Weekly, Fonterra Downgrade, TJX Initiation |ALL|FPH|GXH

7 June 2018

Weekly Report

Here’s your weekly update of news, analysis and research from . The full reports can be read on the
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New Stock Reports
FONTERRA (FSF:NZ / FSF:AX): Dividend Disappointment – Downgrade to HOLD
FSF shares have dropped sharply after announcing they are increasing their forecast
Farmgate milk price (what Fonterra pays farmers for milk) due to higher global demand for
dairy products. Due to the increased input costs squeezing margins, FSF made a significant
cut to its forecast dividend to just over a 3% yield. Fonterra has strong market share and
positioning in the global dairy market as a high-quality dairy provider. However, the recent
update once again highlights to us how FSF favours its farmer shareholders and was not
shareholder friendly, as the dividend being cut in half comes at the detriment of non-farmer
FSF has generally failed on its promise to deliver on its “value-add” product strategy as a way
to create value for shareholders and given their recent track record (with Beingmate Infant
formula and Danone) we are now losing confidence. To add to these issues, milk prices have
not been moving in a favourable manner for Fonterra shareholders. Despite challenging times
in the past, we remained positive given an attractive dividend. Given the dividend yield is now
much lower, we downgrade our recommendation to a HOLD until we see signs of progress
with FSF’s value add strategy.

TJX Companies (TJX:NYSE) BUY: Off Price Retailer, Off Price Stock?
TJX is an “off-price” retailer that has a long history of delivering returns to shareholders
through operational excellence. The company has a large international presence and
operates an extensive store and supplier network that would be difficult to replicate. We
believe that the company’s expanding store count and ability to increase sales on a same
store basis will continue to underpin future growth. The company has proved to be a
shareholder friendly capital allocator and has increased its dividend every year for the last 22
years by an average of 23% per year. Through on market buy backs, management have also
been able to aggressively reduce the number of shares outstanding. This has further fuelled
earnings per share growth. We believe that the company’s extensive store and supplier
network provides a durable advantage that will dull the impact of fierce competition and the
threat of disruption from Amazon. We initiate coverage of TJX with a buy recommendation.

ARISTOCRAT (ALL:AX) BUY: Online Entertainment
ALL delivered an exceptional result for the first half of the 2018 financial year, reporting solid
growth across all business segments. The digital business was the standout with revenues
tripling from last year and segment profit more than doubling from last year due to the
acquisitions of Big Fish and Plarium. ALL have been disciplined in in their focus on growth
which is now underpinned by expanding their digital content, technology and distribution
channels. ALL’s share price has re-rated higher, reflecting the transformation of its business.
We believe growth is likely to continue and for this we maintain our BUY rating given the
massive market opportunity for ALL.


FPH recorded 2018 annual profit at the higher end of its forecast range for the 2018 financial
year. However, its share price initially slipped on the back of growth outlook numbers for the
2019 financial year which were weaker than the market was expecting. The result was
underpinned by growing global demand for their new and innovative healthcare products.
Taking a bigger picture view, FPH has experienced strong market share and growth potential
looking forward remains solid in our view given the tailwinds of an ageing population and our
forecast for a weakening NZ dollar. We remain BUY rated on FPH as a medium-term

GXH recently reported their 2018 full year result, posting operating revenue of $523m which
was up 7.2% from last year. Underlying net profit after tax (which removes one-off items) was
up +10.9% from last year to $18.7m. GXH is also facing some competitive pressure from new
low-cost retail giant Chemist Warehouse who have opened their second store in NZ. We
would note that regulation around how pharmacies can be opened in New Zealand is tough,
and it would take some time for any significant roll-out of stores to have a near-term impact
on GXH’s large pharmacy network. hold a strong positive stance on health care services
as we believe that there will be insufficient public healthcare facilities, particularly as the baby
boomer generation begin to demand more attention to cater for the current population.
However, we struggle to see enough upside or catalysts to upgrade our recommendation on
GXH at the current juncture.

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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