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
Kiwi Property Group (KPG:NZ) BUY: Initiation of Coverage
Kiwi Property Group (KPG) is the largest listed property vehicle on the NZ market. KPG owns
and manages a $3 billion property portfolio, focusing predominately in Auckland (69% of their
portfolio) with a mix between office 28% and retail 68%. Landmark buildings it owns are Sylvia
Park, New Zealand’s largest mall, as well as prime office assets such as the Vero building
and ASB North Wharf – KPG has a solid portfolio of well-known assets with a diverse tenant
base We initiate coverage on KPG as a ‘defensive’ BUY, due to its stable dividend and valuation
(trading below its net tangible assets). We believe it is an industry with moderate upside for
the dominate operator and KPG would be our preferred option for investors seeking exposure
to the NZ commercial property market. While there are risks facing retail assets, KPG has
high quality tenants and assets with malls such as Silvia Park being seen as a shopper
“destination”, which should allow them to outperform retail peers, in our view.
Fletcher Building (FBU:NZ / FBU:AX) BUY (High-Risk): Formica Finalised
FBU has announced the sale of its Formica unit for US$840 million and said it will likely
resume paying dividends in February 2019. The sale of the Formica business was not a
surprise, and in line with analyst expectations, with the date of the announcement well within
the up to 18-month timeframe that managing director Ross Taylor suggested when he
announced the decision to sell in April. The sale refocuses the business more towards its
core AU/NZ operations, and further strengthens Fletcher’s balance sheet at a time when both
the Australian and NZ property markets are showing signs that they have peaked, and the
construction cycle is likely entering a slowing period, in our view. In saying that, the market
is well aware of these risks with FBU shares trading at decade lows.
TPG Telecom (TPM:AX) HOLD: Regulatory Bet
TPG Telecom shares slumped after the competition watchdog raised concerns over TPG’s
planned merger with Vodafone Australia. The merger was initially viewed as the lower risk proposition for TPG to grow into the Mobile market as it reduces execution risk by partnering with Vodafone Australia as an established third player, and allow the three (after the merger) major Telco’s to each hold a reasonable share of the Australian mobile market. The ACCC has called for submission from interested parties, leaving open the possibility that the competition watchdog may block the deal. The share price currently sits in the middle of pre and post-merger announcement levels and could swing either way based on ACCC’s decision in March – as such we maintain our HOLD rating.
Johnson & Johnson (JNJ:NYSE) BUY: Talc Troubles
Shares of JNJ slumped after allegations that from at least 1971 to the early 2000s, JNJ knew the company’s raw talc and finished powders sometimes tested positive for small amounts of asbestos but did not tell regulators. Despite delivering another set of solid quarterly results which haven beaten market expectations, negative sentiment continues to surround the shares on the back of these new claims as well as on-going litigation, with a recent jury ordering JNJ to pay $4.69 billion to 22 women who allege that its talc-based products including baby powder caused them to develop cancer. While JNJ are seeking to appeal this result and remain confident in their ability to have this decision overturned as well as defending the safety of their product under the new claims, the recent success of claims will likely encourage even more law suits. It remains to be seen what the financial and reputational damage will be for JNJ in what is likely to be a long and drawn out court process. In saying that, while we do not want to minimize the situation, it was a large share price fall and the stock does appear to be oversold on the news.
First Solar (FSLR:NASDAQ) BUY (High-Risk): Solar Slump
2018 has been a rough year for the solar industry, with overall demand slowing down from previous years, while tariffs and Chinese government intervention have complicated the investment case. Third quarter results for First Solar alarmed investors, and 2019 full-year guidance has also been released, with earnings forecast to be below analyst consensus estimates, while expected net sales sits above the consensus. We maintain our High-Risk BUY rating on First Solar on the basis that we believe that the company and the wider industry will continue to experience long term growth. With its technological edge and strong balance sheet FSLR is our top solar sector stock pick. However, as illustrated this year the investment is not without execution risk, policy and competition risk.