Weekly, Fonterra | ALL| MPG| RIO | BGP

31 March 2019

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
FONTERRA (FSF:NZ / FSF:AX) HOLD: Fonterra Feeling the Heat
Shares in dairy giant FSF have fallen to all-time lows after cutting its forecast earnings and
announcing it won’t be paying an interim dividend, a month before reporting their 2019 interim
result. Fonterra managed to deliver a net profit for the 2019 interim result of $80m, compared
to a reported loss of $348m in the previous year. Unfortunately, normalised earnings (EBIT)
were down -29% from last year to $323m despite a steady performance from New Zealand
ingredients, which was offset by challenges in Australia, negatively impacting margins.
While sales volumes were up +2% from last year to 10.7 billion LME, revenue fell -1% from
last year down to $9.7 billion due to lower overall pricing. Fonterra were also plagued with
weaker margins across most business divisions and locations which didn’t help the bottom
line. On a positive note, Fonterra remain on track with its goal to reduce debt by $800m by
the end of the year as it continues to review its portfolio, selling non-core businesses. The
review should help strengthen its balance sheet. reducing debt and allowing the co-operative
to focus on its core business – albeit shareholders would have to be patient as the potential
turnaround won’t happen overnight. Fonterra has failed to deliver on its promised “value-add”
strategy to date. We recently removed FSF from our model portfolio as without the ability to
execute on their strategy effectively, we do not believe they will be able to deliver a
meaningful return to shareholders (adding to the inherent issues with the company’s
structure). We will watch how its portfolio review & potential restructure plays out, as these
changes will likely take a long time to implement and we are in no rush to buy back into FSF.

Aristocrat Leisure Limited (ALL.AX) BUY: On track for further Digital Growth
Aristocrat shares have made a recovery in 2019, after being hit hard by last year’s market
volatility with investors questioning Aristocrat’s “expensive” valuation and future growth
prospects. At their recent AGM, Aristocrat re-iterated they are tracking in-line with their plan
for continued growth for 2019, with help from its recent acquisitions to expand into the larger
social gaming market – expected to have a total market share of about $50billion. Their
existing land-based business will experience incremental gains with no major casino
expansions expected in 2019 financial year. We welcome the recent recovery and believe nothing has changed fundamentally for Aristocrat’s business and maintain our BUY rating

METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High-Risk): Soft Australian
Performance
MPG shares have plunged back close to all-time lows after cutting profit guidance once again,
and the company now expects annual operating profit will be about -12% lower than the last
time it downgraded (in November). MPG expects its 2019 full year earnings (EBIT) to be
$25m, down from its previous guidance of $28m (MPG’s full year results are being announced
on 23rd of May.
The downgrade is due to poor performance from its Australian Division, with its improvements
in internal operations lagging behind NZ combined with difficult market conditions. A tough operating environment in Australia is not “new news”, and arguably MPG may be less exposed to the downturn, as they primarily serve the detached housing and alterations market, while the slow-down is currently heavily impacting the volatile multi-residential market. MPG are making efforts to improve internally operations, with it promising to hear New Zealand is on track and that MPG are expected to remain profitable. MPG’s share price currently reflects a lot of negativity given weaker earnings guidance, a softening market and intense competition. We continue to believe there is still a chance of a turnaround – given the bar has been set low. We leave our recommendation unchanged, although highlight there
are significant risks given challenging market conditions across both side of the Tasman.

RIO TINTO (RIO:AX) HOLD: Riding the Iron Ore Wave
RIO shares have rallied over +20% this year, following a surge in the iron ore price. Iron Ore
is currently trading at near four-year highs after a mining disaster in Brazil cost 60 lives, with
expectations that supply could be restricted following strong new regulations and a crack-
down on current practices.
RIO also announced another solid result for the 2018 financial year, with the stand out of the
result was the record $13.5 billion returned to shareholders, in the form of ordinary dividends,
special dividends and share buy backs. This was due to reported net profit after tax was
$13.6 billion, up +56% from last year, reflecting $4.6 billion of gains on disposals of
businesses and land. We believe RIO is fully priced at the moment & see limited near term
upside, reflecting the recent surge in the price of iron ore. While management are focused on
delivering value to shareholders, RIO’s high sensitivity to the iron ore price does make it a
higher risk investment and a play on the price of iron ore.

Briscoes Group (BGP:NZX) HOLD: Decent Result Given Challenging Conditions
BGP managed to deliver a surprisingly decent result for the 2018 financial year, despite bad weather around Christmas making things “challenging” for the retailer, on top of other macro-levels headwinds. The BGP share price was little changed even after releasing a record net profit after tax of $63.39m for the year, which was up +3.3% from last year. The improved profit was driven by modest sales growth, as well a slight margin improvement and an increased dividend received from its investment in Kathmandu.
Management outlined that the economic outlook remains uncertain, flagging consumer confidence, increased wage pressure, erratic fuel pricing and a challenging New Zealand dollar (increases price paid for inventory), but believe they will be able to overcome these factors with an improved shopping experience. We are not so confident and believe that emerging macro-level headwinds will tighten margins and could see sales and profits fall over the medium-term. In saying that, Briscoes is our top retail sector pick.

27-Mar-19

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