Weekly, Qantas & Air NZ | LYC | WES | Nike

2 October 2019

Weekly Report

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

QANTAS AIRWAYS (QAN:AX) BUY (High-Risk): Solid Operator
Qantas shares have been trending upwards recently however in a turbulent manner due to volatility in oil
prices more recently caused by the drone attacks on Saudi Arabia’s Aramco production plant. Prior to that
Qantas shares have been trending upwards after delivering a sound result for the 2019 financial year, despite dealing with a number of headwinds as the market continues to react positively to Qantas’ shareholder friendly management announcing another share buyback which will only improve shareholder returns going forward. Qantas was able to lift revenues by +5% to $15.7 billion to offset higher fuel costs, but not enough to offset Qantas underlying profit before tax came in at $1,302m, down -17% from last year due to higher fuel costs, a weaker Aussie dollar and other cost increases. Statutory profit before tax was down -6.4% from last year to $1,265m with the above-mentioned costs partially offset by gains on asset sales. Overall Qantas was able to lift revenues by +5% to $15.7 billion due to efficient capacity management, while unit revenue grew due to robust demand as well as easing competition capacity on international routes. QAN management have been disciplined and have kept shareholder interests in mind – with its dividend on the rise at a significant rate and share buybacks improving returns for investors. We see QAN as continuing to benefit from stable tourism, and it is attractively priced at a price to earnings ratio of less than 10x. However, if fuel prices were to continue to rise and demand weaken this can dramatically hurt QAN’s margins and for
this reason we have a high-risk caveat (given factors outside of QAN’s control).

AIR NEW ZEALAND (AIR:NZ / AIZ:AX) BUY (High-Risk): Competition Departing
AIR shares lifted higher as rival Jetstar signalled it plans to withdraw from five unprofitable regional New
Zealand routes in November 2019. Air NZ also released a better than expected 2019 full year result, which
beat its previously downgraded earnings guidance (of $340m) due to jet fuel prices remaining more expensive than initially anticipated, and slightly weaker demand. Earnings before tax came in at $374m, down -30% from last year largely due to a +21% increase in average cost of jet fuel, as well as unfavourable foreign exchange movement. Fortunately a lift in capacity, stronger demand and cost savings benefits partially offset higher fuel costs and Air NZ was able to maintain its full year dividend of 22 cents per share, which was flat with last year.
Despite fuel prices remaining higher and tourism growth slowing down, these risks are being offset by
competition easing both domestically and internationally and Air NZ’s cost saving initiatives, including
investment into more fuel-efficient aircrafts. One thing in Air NZ’s favour is it offers an attractive 8% dividend yield for the year ahead, which should compensate for any short-term downside risk and appears attractive, especially in a low interest rate environment.

LYNAS (LYC:AX) BUY (High-Risk): Conditional License Renewal
Shares in rare earth miner LYC continue to be volatile amongst a number of news events, both positive and negative. The major being Lynas receiving a 6-month extension of its operating license, which was shorter than expected with conditions which are slightly tougher than previously anticipated. This includes relocating their Cracking & Leaching process to Western Australia within 4 years – which is currently part of Lynas initial 2025 growth plan, and obtain consent for the location of a Permanent Deposit Facility (PDF) within 6 months. Lynas 2019 full year result was mixed, as weaker rare earth prices offset record production levels (up +8% from last year), which created operating earnings (EBIT) of $56.4m, down -30% from last year. Reported net profit tax was $80m for the year, up +50% from last year, largely due to lower financial expenses and a one-off financial gain. NdPr pricing was weak for most of the year, however trade war concerns (US banning Chinese rare earth imports) sparked a rally late in the financial year due to concerns around supply. In terms of near-term outlook, demand continues to remain strong outside of China, however Lynas have yet to receive approval in Malaysia to lift its production levels, which had restricted production growth in the 2019 financial year. In our view, Lynas provides an attractive investment for those wanting to gain indirect exposure to electric vehicle theme.

WESFARMERS (WES:AX) HOLD: Bunnings Slowing Down
Retail conglomerate WES shares continue trend upwards after reporting a stronger-than-expected profit
result. The Coles demerger, as well as sales of Bengalla coal operations, Kmart Tyre and Auto Service and
Quadrant Energy, boosted the company’s net profit after tax substantially to $5,510m, which includes
significant one-off items totalling $3,570m. Profit from continuing operations was up +13.5% from the
previous year to $1,940m, with the current portfolio of businesses reporting solid results. WES is generating improved shareholder return following a successful repositioning of their portfolio – largely driven by Bunnings which continues to be a strong performer – albeit at a slower growth rate than in the recent past. Heavy interest rate cuts have made WES dividend appear more attractive to income investors. We have also changed our negative view on the retail industry to stable, as consumer sentiment will more likely remain supportive whilst the property markets in Australasia stabilise from its recent weakness. We remain HOLD rated on WES based on its current valuation and intense rivalry in the retail sector, but still continue to view the business more positively than rival Woolworths given the current portfolio of businesses.

Nike (NKE:NYSE) BUY: “Just” getting it done
Nike shares soared to new highs after delivering an impressive first quarter result for the 2020 fiscal year,
which beat the market’s high expectations. Revenue rose +7% to $10.7 billion, net profit after tax was $1.4
billion, up +28% from last year, and earnings per share came in at $0.86, well above management expectations of $0.70. Despite macroeconomic uncertainty Nike continue to get the job done, thanks to its smart marketing campaigns, strong product innovation and continual growth in demand for both athletic apparel and gear, and athleisure. Nike’s growth was broad-based both geographically and across product lines, with the standout being China again lifting revenue by +27% from last year, and sales from digital source up +42% following improved digital services and greater international penetration of the Nike and SNKRS apps. Despite the ongoing presence of US-China tariff headwinds and economic uncertainty, management lifted its 2020 fiscal-year revenue guidance to high single digit and increased its forecast for gross margins. We maintain our positive rating on the back of Nike’s drive to deliver new and innovative products consumers want, driving growth in China and North America – whist further expanding margins.

29-Sep-19

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