Weekly, Pushpay | ZEL | GEM | GNE | ALG

21 September 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: Still Believers
Shares in church payments software business PPH have been under pressure since our last update, largely due
to former CEO (and co-founder) Chris Heaslip stepping down from his position as CEO and offloading 12.24m
of his shares which spooked the market. Since that slump, Pushpay shares have staged a recovery recently, as
new CEO Bruce Gordon enlightened the market of his plans to take Pushpay to the next level, which was well
received. The plans included further product development and functionality and improved sales and
marketing initiatives. We also recently met with and were impressed by Bruce who has an impressive
background in the payments sector. Pushpay have upgraded their operating earnings (EBITDA) guidance for
the 2020 financial to be between $23m to $25m, driven by cost efficiencies in recent months which will result
in lower costs in the second half. Unfortunately, operating revenue is guided to be slightly lower due to
customer acquisitions in recent months being slightly weaker than in the previous year. 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 our medium-term our 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 to
improve customer acquisitions.

Z ENERGY (ZEL:NZ / ZEL:AX) HOLD: Margin Pressures
ZEL shares slumped recently, largely due to announcing a -$60m cut to its 2020 full operating earnings
guidance citing increased competition and heavy discounting in a flat market which is tightening margins
creating challenging trading conditions. Ironically this comes at the same time the Commerce Commission
market study into the fuel industry suggested that the sector was generating excess returns due to a lack of
competition. Also, soon after a drone strikes knocked out ~50% of Saudi Arabia’s Aramco production, which
has caused oil prices to rise +10% as the disruption affects short-term pricing. A significant volume of the
halted oil production should be restored within days, but weeks will be needed to restore full output capacity.
Z Energy added that there would be no ‘immediate supply issue’. There are too many headwinds at play,
predominately increased competition in a flat market which is likely to decline as the proliferation of electric
vehicles starts to increase (over the long term), along with uncertainty with oil pricing likely to become more
volatile and potential government regulation limiting upside. The above headwinds are too great to justify Z
Energy’s high dividend yield (based on current share price) and we remain wary around Z Energy’s underlying
business. We have a HOLD rating as the dividend will likely support the share price, but with our long-term
view being negative.

G8 EDUCATION (GEM:AX) BUY (High-Risk): Turnaround Commencing
GEM shares slumped after delivering their 2019 first half result, as their reported net profit after tax fell -20%
from last year down to $19m. However, this was largely due to a change in accounting policy with the
treatment of leases. After a challenging stint with unfavourable trading conditions of over-supply of childcare
centres and weakening demand, G8 education appears to be heading towards the right direction of a
turnaround, benefiting from moderating supply and improved demand following the new childcare subsidy.
Operationally we believe G8 education delivered a promising result and the market reaction might be
overplayed. As a result, total revenue grew +8.6% largely due to improved occupancy and higher fees, coupled

with improved wage efficiencies which helped boost earnings (EBIT) of existing centres by +14%. Underlying
earnings rose 7% from last year to $51.6m, in line with consensus forecasts, and on an underlying basis net
profit after tax came in at $26.2m, +2.3% higher than the previous year – both ignoring the impact of the new
accounting treatment providing a better indication of the group’s underlying operations. With the worst over
and costs likely to remain relatively fixed, earnings are showing signs of should improvement as market
dynamics continue to act in GEM’s favour with occupancy rates continued to lift. We remain comfortable with
our High-Risk BUY recommendation and are optimistic around a recovery although caution investors that GEM
shares are still prone to short-term volatility. With the recent dip providing an attractive entry point while
paying a healthy 6% dividend yield which appears appealing in a low-interest rate environment.

GENESIS ENERGY (GNE:NZ / GNE:AX) HOLD: Still Reliant on Coal
GNE shares continued to climb higher, following an OCR interest rate cut by the Reserve bank of New Zealand,
and lower interest rates globally indicating the current low-interest rate environment will be around longer
than initially anticipated. Genesis shares also moved higher after delivering a strong operating performance
despite challenging conditions with electricity generation outages and gas constraints limiting production
volumes. Operating earnings was $363m for the 2019 financial year, which was up +0.8% (or +$3m) from last
year. Underlying net profit after tax, which excludes fair value movement adjustments and business
acquisition costs was $67m, up +16% from last year, largely due to improved retail earnings offsetting weaker
oil production from its Kupe interests and a flat performance from the generation arm. Interestingly, Genesis
plans to cut the use of coal for energy production by 2020 despite continuing to remain heavily reliant on it as
it doubled energy generation from coal to offset decline in hydro and gas production. Genesis Energy remains
our top pick in the sector – primarily due to its diverse production base. But given its strong share price run it
is now only paying a relatively modest dividend yield of 5.1% – and we maintain our HOLD recommendation
due to its valuation.

ALG shares continue to slide downwards as it struggles to recover from the fatal incident at Deamworld in
October 2016, slumping lower after releasing another weak result for the 2019 financial year. Ardent reported
a net loss of -$60.9m for the 2019 financial year, lower than the -$90.7m net loss reported in the previous year
due to a reduction of specific items. While management cancelled paying a dividend as it focused on expanding
their Main Event business and investing into revitalising their Dreamworld theme park. Revenue from
continuing operations (excluding the disposed businesses) was up +14.4% from last year as Main Event
expanded the number of centres and with favourable currency movements. Excluding the impact of all specific
items (non-recurring items), operating earnings from continuing operations was $54.2m, up +15.7% (or
+$7.3m) from last year, due to increased earnings from Main Event (boosted by favourable currency
movements and reduction in corporate costs), which were both offset by weaker earnings from Theme Parks.
Following another disappointing result and we maintain our HOLD rating, given the turnaround of the core
Dreamworld theme park appears more difficult than expected given the amount of time that has passed.

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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