Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
FONTERRA (FSF:NZ / FSF:AX) HOLD: Promising Plan
Shares in dairy giant FSF recovered slightly, despite reporting a net loss after tax of -$605m following $826m of asset write downs and as a result cutting their 2019 financial year dividend to zero. Ignoring the write offs, Fonterra’s underlying earnings (EBIT) came in at $819m for the year, which was down -9%, largely due to weaker butter sales in China in the first half and challenging market conditions, predominately in Australia, as well as Latin America, and parts of Asia.
The result was no surprise and within earlier guidance. The market looks to have reacted positively towards Fonterra’s ambitious new strategy to focused on extracting more value, primarily from its New Zealand business, as opposed to chasing volume. Fonterra also announced it will be selling a 50% share of its DFE Pharma business for $633m, resulting in $1 billion in debt to be paid down following a number of asset sales across the year, with Tip Top being the other significant contributor. We still find it difficult to see significant upside potential given underlying earnings could be under further pressure as trading conditions (overseas) are expected to remain challenging, as Fonterra have guided 2020 will be another transitional year. We remain comfortable on the side-lines with our HOLD recommendation, and would wait for trading conditions to improve and Fonterra to execute on their new strategy and restructuring plans before changing our recommendation.
SELECT HARVEST (SHV:AX) Buy (High-Risk): Amazing 2019 Harvest
Shares in almond producer Select Harvests (SHV) have been on a strong run after another well received crop update, announcing the 2019 harvest is expected to be 22,500 MT (+43% higher than last year’s) due to better crop management and higher than expected yields. Market conditions also improved as demand from China continues to remain strong, pushing the price of almonds higher up to $8.60 to $8.70 per kilo. Earlier, Select Harvest released their 2019 first half result, and showed a strong turnaround in performance after a troublesome 2018, benefitting from higher sales volume and better almond pricing – which lifted net profit after tax by +96% from last year to $20m. At the time the 2019 harvest was expected to yield 20,750 MT with the average almond price of $8.50 per kilo – which was a significant improvement from the previous year and has been lifted since then. After what has been a challenging three-year period for SHV, things are starting to turn around dramatically for the almond producer. This is being driven by favourable market conditions with
demand for plant-based protein (particularity from China) outstripping supply with the outlook remaining promising, especially given the recent opportunity created by the China-US trade war, and improved
horticulture programs. SHV is also benefitting from a weaker Aussie dollar, which we expect to remain weak.
We continue to see SHV as an interesting way for investors to gain exposure to global agricultural and health conscious consumer trends over the long-term, especially growing trend towards plant-based protein, although advise investors time their entry point given the volatile nature of SHV’s business/shares.
Coca-Cola Amatil (CCL:AX) HOLD: 2020 Bringing Back the Fizz
Shares in CCL have continued on their run this year, climbing higher after delivering a sound result for the 2019 first half. Soon after CCL shares pulled back slightly as the container deposit scheme impacting the Australian business will likely be introduced into New Zealand by 2022, as the New Zealand government are in early discussions. For the first half of the 2019 financial year CCL’s revenue rose +5% from last year to $2.427 billion, with strong growth across most major divisions, except Australia where revenue was almost flat. Most business divisions performed well delivering strong earnings growth, whilst Australia’s earnings fell as it
struggled with the adoption of container deposit scheme in Queensland. The market reacted positively
towards management’s guidance for 2020 financial year, adamant their investments and plans in place should see the struggling Australian business return back to modest growth, with the overall objective to achieve mid-single digit earnings growth in 2020. While CCL is facing headwinds in its core Australian business, management are confident in turning the business around achieving overall mid-single digit earnings growth for the 2020 financial year. At current valuations we believe CCL shares are now fairly priced given the possibility earnings and dividends could remain flat if management aren’t able execute as effectively on their growth plan
KATHMANDU (KMD:NZ / KMD:AX) HOLD: Rip Curl Acquisition
Kathmandu shares were up following a trading halt where the retailer announced it will pay $368m to buy surf brand Rip Curl. The majority of the purchase will be debt funded, with $145m of equity raised from existing shareholders in the form of a one-to-four pro rata entitlement offer, with the institutional component now completed. The acquisition provides an attractive opportunity to expand Kathmandu’s outdoor offering but to also diversify its earnings geographically and seasonally, whilst providing a platform to expand both brands globally and realise synergy benefits. Kathmandu also recently reported net profit after tax of $57.6m, up +13.6% from last year due to rapid sales and profit growth from its Oboz acquisition and Australian business performing well, offsetting weaker performance from its NZ business. The result was on the top end of its recently upgrading earnings guidance, which should not have surprised the market. However, a trading update for the first 7 weeks for the 2020 financial year appears promising with same store sales growth up +11.7% from last year as it experienced late winter sales. Kathmandu have bucked the trend against intense retail competition and continued to deliver growth due to their unique product offering. We have recently changed our outlook from negative to neutral on retail and believe consumer confidence should remain supportive around current levels. In saying that, the current share price reflects an upbeat outlook ahead for the retailer in our view and we maintain our HOLD rating given upside from the Rip Curl acquisition is yet to been proven
at the current juncture.
CALTEX AUSTRALIA (CTX:AX) HOLD: Margins Squeezed
CTX shares have continued to slide, after delivering a disappointing result for the first half of the 2019 financial year despite remaining within its previously announced guidance. Net profit after tax (under replacement cost basis) of $135m, was significantly lower than the previous year ($296m). This was largely driven by weaker refining margins and lower production volumes as earnings (EBIT) from the Lytton refinery came in at only $1m, down from $105m last year. While Convenience and retail earnings (EBIT) halved to $85m, due to tighter retail fuel margins and lower sales volumes given a slowing Australian economy. Caltex remain confident they can enhance the retail offering by rejuvenating stores and grow earnings. As a result, Caltex cut is its interim dividend by -44% from last year down to 32 cents per share which would has not been well received by the market. The retail fuel market continues to be a very challenging industry, and longer term we believe with the popularity of fuel efficient (hybrid vehicles) and uptake of affordable electric vehicles there will be unavoidable headwinds and uncertainties for the industry, as demand for fossil fuels head downwards creating further margin and earnings pressure. Given the share price movement over the last two-years we are glad we removed our BUY rating early.