Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
NEXT DC (NXT:AX) BUY: Resilient Thematic
Shares in data centre operator Next DC have been a standout as the market continues to fall on concerns around the spread of the coronavirus. NEXT DC shares rose after delivering a solid result for the first half of the 2020 financial year, and more importantly maintained their earnings guidance given the nature of the business is not too sensitive to the spread of the coronavirus. For the six months ended December 31, the data centre operator reported total revenue of $97.7m and underlying operating earnings (EBITDA) of $50.9m, which were both up +8% and +21% respectively, over the prior corresponding period. The result driven by growing customer numbers and increased connections, pushing recurring revenue up +13% from the same corresponding period last year, with better revenue growth expected in the second half due to the completion of more capacity. Net loss after tax was $4.9m, larger than the previous year reflecting higher depreciation and interest costs associated with a record period of heavy investment. We remain positive on NXT given its exposure to the “explosion of data” investment theme – with data expected to double every two-years. The share price outperformance amongst the market-wide sell off shows the resilience Next DC’s business has in a potential economic slowdown, therefore we remain comfortable with our BUY rating once volatility subsides.
AUCKLAND AIRPORT (AIA:NZ / AIA:AX) HOLD: Passenger Numbers Descending
Shares in AIA were lower after delivering a modest result for the first half of the 2020 financial year, weighed down by weaker passenger numbers which were down -0.5% from the previous year. The diversified nature of the business meant underlying (which excludes property revaluation gains) net profit after tax rose +2.2% from last year to $139.9m helped by higher retail and property rental income. AIA delivered a slight earnings downgrade to reflect the coronavirus outbreak, which at the time was only concentrated in China. Since the result announcement it has now spread globally and is nearing pandemic levels with airlines announcing significantly weaker demand, with flight cancelations and
lowering capacity we anticipate 2020 earnings will be much weaker than initially guided. Despite the AIA shares falling shares they are near fair value in our opinion, and not exactly ‘cheap’ assuming normal operating conditions. Given the global spread of the coronavirus, there is still a lot of uncertainty over the economic impact it will have and the pace of any subsequent recovery – with AIA clearly directly hit being in the travel industry. Given the uncertainty we anticipate there is still some short-term downside risk especially for the transport and tourism sector and would wait on the fence
for now.
SUMMERSET (SUM:NZ / SNZ:AX) BUY: Top Retirement Pick
SUM shares fell despite releasing a solid result for the 2019 financial year, as the retirement village operator expects no growth in underlying earnings for the 2020 financial year due to higher wages & weaker development margins. Adding that current demand could be weakened due to the coronavirus outbreak, if retirees opt to stay home. For the 2019 financial year Summerset’s underlying net profit after tax, which is the retirement villages preferred metric (which excludes unrealised valuation gains in the fair value of investment property) was $106.2m, up +8% from last year due to the maturing nature of their business and strong margins on resales benefiting from good unit price appreciation over
the tenor of occupancy, partially offset by new sales with weaker margins and lower volumes. Reported net profit after tax $176.3m, down -18% from last year as it reported a lower fair value gain in investment property compared to the prior year. Our view on Summerset’s business remains positive as a benefactor of a rise in ageing population tailwind (on a medium to long term view). With the Metlifecare takeover, SUM is now our preferred retirement village operator.
Summerset provides strong growth potential as it expands its land bank and is still trades at a relatively attractive valuation. However, we would advise new investors to wait for some certainty surrounding the containment of the coronavirus and current market volatility to subside before buying the stock.
QBE INSURANCE (QBE:AX) HOLD: Low Interest Rate Headwind
QBE has fallen heavy recently partly due to corona virus related risks, and due to a surprise rate cut by the US Fed, as well as concerns interest rates globally are set to remain even lower (than previously anticipated) for longer. Prior to that QBE, were on a strong recovery mode reaching multi-year highs after delivering a solid result for the 2019 financial year as QBE’s adjusted net profit after from continuing operations was up +6% from last year to $619m. The result was largely underpinned by a significant boost in investment income as well as improved operating performance for most of the
business albeit a severely weather-impacted North American Crop result. As we have discussed in the past, QBE is one of the only Australasian listed companies which benefits directly from higher US interest rates (as it improves QBE’s investment income). Unfortunately, the surprise 50 basis point rate cuts from the Federal reserve and likelihood that interest rates are now expected to remain lower for longer will negatively impact QBE’s investment earnings. We maintain our HOLD rating on QBE given there is limited upside given margins from QBE’s underlying business are now likely to stabilise adding to the negative impacts of a low-interest environment on QBE’s net investment income.
FLETCHER BUILDING (FBU:NZ / FBU:AX) BUY (High Risk): Better than Feared
Shares in FBU slipped with the market as concerns surrounding the economic impact of coronavirus shock is creating a lot of volatility. Prior to the global outbreak, FBU shares had been climbing higher (since our last report) and jumped after reporting their 2020 first half result. Despite reporting a weaker result, the market reacted positivity to the higher interim dividend as well as relatively upbeat guidance as their efforts to cut costs in their struggling Australian business started to be realised in the second half, with more cost benefits expected in the following year. FBU’s operating earnings (EBIT) was $219m for the first half of the 2020 financial year, down -12% from last year largely due to challenges facing the steel
business and Australia providing another disappointing result, while the remaining New Zealand core businesses delivered a stable result. Partly due to challenging market conditions as well a larger skew of earnings expected in the second half. Management guided group earnings for 2020 full year is expected to be between $515m and $565m, with earnings having a strong weighting towards the second half, with more residential settlements expected and a recovery in steel business, albeit this guidance does not take into account any coronavirus related disruption. Given the spread of coronavirus we believe there is still a lot more near-term volatility and possible downside risk to face the market and because of this we would hold back on new investments. Under normal conditions when coronavirus risks/uncertainty has subsided we maintain our High Risk BUY recommendation on FBU given its current valuations for medium term
investors, with upside potential supported by stable construction activity in New Zealand as well as a healthy balance sheet.