Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
New Stock Reports
QANTAS AIRWAYS (QAN:AX) Buy (High-Risk): Initiation of Coverage
Qantas (QAN) is Australia’s largest domestic and international airline with a dominant market
position operating in almost a domestic duopoly. QAN has a strong brand presence with 15%
market share of international flights in and out of Australia. As an airline, QAN is a clear
beneficiary of our tourism boom investment theme.
The last few years have seen a successful turnaround of the business which has been through some challenging times. QAN is now a cost-efficient operator and generates superior margins relative to much of the competition. QAN management have been disciplined and have kept shareholder interests in mind – with its dividend on the rise and significant share buybacks improving returns for investors. Given a strong share price run, QAN trades at a slight premium to peers although the valuation remains reasonable in our view at circa 10x earnings. Finally, airline investments do require a higher appetite for risk. Key risks for the stock include increased competition, and a higher oil price (jet fuel is the most important cost
for an airline).
SUMMERSET (SUM:NZ / SNZ:AX) HOLD: Still Expensive
SUM shares were a touch higher after they released solid guidance for their 2018 interim
result. While new sales volumes were down from 179 units last year to 145, resales were up
slightly to 154 units. Summerset said they benefitted from strong development margins on
homes settled over the half, which drove the result. We expect demand for retirement villages
to remain strong given an ageing population, although a weakening property market will likely
slow down profit growth at the margins. Our view on Summerset remains unchanged, and
we maintain our HOLD recommendation until we see some share price consolidation or
indications of a lower valuation.
ELDERS LIMITED (ELD:AX) BUY: Buy the Dip
Shares in diversified agri-business ELD fell sharply after releasing a seasonal update, stating
drier weather is negatively impacting their retail business and a decline in cattle prices will reduce agency earnings. As a result, net profit after tax is expected to be marginally up from the $58m of last year. We see the share price reaction as particularly harsh, especially as weather events are unavoidable risks for agricultural businesses such as Elders. For medium term investors we see the current fall as a buying opportunity. We reiterate our BUY and continue to see ELD’s as a benefactor of our ‘dining boom’ investment thematic given its diverse agribusiness portfolio.
AUCKLAND AIRPORT (AIA:NZ / AIA:AX) HOLD: Air NZ Attack
(AIA) and other New Zealand airports have been accused of behaving like monopolists and extracting excessive charges by Air NZ at a select committee hearing. Auckland Airport have among other things argued their risk profile is higher (so they need to generate a higher return) given they are undertaking a large expansion plan which requires a $1.88bn investment, which includes the construction of a second runway. Given Auckland Airport has monopoly like power the threat/risks of regulation are unavoidable. We see AIA as a beneficiary of the tourism boom. However, we still see AIA expensive with a valuation at
31.5x earnings, combined with the potential of further captal needing to be raised to fund its expansion plans. Accordingly, we believe there are better value investments to focus on in order to gain exposure to the tourism thematic.