisition.
DELEGAT GROUP (DGL:NZ) BUY: Fruitful Growth
DGL continued its strong run in 2019, reaching all time highs as market sentiment continues to remain
positive for New Zealand’s largest listed winemaker. Despite announcing a weaker harvest for 2019
with volumes down -11% from last year due to unfavourable weather conditions, DGL said they have
adequate inventory to maintain sales guidance. DGL released another solid interim result for the
2019 financial year, delivering record operating net profit after tax of $31.4m, up +17% from last
year. This was boosted by record global case sales volume of 1.58m, up +14% from last year lifting
operating revenue. The standout being UK, Ireland and Europe region where case sales volume grew
+31% from last year thanks to a new distribution listing with a major UK independent co-operative.
DGL expects global case sales to grow 7% compounded over the next three years, with the growthsupported by additional capital expenditure into expanding capacity. DGL expects to spend $33m in 2019 to develop another 136 hectare vineyard, which will step up significantly in the 2020 financial
year onwards with another 575 hectares of vineyard to be developed. DGL do trade at a 22x forward
price to earnings multiple which is not cheap but we believe the valuation is justified given the
company’s solid operational performance and track record – which has seen us experience strong
returns since as buyers of the stock since 2016.
Coca-Cola Amatil (CCL:AX) HOLD: Stabilising the Core
Shares in CCL have staged a sizeable recovery as of late. This has come despite providing no real
surprises at their AGM, reiterating 2019 will be another ‘transition year’ as CCL continues to invest
heavily into their Australian business. The market reacted positively to CCL’s trading update as they
surprisingly reversed the decline in beverage sales in NSW following heavy investment in sales staff,
as expectations were that sales would continue to fall further as CCL’s core Australian business
struggles with prevailing headwinds. CCL also announced it has successfully completed the sale of its
SPC business, for $40m, realising a profit on sale of around $10m to $15m, after CCL effectively wrote
down the value of the business down to zero. While CCL is facing headwinds in its core Australian
business, management are focussed on delivering medium term earnings growth. At current
valuations we believe CCL shares are now fairly priced given the possibility earnings and dividends
could remain flat if management aren’t able execute on their growth plan. We would wait for some
share price consolidation for CCL before considering CCL as a suitable investment for income seeking
investors with a tolerance for risk, or for more certainty on their ability to deliver growth in Australia.
HARVEY NORMAN (HVN:AX) SELL: Overseas Support
Shares in retailer HVN have been on a strong run since delivering a better than expected result for
the first half of 2019 financial year. HVN delivered an underlying net profit before tax of $297.04m
for the half, up +0.3% from last year (which excludes net property revaluations, joint venture losses
and impairment losses against KEH partnership). The result was driven by solid overseas company
operated retail stores, particularly in Malaysia and Ireland, offsetting weaker franchising operations
in Australia. The recent share price run has been due to a shift in market sentiment following the
Australian election, and cut in interest rates which are expected to have potential positive impact on
both consumer spending and the housing market. Many analysts appear to have a more upbeat view
upgrading their recommendations on the retailer as consumer confidence is likely to return boosting discretionary spending. We continue to have a negative outlook and believe things are more likely
going to get worse for the retailer. We believe the highs of the Australian and NZ housing markets
are behind us, following a sizeable fall we anticipate the market to stabilise from here – meaning no
increased wealth effect which has had traditionally helped boost strong retail spending (particularly
on household furniture and electronics) in the past. The arrival of Amazon and competition
intensifying from JB Hi fi and Kogan, and at the same time a weakening AUD (which will lead to higher
cost of goods) will result in lower sales revenue and weaker margins impacting profits going forward
in HVN’s core markets, in our view. Despite a ‘potential’ boost in consumer confidence, we believe
intensifying competition and weaker economic outlook in Australia and New Zealand will continue
to weigh down on HVN’s earnings given the nature of their products.
JP Morgan Chase (JPM:NYSE) HOLD: Restricted by Lower Rates
JP Morgan (JPM) beat expectations on both on the top and bottom line in its 2nd quarter result, but
the share price reaction was muted given pressure on interest margins. Revenue for the quarter was
$29.57 billion, which was up +4.2% on the same corresponding period last year and more importantly
beat market expectations by $1.05 billion, due to higher net interest revenue which benefited from
higher interest rates and balance sheet growth and mix, shifting from home loans to credit card loans
and wealth management. Net income for the quarter was $9.652 billion, up +16% from the same
corresponding quarter last year. Earnings per share were $2.82, beating market expectations by 33
cents per share, and up +23% 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 $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, our
rating is a HOLD given the lack of upside potential in a low interest rate environment and potentially
slowing US economy.