Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
New Stock Reports
FLETCHER BUILDING (FBU:NZ / FBU:AX): Backing Ross – Upgrade to BUY (High Risk)
Shares in FBU jumped as new chief executive Ross Taylor set out his five-year strategy to
refocus on core businesses, stabilise the construction division, expand in Australia and exit
non-core operations. Investors were relieved to hear there were not any further provisions
made against the troubled commercial construction unit, with guidance for group full year
operating earnings excluding commercial construction reaffirmed at $680m to $720m. It is
pleasing to see that Taylor is being active in attempt to restructure the business by focusing
on growing strong performing business units and cutting out poor performing ones. He also
said he expects to slash $30 million from annual overheads through restructuring, which will
see about 90 jobs eliminated.
We have previously highlighted that we were waiting for signs of stability around FBU after
the company has clearly experienced a very challenging period. With a successful capital
raise resolving debt/balance sheet concerns (through the rights issue) and the fact that there
has not been another construction division downgrade, we are now backing Ross Taylor to
turnaround the business. We also like the cull of middle management and plans to simplify
the business. We reinstate our BUY recommendation with the caveat that there are still
considerable execution risks.
TELSTRA (TLS:AX) HOLD: Telstra Tumbles Again
Shares of telco giant Telstra continue to tumble after their strategic announcement failed to
impress the market. Expectations were optimistic heading into the announcement, which was
headlined by Telstra’s plans to split off its infrastructure assets (presumably with a view to
offload them altogether) alongside massive cost saving promises of $2.5bn per year with a
plan to cut 8000 jobs, among other things. While trading at all-time lows Telstra appears
cheap at face value. We remain on the side-lines. While we are not sell rated, we are not
buyers of Telstra as we continue to expect that competitive pressure will be overwhelming
for the incumbent telco giant. At the same time, we do acknowledge Telstra is implementing several initiatives discussed above which on balance results in our neutral rating.
PGG WRIGHTSON (PGW:NZ) BUY: Guidance Reaffirmed
After a strong rally over the past two months share in PGW have pulled back slightly after
reiterating its annual earnings guidance. PGW reaffirmed its forecast for annual earnings
between $65 million to $70 million, saying weaker performance from its Australian and South
American businesses would be offset by better trading in NZ. This once again highlights to
us the benefits of PGW’s diverse portfolio of agri assets. Takeover rumours remain in the
market and PGW is running a strategic review of its business – they are waiting to comment
on this final review later in the year. The long-term investment case remains very much intact
regardless of a takeover, in our view.
METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High-Risk): Recovery Mode
Shares in MPG appear to be in recovery mode, potentially indicating the worst may be over
after hitting an all-time low earlier this year. MPG shares rose as investors were relieved that
while Its full-year profit fell -16% to $16.3 million, this was in line with guidance it gave in April
(and not another downgrade). MPG said earnings will be relatively unchanged this year as
the company beds in its “back to basics” strategy – saying it is shifting from “expansion and
diversification, to optimisation and enhancement of our internal capability to execute”. The
market appears to have lost faith in management who have performed very poorly, and we
view the recent departure of the CEO as a positive in terms of refreshing MPG’s management
team.
CALTEX (CTX:AX) HOLD: Industry Headwinds
CTX shares have bounced higher after releasing a well-received profit guidance update. The
update was driven by strong performance from its Fuels and Infrastructure business segment,
which was partially held back by lower refinery earnings due to weaker refinery margins.
Retail and Convenience segment earnings were down from last year primarily due to the
costs and disruption associated with site transitions from franchise to company operations.
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. However, we believe with the popularity of fuel efficient (hybrid vehicles) and with mass production and uptake of cheap electric vehicles just around the corner, there will be long-term unavoidable headwinds and uncertainties for the industry.