Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
FISHER & PAYKEL HEALTHCARE (FPH:NZ / FPH:AX) BUY: Quality Business
FPH shares have been on a strong run lately, and hit all-time highs as the Breathing Mask Maker kept 2020 full year profit guidance unchanged, after delivering another record first half result – all largely within market expectations. FPH reported for the first half of the 2020 financial year that its operating revenue was $570.9m for the half, up +12% from the same corresponding period last year – partially helped by favourable foreign exchange movements. Net profit after tax rose +24% from the same corresponding period last year to $121.2m driven by strong revenue growth and margin expansion realising the benefits from their second Mexico manufacturing facility, benefiting from scale of operations, and omission of litigation costs. In terms of the outlook for the remainder of the 2020 financial year, it looks solid and likely conservative. FPH anticipate consistent underlying trends in the Hospital product group, and Homecare revenue for the 2020 financial year similar to the previous financial year, in constant currency terms. FPH expect “At current exchange rates we continue to expect full year operating revenue for the 2020 financial year to be approximately $1.19 billion
and net profit after tax to be in the range of approximately $255 to $265 million” – both up +11% and +24% from the previous year respectively. Taking a bigger picture view, FPH continues to experience strong market share gain and there remains growth potential looking forward given the release of new products, the tailwinds of an ageing population, and our expectations around the NZ dollar to remain relatively weak.
TELSTRA (TLS:AX) HOLD: Dividend Stabilised
TLS was up on their investor day presentation, despite reiterating operating earnings for the 2020 financial year would remain unchanged and about -7% lower than the previous year. Soon after it prompted a number of brokers to upgrade their recommendation as they identified the Australian mobile market may have reached its turning point, and that Telstra’s dividend appears sustainable and relatively attractive with scope of growth in future – as Telstra lowers their capital expenditure. The competitive mobile industry is expected to have another challenging year for Aussie Telco’s with price competition looking to ease and Telstra likely to benefit from the roll-out of their 5G technology, which is expected to resurge the market like previous technologies (3G and 4G) have done so in the past. Also given their heavy capital investment in the past, Telstra’s capital expenditure guidance suggests there is adequate cashflow to sustain their current dividend with the possibility of growing. Telstra is now trading at a 4.1% dividend yield and a forward price to earnings multiple of 19.1x – which is not cheap considering lingering headwinds remain and another year of declining earnings is expected. We remain on the side-lines with our HOLD recommendation, largely due to valuation – and being less optimistic on any group level growth with near-term risks still persistent. We would feel more comfortable upgrading our recommendation if we saw a bottoming out in earnings and better risk adjusted valuation.
METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High Risk): Not Panic Selling
MPG shares slid lower after reporting their 2020 first half result. For the half MPG delivered a net profit after tax of $7.7m, which was down -15% from last year as increased competition and price pressure weighed down on margins in the upper North Island of NZ and Australia. While challenging operating conditions in Australia aren’t new, intense competition in NZ (despite elevated construction activity – largely driven towards higher density development) meant MPG had to downgrade their earnings guidance for the 2020 financial year to be between $21m to $24m (down from its previous guidance of $25m to $27m). MPG have also announced they will downsize their NSW operations (their only loss making business and primary contributor to the Australian group loss) to focus on double glazing. These changes are believed to provide an improved competitive position and financial performance over the medium term, as MPG are experiencing strong growth in double-glazing in Australia despite overall construction activity falling. Management are fighting against a difficult backdrop – with a negative outlook currently priced in and possibly overplayed. While there are notable risks,
there could be a significant recovery in their share price if MPG can turn things around or show some positivity with its downsized Australian business and hold market share in NZ – for this reason we believe existing shareholders should not panic sell.
WiseTech Global (WTC:AX) HOLD: Short Seller Stings
WTC shares pulled back significantly after being attacked by a short-seller who alleged WTC is overstating its profit and revenue, saying “WTC is using uniquely confusing accounting strategies to exaggerate growth and income”. Accordingly, WTC have rejected the claims of financial impropriety and irregularity contained in the report. We would also note that short seller reports should be taken with a grain of salt, as the writers make money when the share price falls. WTC shares slipped further after their AGM where they reiterated that WTC remain on track to achieve their previous guidance for both revenue and earnings for the 2020 financial year – with the market anticipating another guidance upgrade. The presentation provided investors with a breakdown of its performance for the 2019 financial year which was underpinned by significant organic growth in revenues across its global business. It was also supported by the development of hundreds of product enhancements and features for its CargoWise One technology platform, and the acquisition of many strategic assets in new geographies and adjacent technologies. As well the massive market opportunity WTC has improving the efficiency of a capital intensive $16 trillion industry. WTC is a quality company, however we are cautious around its valuation even after the heavy pull back. The market continues to price in a tremendous amount of growth as is still one of the most expensive tech companies in the world – based on both earnings and sales multiples. We are still wary on the risk that WTC may miss the markets lofty expectations severely punishing the share price as it has done previously and believe that risk outweighs upside potential at the current valuation
Visa (V:NYSE) BUY: No Slowing Down
Visa shares have been on a strong run again as it delivered its sixteenth consecutive better than expected
quarterly earnings result. The payments processor managed to lift its 2019 fourth quarter revenue by +13% from last year to $6.14 billion despite unfavourable currency movements. Helped by strong volume and transition growth as the use of credit and debit cards for payments instore and expansive e-commerce retail continue to grow, across all regions. Visa has a great existing business and benefits from a clear thematic tailwind of growth as the move towards a cashless society accelerates. Visa also continually achieves strong double-digit earnings growth, as it grows revenue and widens its margins. Because of this, Visa is valued at a premium to the overall market due to its successful track record of continual growth and future growth prospects. We rate Visa as a BUY as a medium-term investment, as it benefits from rising online transactions and the gradual global shift to a cashless society.