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: Don’t Cry Over Spilt Milk
Fonterra released a disappointing 2019 first quarter update as the dairy giant was forced to
lower its forecast pay-out to farmers due to a global oversupply that is weighing on milk prices.
A strong performance from its ingredients business partially offset lower sales volumes and
weaker margins across its Asia and Greater China consumer businesses. Fonterra also said
it is investigating a sale of its Tip Top ice cream business, confirmed the end to a joint-venture
with Beingmate Baby & Child Food, and said a third asset was under the microscope too –
as part of their plan to pay down $800m of debt by the end of the financial year. Fonterra has
strong market share and positioning in the global dairy market as a high-quality dairy provider,
although to date has failed to deliver on its “value-add” strategy. We recently removed
Fonterra 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).
QBE INSURANCE (QBE:AX) BUY: Still Seeing a Turnaround
QBE shares fell after announcing its 2019 reinsurance plan will significantly reduce its
exposure to large scale catastrophes, which will come at a $50m to $100m headwind to its
near term profit. This overshadowed QBE’s new cost cutting program set to remove $US130
million ($180 million) of expenses between 2019 and 2021, as well as the sale of its insurance
operations in Puerto Rico, Indonesia and the Philippines as it makes good on its word to
streamline business to be smaller and less complex. Despite the headwind, the 2019 result
will be a significant improvement from the 2018 result. QBE is one of the only Australasian
listed companies which benefits directly from higher US interest rates (as it improves QBE’s
investment income), which we believe will be a key theme over the medium term. We
maintain our BUY rating on QBE and see it as a benefactor of the macro tailwinds of rising
interest rates and strengthening USD. We have a positive view on QBE as a turnaround story
led by its new CEO to run a more efficient and simpler operation
Electronic Arts (EA:NASDAQ) BUY: Keeping Consumers Happy
It has been a volatile year for EA after its shares rallied strongly over the first half of the year
as they continued to perform well delivering top line growth, and solid profit numbers. Things
went south when management announced guidance which was weaker than what the market
expected, and things got worse post the market sell-off which began in October and impacted
the tech stocks such as EA the hardest. EA delivered a solid second quarter result for the 2019 fiscal year which beat expectations with revenue up +34.5% year on year and net profit after tax of $255m. However, EA announced a delay in the launch of the much-anticipated Battlefield V game – which would result in downgraded guidance for the 2019 full year result. EA said they will delay the release to keep players happy and engagement up and avoid mistakes made with previous game launches being to frequent and aggressive with monetisation.
HARVEY NORMAN (HVN:AX) SELL: Going Private?
Shares in Retailer HVN continue to be punished, this time as their outspoken chairman and co-founder Gerry Harvey made comments that overshadowed a better than expected trading update for the start of the2019 financial year. Mr Harvey has called his critics “totally friggen mad” at a tense annual meeting, during which shareholders handed his board a first strike over executive pay. This is the first time there has been back-lash towards the board which has been unchanged since 2007. Mr Harvey also suggested the possibility of a taking HVN private given its share price trading around $3 is well below what Mr Harvey believes his business is worth. The core Australia business reported a sales decline as it begins to feel the pinch from a weakening Aussie housing market. We believe things are more likely going
to get worse as the Australian and NZ housing markets experience a correction, competition intensifies from JB Hi Fi, Kogan, and Amazon, and at the same time a weakening AUD will lead to higher cost of goods.
AlarmCom (ALRM:NASDAQ) BUY (High-Risk): Solid Quarter Despite Lawsuit Bill
ALRM shares were caught up in the market sell-off which began in October and has hit
technology stocks particularly hard. In saying that, ALRM looks to have outperformed since
November, bucking the broader market trend and rallying post what was a solid 3rd quarter result. The third quarter for 2018 exceeded the expectations of both customers and members
of the company, with a total revenue of $1118 million up +24.3% year-on-year. Despite the
strong growth in revenue and high margins in SaaS and License Revenue, net income sat at
a negative of -$7.6 million. This was because of a $28 million-dollar bill that came from the
settlement of a putative class-action lawsuit. We believe this can be largely ignored given the
one-off nature of the expense.