Weekly, Pressure on Heartland | SHV| PPH | EA | AAC

13 February 2019

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
Heartland Group (HGH:NZ / HGH:AX) HOLD: Mortgage’s Reversing
Heartland Bank shares have been under pressure of late, most recently with the recent
announcement from the royal commission in Australia – in which there are proposals to ban
trail fees/commissions for mortgage brokers. The majority of Heartland bank’s recent growth
has been from reverse mortgages in Australia, with 70% of that revenue attributed to brokers
– so the recommendation is set to hurt Heartland due to their heavy reliance on brokers in
Australia and lack of physical presence. As well as that, the RBNZ are proposing new capital
requirements which would require banks to hold more capital, which would then further limit
their ability to grow in New Zealand. The risks of a slowdown in the NZ economy and
regulatory pressure from the royal commission and RBNZ, combined with their higher risk
profile has seen us hold a more cautious view on the outlook for HGH.

SELECT HARVESTS (SHV:AX) BUY (High-Risk): 2019 the Year of Opportunity?
Shares in almond producer Select Harvests were up as it released an encouraging update
on the back of a very favourable growing season. While the drought in Australia has impacted
many Australian agriculture stocks, the dry conditions are favourable for growing almonds
(although water shortages are still an issue) and severe weather events have been mitigated
by increased investment in orchard management. SHV also continue to expand into key
markets like India and China, and exports to China from Australia are booming, particularly
as China has been raising tariffs on US almond imports – which makes Aussie a much more
attractive trading partner. SHV released a promising update, and look to be in a recovery
phase after what has been a challenging two-year period for the company.

Pushpay (PPH:NZ / PPH:AX) BUY (High-Risk): Widening Gross Margins
Shares in church payments software business Pushpay were lower last week, after releasing
what we saw as another encouraging result for its December 2018 quarter. It appears the
market had higher hopes, particularly with revenue per user was a little short of market
expectations, due to processing volumes not quite meeting management expectations. The
highlight was that Pushpay now expects that its gross margin percentage will increase to over

60% for the full year ending 31 March 2019. This is an improvement on previous indications,
and compares to a gross margin percentage of 57% in the first half of 2019 financial year. It
is pleasing to see Pushpay move closer to profitability. Despite what was been a time for
their share price in recently, operationally nothing significant has changed in terms of the
medium-term outlook. We believe that shareholders will be rewarded if Pushpay can grow
into and achieve the market penetration targeted.

Electronic Arts (EA:NASDAQ) BUY: E-Sport Growth
The last 12-months have been volatile for EA after announcing a disappointing third quarter
result and another revenue downgrade, due to the significant competitive challenges. Total
revenue for the 2019 fiscal year third quarter came in a $1.29 billion, which was up +11%
from last year but missed expectations due to intense competition and transformation of the
gaining industry, as well as operational mistakes weighing on performance. However, soon
after EA shares bounced back, after a positive analyst note pointed out the potential long-
term benefits of the popularity of its major sporting titles – boosting further subscription style
revenue. Other than boosting digital revenue and margin, a subscription service makes it
easier for gamers to access new content updates for the company’s games, thereby
encouraging more spending and engagement.

AAC shares have fallen to 15-year lows after a once-in-a century downpour throughout
Western Queensland severely impacted 4 of its 21 properties. While it is still difficult to make
an accurate assessment of the livestock and infrastructure, the overall impact on the 2019
financial year is expected to be material. Despite this event ACC have claimed it “will not
affect the company’s ability to fulfil supply obligations or the rollout of its branded beef
strategy”. We had high hopes for AAC’s transition to becoming an integrated beef seller
where it could benefit from value-add opportunities and capitalise on our ‘dining boom’
investment thematic. While the recent one-off weather event was unfortunate, we believe
macro factors continue to act against AAC and now that AAC is considering shifting most of
their business back to more stable cattle sales, we maintain our HOLD recommendation as
we see limited upside.

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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comprises general securities information only, and has not been prepared taking into account the particular investment objectives, financial situation
and needs of any particular person. Individuals should therefore assess whether it is appropriate in light of individual circumstances, or discuss, with
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weekly 13 Feb 19

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