Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
MACQUARIE (MQG:AX) BUY (High Risk): Mortgage Disruptor
Shares in Macquarie were a touch lower after releasing an operating update which ‘only’ reiterated its
previous guidance that 2020 full year earnings will be slightly lower than the previous year – with the market anticipating a traditional upgrade. Macquarie stated trading conditions over the December 2019 quarter were satisfactory across the group, as their ‘annuity style’ business continued to perform well – driven by higher fees and continued volume growth. The more volatile market facing business was down significantly, as expected compared to a stronger corresponding period (which would be difficult to match). The result highlight being the mortgage portfolio of $48.6 billion which was up 11% compared to the previous quarter as a result of policy changes made in 2017 – including reducing pricing for customers with more than 30% per cent equity in their homes – and the 2013 decision to rebuild its technology system from scratch. This appears promising as Macquarie seek to gain market share from the big 4 Aussie banks while maintaining a lower risk portfolio of mortgages. Macquarie offers a more diversified income stream over the big 4 Aussie Banks, and we believe Macquarie offers a more attractive risk/return proposition relative to the big 4 Aussie banks – which are largely exposed to the headwinds facing the mortgage market. In our view Macquarie is seeking to grow its mortgage book (which represents a part of their overall business) in a different manner as a more efficient disruptor, whilst at the same time minimising their risk.
SKY NETWORK TELEVISION (SKT:NZ / SKT:AX) SELL: Too Little, Too Late
Sky TV shares continue freefall after it reported a net profit after tax of $11.868m for the first half of the 2020 financial year. This figure was down -77.9% from the same corresponding period last year, as Sky TV enters into a transitional phase from satellite to stream as revenues continue to decline, while operating costs increase. Despite lifting subscriber numbers up +6% from last year up to 795,000, driven by solid streaming subscriber growth, this was offset, by further declines in high value satellite customers which dragged group revenue down -6.8% from last year to $384.8m. Unfortunately, due to the nature of the business the majority of the costs are fixed (and do not fluctuate with subscriber numbers), and for the half increased largely due to transitional one-offs as well increased costs associated with marketing activity to grow subscribers and increased programming rights and other investments. SKY TV appear optimistic on their turnaround, as they expand their streaming services, helped by the recent lightbox acquisition which will further enhance their content and grow streaming subscribers, pushing to stream more sports thanks to the RugbyPass (which will expand their market to outside of New Zealand) as management look to secure key sporting rights over new rival Spark sport. Our outlook continues to remain negative – SKT has done “well” to secure some major sporting content lately and attempts to expand their streaming services to adapt to changes in market dynamics. We believe intensifying competition and increased availability of content from other providers will force Sky TV to continue to struggle to grow revenue back to more adequate levels. There is potential that a large industry player may buy Sky, although we would not buy Sky shares simply on the hope of a takeover.
DELEGAT GROUP (DGL:NZ) BUY: 2020 Hiccup
Shares in Delegat Group (DGL) have been lower lately largely due to Coronavirus scares impacting NZ exporters as well as news regarding oversupply of wine in the US market (largely created by last year’s trade war, as China restricted US wine imports). Despite positive industry trends for NZ wine exporters, investor sentiment continues to remain cautious. However, we believe the two major concerns (coronavirus and US supply gut) appear to be fairly limited to Delegat as China does not represent a significant export market for Delegat’s, and the US market conditions remain favourable as DGL focuses on ‘Super premium brand’. Delegat ended 2019 on a relatively strong run, especially after delivering a solid result for the 2019 financial year achieve record operating net profit after tax of $51.4m, up +14% from last year. Unfortunately, 2020 has been guided to be a flat year impacted financially as a weak 2019 harvest (which was signalled earlier) means weaker margins will offset sales growth – which are expected to growth ~7% per annum over the medium and will be unaffected by the weaker harvest as DGL continues invest to expand capacity. DGL do trade at a 19x forward price to earnings multiple which is not cheap but we believe the valuation is justified given the company’s solid operational performance and track record. While there are some near-term risks these have been partially priced in and we still continue to believe there is strong upside potential over the medium-term.
CSL LIMITED (CSL:AX) BUY: Our Top Aussie Pick
CSL shares have broken out to new all-time again highs, and it has now become our top performing pick in the Australian portfolio. This comes after the global biotech giant upgraded its 2020 full year profit guidance to be between US$2.11 billion and US$2.17 billion, up +3% from its previous guidance. The upgrade is driven by better business expectations in the second half, with stronger demand for CSL therapies products, and a one-off sales boost from the transition to new distribution model in China. CSL Reported net profit after tax (NPAT) US$1.248 billion for the first half of the 2020 financial year which was up +8% (+11% on constant currency basis). This on the back of +11% revenue growth (under constant currency), driven by strong sales across key immunoglobulin and Idelvion, while costs were higher than expected driven by higher research & development spend and general business expansion to fuel future top-line revenue growth. Trading at 44x price to earnings CSL is now at more expensive valuation (CSL has traditionally traded at around 35x PE multiple) but is warranted given their growth potential and ability to deliver. CSL continues to be a star performer, and we hold it in our Australian portfolio as a defensive healthcare business.
SKYCITY ENTERTAINMENT (SKC:NZ / SKC:AX) BUY: International Business Weakness
SkyCity shares we were hit hard once news broke about the coronavirus – given SKC’s tourism exposure.
SkyCity delivered a difficult to compare set of financial statements, due to a number around abnormal items resulting in net profit after of $328m for the first half of the 2020 financial year, up fourfold from the previous year result of only $82.8m, largley due to the $66.5m gain on the sale of their Auckland carpark and $186.3m insurance claim against the NZICC fire impacts. At this stage, SKC are not expecting any material change in previous guidance for total project costs, with costs expected to be covered by insurance. Normalised (which adjusts for abnormal items) net profit after tax fell -15% from last year down to $75m, as group operating earnings across most properties were sound, and the result dragged lower by weaker earnings from International Business (IB) – VIP’s. This result does not include the events of the Coronvirus (which will be realised in the second half), but for the 2020 financial year SkyCity downgraded its earnings. SkyCITY expects its core properties to continue to perform well, partly offset by weakness from Coronavirus. The downgrade is due to challenges facing International Business, with key high value customers cancelling visits due to the coronvirus. We believe SKC shares are more or less fairly priced given recent events are near-term risks, but we remain supportive given they continue to pay an attractive 5.4% dividend yield in a low interest rate environment. We also expect SKC should benefit from the Adelaide expansion – supporting the current share price and dividend, partly offsetting IB weakness
TPG TELECOM (TPM:AX) HOLD: Merger Greenlight
TPG shares soared as the $15 billion TPG Telecom and Vodafone merger was given the green light by the
Federal Court, overruling a rejection by the Australian Competition and Consumer Commission. The merger has now overcome a major hurdle and requires shareholder approval and approval from other regulatory bodies before being officially finalised. The Federal Court stated that they did not believe the merger would reduce competition in the Australian telco market. Largely due to the fact that it would be difficult for a fourth entrant to establish themselves in the market and that three major players would be sufficient in creating a competitive market. The merged group will have an implied enterprise value of $15 billion (with ~$4billion of debt, bringing equity value to $10.9 billion), with revenue of $6 billion, and operating earnings (EBITDA) of $1.8 billion, excluding synergies. Combined market share across mobile and fixed line broadband of ~20% and ~22% respectively. We maintain our HOLD rating, given much of benefits of the merger are now priced in, and it is difficult to determine upside potential for investors at the current juncture.
Heartland Group (HGH:NZ / HGH:AX) HOLD: Hesitant on Product Mix
Heartland Group (HGH) shares jumped after releasing a solid result for the first half of the 2020 financial year, as net profit after tax rose to $39.9m, up +20.7% from the same corresponding period last year. Net profit growth was largely driven by an increase in HGH’s net finance receivables (total loan book value) which grew to $4,585m, up +177m or +4% over the half, with strong lending growth in their reverse mortgages, motor and business lending divisions. This reported result was also helped by accounting changes for the treatment of reverse mortgages and one-off fair value gain on investment of $4.4m and $2.1m respectively. HGH continues 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. Lending growth was offset by net interest margins continue to remain challenging for all banks especially in a low interest rate environment. However, further rate cuts do not appear likely in NZ. We maintain our HOLD recommendation based on HGH’s ‘elevated valuation’ not taking into account the risks of a potential slowdown in the NZ economy (which could increase the bank’s bad debts) especially given HGH’s higher risk profile (due to the nature of their loans) and lower exposure to the property market which appears more upbeat than the economy.