Weekly, Infratil | HGH | WBC | PGW | ZEL

17 November 2019

Weekly Report

Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.

INFRATIL (IFT:NZ / IFT:AX) BUY: Our Top “Defensive” Pick
IFT shares have continues to climb higher as it becomes a favoured defensive holding in a low-interest rate
environment. Infratil’s recently released first half result for the 2020 financial year saw operating earnings
from continuing activities come in at $289.4m, up +1.7% from last year. The earnings boost was from the
addition of the Vodafone business and growth in Canberra Datacentres was offset by lower earnings from
Trust power and Longroad Energy – due to low hydro generation in New Zealand and the timing and terms of
Longroad’s development activity and asset sales. Over the half Infratil invested $1.4 billion, which included
the acquisition of Vodafone NZ for $1,029m and remaining $332.6m invested into Infratil’s existing businesses
including significant projects developed by Tilt Renewables and further expansion of Canberra Datacentres.
These investments will underpin Infratil’s future earnings and long-term capital growth – with plenty of further
investment in the pipeline. Cashflow from the Vodafone acquisition will be used to help fund future growth
projects across Infratil’s portfolio. Along with the acquisition, the disposals of four businesses totalling $450m
were realised to not only release additional capital, but the asset sales reflect the desire to simplify Infratil’s
portfolio and recognise that those activities were unlikely to grow to a material scale – we view the portfolio
changes positively, as we believe there are strong tailwinds and growth potential for many of IFT’s businesses
– with the Vodafone acquisition supplementing its data centre business and providing additional cashflow.
Heartland Group (HGH:NZ / HGH:AX) HOLD: Sound Result but Stay Neutral
HGH shares ended up higher after delivering a reasonably sound result for the 2019 financial year. Unlike the
major banks Heartland managed to increase their net receivables (total loan book) by +10.5% from last year,
as they continue to provide niche lending products which are not in direct competition with the big 4 Aussie
bank’s core business of low-risk mortgages – which has been experiencing headwinds due to tightening credit
growth. Heartland posted a net profit after tax of $73.6m for the 2019 financial year, which was up +9% from
last year, largely driven by lending growth in their reverse mortgages, motor and business lending divisions.
Lending growth was partially offset by easing net interest margin as a greater proportion of Heartland’s lending
is attributed to lower risk reverse mortgage lending, and a number of one-offs associated to accounting policy,
corporate restructure costs and break fees. We maintain our HOLD recommendation on the basis that we are
aware of the risks of a slowdown in the NZ economy (which could increase the bank’s bad debts) and
regulatory pressure from the royal commission and RBNZ, combined with HGH’s higher risk profile (due to the
nature of their loans).

Westpac (WBC) shares fared the worst amongst the big 4 Aussie Banks following reporting season after
announcing disappointing cash earnings of $6,849m for the 2019 financial year, down -15% from last year. The
result was weighed down by a challenging low credit growth, low interest rate environment and large notable
items totalling $1.13 billion associated with customer refunds, provisions, litigation and restructuring costs.
Ignoring these notable items cash earnings would have been $7.979m, down -4% from last year. Westpac’s
share price was also weighed down due to its large dividend cut, amidst tough trading conditions ahead and
also as it undertook a $2.5 billion capital raise in order to strengthen its balance sheet and meet regulatory
requirements – particularly the RBNZ’s proposed higher capital requirements for banks operating in New
Zealand. WBC shares appears to be trading at a cheap valuation compared to the past, unfortunately its priced
in weaker earnings and its previously attractive dividend has been cut significantly.
PGG WRIGHTSON (PGW:NZ) BUY (High Risk): Livestock to Horticulture
Diversified agri-business PGW shares edged higher after a well-received AGM, recovering after delivering a
weak full year result for the 2019 financial year. PGW reaffirmed its guidance for the 2020 financial year would
be above $30m, (similar to the $34.5m reported in the 2018 financial which was considered a strong result)
and guided to pay an interim dividend of no less than 8 cents per share. The meeting highlighted the challenges
faced in the previous year, largely from the livestock and dairy industry, with the silver lining that growth
appears promising across the horticulture industry ,which could offset these headwinds – highlighting the
benefits of their diversified business. For the 2019 financial year PGW reported a net profit after tax of
$131.8m, boosted by the sales of its Seeds and Grain business resulting in a $134.3m gain on disposal.
Unfortunately operating earnings from continuing operations (which excludes any contribution from the
Seeds and Grain business) came in at $24.4m, which was down significantly from last year’s result of $34.5m
and missed guidance of $25m to $34.5m, largely due to weak farmer confidence lowering spending and
weakness in PGW’s agency business due to unfavourable market conditions – heavily weighted towards the
livestock industry. Once again, we believe the business fundamentals are still sound, and the share price is not
as attractively priced as anticipated – but an attractive ~6% dividend should provide share price support. PGW
is now a smaller, more concentrated business which is more heavily impacted by any adverse NZ specific
events, and given the near-term headwinds impacting the livestock industry we maintain our BUY rating with
a High-risk caveat.
Z ENERGY (ZEL:NZ / ZEL:AX) HOLD: Near-Term Challenges Intensify
ZEL shares delivered weak result given the challenges facing the fuel industry – but maintained earnings
guidance and expectations of paying an attractive dividend given ZEL’s beaten down share price. Z Energy

delivered a net profit after tax (under replacement costs basis) of $22m down significantly from last year’s
profit of $72m. The result was driven by challenging market conditions in the fuel industry, a $35m write down
against ZEL’s 70% ownership of Flick Electric holdings, and increased amortisation expenses relating to
intangible digital assets. Operating earnings was $182m, up +4% from last year only due to the previous period
being adversely impacted be NZ refinery outage which weakened margins and increased costs. There are too
many headwinds at play, predominately increased competition in a flat market which is likely under some
near-term uncertainty given its sensitivity to economic growth, not to mention over the long-term an overall
decline as the proliferation of electric vehicles starts to increase. Despite an attractive dividend, we remain
cautious and would like to see an improvement in market fundamentals before potentially buying ZEL.

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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and needs of any particular person. Individuals should therefore assess whether it is appropriate in light of individual circumstances, or discuss, with
their financial planner or advisor, the merits of each recommendation for their own specific circumstances.
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