Weekly, Netflix | Z Energy | DGL | TPM

25 October 2018

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
Netflix Inc. (NFLX:NASDAQ) HOLD: Still One of the Best Performers in 2018
Netflix shares have been volatile of late, slumping in the large tech sell off which started
earlier in the month, with growth stocks like Netflix being hit hardest. Netflix shares then
quickly bounced back after releasing a solid third quarter result, adding 7 million new
subscribers, smashing expectations and dampening fears the company’s subscriber growth
is slowing down. NFLX managed to bring total subscriber numbers to 131.7m, which
generated $3.999 billion of revenue for the quarter, which was up +5.5% from last quarter
and up +34.1% year on year. While shares are down significantly from earlier in the year,
NFLX remains one of the best performers of 2018. In saying that, we would expect to see
further volatility driven by several factors, be it stock specific quarterly results, the rise of
competition or greater market/economic drivers. The question is whether Netflix can continue
to deliver further value to investors. We remain positive on Netflix’s ability to grow earnings
and deliver on their guidance, although have advised that early shareholders may wish to
take some profit at this point – we maintain our HOLD rating given valuation and risk of
competition entering the market.

Z Energy (ZEL:NZ / ZEL:AX) HOLD: Elevated Political Risk
Z Energy shares continue to fall as it faces a number of industry wide headwinds. The price
for fuel paid at the pump has shot up this year, as brent crude oil has jumped in conjunction
with a weakening NZD. To add to this, the government announced another 4 cent per litre
fuel tax, on top of the 11.5 cent per litre Auckland regional fuel tax. The higher price at the
pump has seen ZEL report lower petrol volumes for their most recent quarter as people are
willing to spend less or drive less when petrol prices are higher. Unfortunately, with
competition intensifying particularly from low-cost operators such as Waitomo fuel, margins
have been declining and set to decline further as it appears ZEL may have to absorb some
of the price increase. Jacinda Arden is also fast tracking new investigative powers for the
Commerce Commission into fuel prices due to the recent price hikes, with the possibility of
ZEL’s margins coming under further scrutiny if the government decides to introduce new pricing regulation. It has been an unfortunate year for ZEL shareholders, with industry wide
headwinds applying pressure on fuel margins, volumes and earnings. Thinking longer term
we also believe there is a huge uncertainty around the company imposed by the potential
proliferation of electric vehicles.

DELEGAT GROUP (DGL:NZ) BUY: Delivering Double-Digit Growth
Shares in New Zealand’s largest listed winemaker Delegat Group reached record highs after
delivering another record result for the 2018 financial year. The market was also upbeat on
their guidance with global case sales volume expected to increase to 3.38m by 2021 financial
year. However, soon after the announcement its shares were hit heavily with other growth
stocks in the recent market pullback. We are not concerned by what we view as a healthy
pullback given a strong run, as DGL shares are still trading +48% higher than they were 12
months ago. More into the result, DGL revenue was up +8% from last year to $272.1m due
to a +3% increase in case volumes sold and favourable pricing. Operating net profit after tax
was $44.9m, up +17% from last year, as the company benefits from increasing scale and
favourable pricing, widening margins. DGL expects global case sales to grow 7%
compounded over the next three years, with the growth supported by a record harvest for
2018. With global sales expected to grow, forecasted profits should be able to achieve
double-digit growth with increased scale reducing costs and widening margins – justifying
their 19.5x price to earnings multiple, in our view. We remain BUY rated for DGL given its
solid operations and growth guidance, along with being a benefactor of a weakening NZD.

TPG TELECOM (TPM:AX) HOLD: Consolidation Phase
TPG Telecom shares have been on a downward trend since announcing its merger with
Vodafone Australia in late August. TPG fell on its mixed result, which delivered almost flat
revenue growth below market expectations, while earnings were up a marginal +0.7% from
last year comfortably beating its guidance. Revenue and margin growth from its corporate
division offset margin and earnings pressure on its consumer business, particularly from its
fixed voice business. Management guidance for 2019 earnings was lower than the 2018
result, and did not take into account the merger. The execution risks around TPM’s core
business and expansion into mobile have been largely mitigated with the possible merger,
however we maintain our HOLD rating on the basis of valuation. It appears the value of this merger is now reflected in TPM’s share price and we find it difficult to see value at the current
share price. If investors seek exposure into the Australian Telco space, we have had a
preference for disruptor TPG over Telstra (the incumbent major operator) – however upside
appears limited given its current valuation.

weekly 25 oct 18

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