Weekly, Hack Cybersecurity ETF |Air NZ |HSO |JHX |JPM

6 February 2019

Weekly Report

New Stock Reports
BetaShares Global Cybersecurity ETF (HACK:AX) BUY (High-Risk): Initiation of
Coverage
The spectacular growth in online activity and information technology in recent years has,
unfortunately, also seen equally strong growth in cybercrime.
Global cybersecurity is a growing industry driven by technological trends such as cloud
networks, mobility, social interactions, and big data & analytics. Global spending on
cybersecurity has increased at an annual rate of around 8% since 2011, and is estimated to
be $US96 billion at the end of 2018. The area is an interesting high risk/reward investment
space, and is aligned somewhat with our “explosion of data” investment theme. While not a
“new idea”, we believe there will be multi-year tailwinds behind the sector over the medium-
term.
Rather than try and pick stocks in the Cyber Security sector, an approach to benefit from the
cybersecurity trends above is to invest into an industry ETF such as HACK.
We begin initiation on HACK with a BUY, but with a High-Risk caveat given recent Tech
sector volatility, and recommend investors stage their purchases over time.

AIR NEW ZEALAND (AIR:NZ / AIZ:AX) BUY (High-Risk): Earnings Descending
AIR shares hit a three-month low after warning its annual earnings will fall by as much as
37%. Air NZ cut its forecast for earnings, blaming ongoing global issues with the Rolls Royce
engines that have disrupted schedules. At the same time, smaller increases in domestic
travel and inbound tourism weighed on revenue, prompting schedule adjustments to increase
capacity 4% for the year, the bottom of its prior 4% to 6% guidance. Despite the large
earnings downgrade there is still passenger growth both domestically and internationally –
albiet possibly not at the higher rates previously achieved. We do not see reason to panic,
and continue to believe the tourism boom tailwind will be a multi-year trend given the
continued affordability of travel and growing Asian middle class. We still believe Air NZ is
reasonably priced on a relatively low PE multiple and offers an attractive 7.8% dividend yield
for the year ahead (assuming a small dividend cut).

HEALTHSCOPE (HSO:AX) Takeover Likely – Downgrade to HOLD (was BUY)
HSO shares have jumped after the board recommended a takeover bid worth $2.50 a share
including the 3.5 cents per share dividend with Brookfield. Healthscope also said that in the
first half of its 2019 financial year the company achieved solid revenue and operating
earnings growth. The core Hospitals segment was the key driver of growth, while HSO found
earnings growth harder to come by in New Zealand. HSO has manged to turn things around
with an encouraging first half result, however these numbers may be largely irrelevant if the
company is acquired. We’ve always maintained an optimistic view on HSO with their
performance likely to improve as the aging demographic offsets current challenges in the
market over the medium term. However, we change our recommendation to a HOLD now
that the shares are trading so close to the takeover price, which is likely to go through.

JAMES HARDIE (JHX:AX) BUY (High-Risk): Relief Rally
Shares in construction company JHX were up on its 2019 third quarter result, which delivered
a better than expected result with more upbeat guidance – relieving some of the recent
negative sentiment. The market has hit JHX shares heavily due to their profit downgrades of
late and expectations of a sharp and painful slowdown in the US home construction market.
To the contrary, JHX reported a slight increase in its key US market and guided for modest
growth to continue – which was better than what the market had recently anticipated. We
have been supporters of JHX given its exposure to the US housing market recovery, which
we had previously seen as a multi-year theme – however now have a more timid view on
their growth opportunity and believe it will more likely be at modest levels over the medium-
term. We have changed our recommendation to a High-Risk BUY, with the potential of
housing market slowdown or further increases in input margins slowing down earnings
growth.

JP Morgan Chase (JPM:NYSE) BUY: A Rare Miss
JPM shares fell on their 2018 fourth quarter result after posting a rare miss on earnings
expectations. JPM reported fourth quarter revenue of $26.8 billion, which was up +4.1% on
the same corresponding period last year and missed expectations by $100m. Earnings per
share were $1.98, missing market expectations of $2.34 per share, even though they were
almost double the earnings per share from the same corresponding period last year. The
miss was attributed to an increase in expenses and also weaker trading revenue from its

fixed income (bond) trading business, which was down -16% due to December’s volatility.
Other than that, most businesses segments performed strongly and the majority achieved
moderate growths rates. We maintain our BUY rating on JPM due to their strong track record
as a top performer in the US banking sector.

weekly 6 feb 19

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