Weekly, Pushpay | XRO | KPG | NZK | TPG

17 November 2019

Weekly Report

Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.

Pushpay (PPH:NZ / PPH:AX) BUY: Acquisition Hunt
Shares in church payments software business Pushpay (PPH) jumped higher after releasing a solid first half result for the 2020 financial year. For the first half of the 2020 financial year PPH delivered net profit after tax of US$6.5m, a turnaround from a net loss of -US$4.4m in the same corresponding period last year. The result was driven by solid revenue growth up +30% from last year and stripping out costs which helped deliver operating leverage with improved both gross margins and operating earnings (EBITDAF) margins. Given the business is now generating positive operating cash flow, the market reacting positively to Pushpay’s announcement that they are actively looking for acquisition opportunities to achieve scale faster than through organic growth alone. Pushpay operating earnings (EBITDA) guidance for the 2020 financial year remains unchanged from its recent upgrade, to be between $23m to $25m, driven by cost efficiencies in recent months which will result in lower costs in the second half. Operating revenue is guided to be at the upper end of between US$121m and US$124m, and gross margins to be above 63% – which has Pushpay achieved so far in the first half. We reiterate our BUY rating on Pushpay, as the current share price provides a relatively attractive entry point for medium term investors with an appetite for risk. With operational performance improving and given the business model benefits from its operating leverage our medium-term outlook on Pushpay remains unchanged, and we believe shareholders will be rewarded if Pushpay can grow into and achieve the market penetration targets it has set – especially as it looks to expand its product offering via acquisition, potentially a church CRM software business, to improve its product offering and grow faster.
Xero (XRO:AX) BUY (High-Risk): Regulatory Tailwinds
Xero shares soared to new high’s again to become ’s best performing stock pick, up +450% since initiating our BUY recommendation in 2015 (starting in our NZ portfolio, then shifting to our Aussie portfolio). The cloud-based accounting software firm swung to its first interim net profit after tax of $1.34m, as subscribers grew to 2,057,000 up +30% over the last 12 months, and taking two and a half years to double from 1 million subscribers. Subscriber growth was driven by Australia and UK both adding 112,000 and 101,000 subscribers over the half, driven by regulatory requirements which are easier to adopt for cloud-based accounting software. Accordingly, total operating revenue for the half was $338.7 million, up +32% from last year in-line with subscriber growth, with average revenue per user exceptionally strong in New Zealand showing benefits of additional services even in a mature market. Xero are showing signs of benefitting financially from its growing scale as gross margin and operating earnings margin both improved, offsetting continued increase in investment to drive strong subscriber growth. While we continue believe Xero is a great business with strong growth potential over the long-term given the market opportunity, at current valuation it is priced for perfection making it subject to some volatility if future growth rates are below the markets high expectations. We remain BUY rated given their execution and strong market growth potential, however with a High-Risk caveat given its expensive valuation and Xero’s late entry (and competition risk) in what was once seen as its largest potential market (North America). New investors may want to wait for some share price
consolidation and time their entry.
Kiwi Property Group (KPG:NZ) HOLD: Expensive Offer
Shares in New Zealand’s largest listed property vehicle Kiwi Property Group (KPG) fell after announcing their plan to raise up to $210m, with a capital raise issuing new shares at $1.58 per share (a -5.4% discount to what they were trading at prior to the announcement). It appears to be an opportune time to conduct an equity raise as KGP shares have been on a strong run this year and were trading at all-time highs. With the proceeds used to pay down debt to allow headroom to proceed with further development at their mixed-use site or even pursue acquisition opportunities. $180m has been successfully raised by institutional investors, with $20m available for New Zealand retail investors (with the ability to take up $10m more depending on demand).
Given KGP’s current valuation (well above NTA of $1.43) and the price the new shares are on offer, we would not recommend taking on the offer. KPG is our preferred New Zealand commercial property exposure given the quality of assets in their portfolio. However, we maintain our HOLD given its relatively expensive valuation given its strong run this year (now trading above net tangible asset per share) and only paying 4.4% dividend we see limited upside potential at the current juncture.
NZ King Salmon (NZK:NZ / NZK:AX) HOLD: Still in ‘Hot’ Water
NZK shares edged higher after their AGM where they reiterated their guidance for the 2020 financial year
which was unchanged since their 2019 full year result release a few months earlier. NZK expect operating
earnings guidance for the 2020 financial year will be between $25m to $28.5m, in line with the 2019 result. The guidance is underpinned by 2020 harvest volumes being around 8,000MT, improving slightly from the current year’s expected harvest volumes – which assumes elevated mortality rates due to warmer waters persisting with increased capital expenditure to improve capacity, and increased automation equipment used to help regulate cooler water at warmer sites (possibly mitigating mortality rates). The real positive being NZK remain upbeat towards receiving consent to relocate farms to cooler deeper water, however any decision won’t be made until after the 2020 election. NZK’s 2019 full year result came with no surprises as net profit after tax fell -11% from last year down to $12.9m, after another challenging year due to warmer waters increasing mortality rates affecting fish performance. Despite lower sales volume, revenue rose +8% from last year to $172.6m, benefiting from continual focus to target branded premium markets to maximise value, shifting limited volume to better returning markets where demand was strongest. While NZK has a great

business and product in high demand which it is able to sell at a premium price, weather events such as this are largely an unavoidable risk for companies such as NZK. Unfortunately, the warmer water temperatures are creating a setback to NZK’s harvest levels and profitability – and given risks surrounding the company we continue to remain HOLD rated
TPG Telecom (TPM:AX) HOLD: Merger Possibility?
TPG Telecom (TPM) have been trading higher after delivering a better than expected 2019 financial year result, as well the market appearing more upbeat on TPG’s ability to overturn the Australian Competition and Consumer Commission (ACCC) block on the proposed merger between the listed telco and Vodafone.
Earlier, TPG shares jumped on its 2019 financial year result after delivering an underlying operating earnings (EBITDA) of $823.8m, despite being down marginally from last was ahead of its guidance range $800m to $820m. Despite being adversely impacted by customer migrations to NBN services and experiencing weaker margins in its core consumer business, TPG managed to offset these headwinds by improving revenue and earnings in its corporate business, as well as continued realisation of operating expense efficiencies across the group. TPG’s reported net profit was $173.8m, less than half from last year due to largely due to non-cash impairment arising from their decision to not roll-out their own Australian mobile network. The current share price over-values TPG’s existing business in our view as with a price to earnings multiple of 25x it is rich given the lack of growth with its existing business and prevailing headwinds impacting its core business. TPG’s share price currently reflects that there is a good chance they should receive regulatory approval to go ahead with the merger, but could easily sink significantly lower if their appeal to overturn the ACCC decision is rejected – which is still a potential risk.


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