Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
FLETCHER BUILDING (FBU:NZ / FBU:AX) HOLD: Waiting for the Dust to Settle
Shares in FBU have entered into a trading halt as they announced a $750m capital raise, as part of a
refinancing plan to strengthen their balance sheet and gain support from US lenders after previously
breaching debt covenants (which includes the potential sale of FBU’s Formica and Roof Tile Group businesses).
Prior to the capital raise, FBU shares jumped as media sources reported Australian Retail Giant
Wesfarmers had bought a 3% to 4% stake in FBU and was considering a full takeover. On the next
trading day an Australian Fund Manager Ellerston Capital notified the market that they had increased
their interest to 5.1% as they believe FBU may be a “turnaround story”. The rationale from large
investors suggests that once FBU exits out of their problematic Building + Interiors (B+I) unit, the
current share price offers value in terms of buying the other business divisions which are performing
well.
Based on current valuations we believe there is some upside potential for longer term investors,
which has been backed up by interest from the large investors touched on above. However, we would
like to see how the capital raise plays out (a rights issue has been announced at $4.80 per share) and
wait for the dust to settle around the restructuring of FBU’s balance sheet before considering
changing our recommendation.
NEXT DC (NXT:AX) BUY: Another Record Result
NXT announced another solid result for the first half of the 2018 financial year, as the data storage
company posted revenue of $77.5m which was up +32% from last year. The growth in revenue was
fuelled by strong customer growth as the demand for data storage services begin to rise in the new
‘data age’. Operating earnings for NEXTDC also grew to record levels as the company begins to
achieve scale of operations. The result reinforces our investment thematic that data continues to
grow at a tremendous rate, and therefore the demand to store it securely and reliably.
MACQUARIE GROUP (MQG:AX) BUY (High Risk): Long Term Opportunities
MQG continues to reap rewards as the investment bank benefits from its transformation to a more
stable annuity style business. During the recent investor briefing, MQG upgraded its profit outlook
for the 2018 financial year, expecting a +10% improvement on their record 2017 result. The investor
briefing also included MQG’s long term investment opportunities, focusing on Energy (particularly
renewable energy), Infrastructure and Technology. Research suggests that global investment into
these areas is set to be in the trillions of dollars over the next decade. While MQG’s business is driven
by volatile factors such as equity market conditions and exchange rate moves, we believe conditions
could continue to swing in MQG’s favour.
METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High-Risk): Fresh Management, Fresh
Start?
MPG shares have started to recover after its shares fell to an all-time low of 71 cents after exiting the
NZX 50 index. MPG recently released a trading update for the 2018 financial year although it appears
this news was already expected by the market. The market appears to have lost faith in management
who have performed very poorly, and we view the recent departure of the Nigel Rigby (CEO) as a
positive in terms of refreshing MPG’s management team. If MPG can find more capable leaders, we
believe the medium-term construction backdrop should remain supportive. MPG currently trades on
an 8x price to earnings multiple and offers a dividend yield of 8%.
QBE INSURANCE (QBE:AX) BUY: Turnaround?
It came as no surprise when global insurer QBE released their 2017 full year result, posting a reported
net loss after tax of -$1,249m, which was in line with its most recent profit downgrade – due to the
number of large scale weather catastrophes which saw a fall from the previous year’s net profit after
tax of $844m. There is potential for a turnaround as new CEO Pat Regan plans to exit poor performing
operations as they focus on core markets to improve quality and consistency within their results, as
well as refreshing the leadership team (who have developed a track record of disappointing the
market). As changes won’t happen overnight, QBE is more suited for patient investors with a
medium-term view. Further, QBE is one of the only Australasian listed company’s which benefits
directly from higher US interest rates (as it improves QBE’s investment income).
NETFLIX (NFLX:NASDAQ) BUY (High-Risk): “We Strive to Entertain”
It was another excellent quarter for Netflix as the company continues to outperform expectations,
adding another 7.41m subscribers. Revenues grew +43% year over year in the 1st quarter, the fastest
pace in the history of the streaming business. The majority of the growth is now being driven
internationally as Netflix expands their partnerships to increase reach and awareness overseas, while
introducing quality new content both domestically and abroad to meet the diverse taste of their
global subscribers. In saying that, arguably a bigger surprise was that Netflix was able to achieve
double digit growth across their US domestic subscriber numbers, indicating the market has not yet
hit a saturation point.