Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
SCALES CORP (SCL:NZ) BUY: Essential Service Status
Scales Corporation (SCL) shares jumped after announcing it is considered an ‘essential service’, and will continue to remain operational during New Zealand’s four-week lockdown. Scales have completed 40% of the 2020 crop harvest and subject to market conditions currently has adequate resources to cover harvest, packing, cool storage and shipping.
Further, given the nature of their exports, so far there has not been an issue in terms of exporting products such as apples into key markets such as China. Scales also delivered a sound result for their 2019 financial year, with an underlying gain in net profit after tax of $36.4m, up +2% from last year, near the upper end of management’s guidance. We remain confident in SCL’s ability to growth their earnings both organically and see significant upside potential via strategic acquisitions given the additional funds it has to reinvest – as it actively searches to make a value add agri acquisition.
There may be market related volatility over the near-term, but Scales should emerge from the covid-19 crisis relatively unscathed, especially given it has an ample amount of cash. We remain comfortable with our BUY recommendation on Scales at its current valuation.
FISHER & PAYKEL HEALTHCARE (FPH:NZ / FPH:AX) BUY: Covid-19 Tailwinds
While this a difficult period for many both in terms of health and finances, there are some businesses which are benefitting from the coronavirus outbreak. These include FPH, which is trading at all-time highs as demand for their core repository products has surged higher, while the significantly weaker kiwi dollar is creating an earnings tailwind (most of FPH’s sales are in US dollars), trading below US$0.60, levels not seen since 2009. As a result, FPH have lifted their earnings guidance for the 2020 financial year and expected net profit after tax to be between $275m and $280m, up +32% from last year, and +$20m higher than the previous guidance. With the recent surge in share price FPH does trade at a high
valuation multiple (P/E of 49x) with the market having high expectations around growth. However, we believe FPH is a quality business that deserves its premium valuation, given their track record and positive outlook. We remain comfortable with our BUY rated on FPH for medium-term investors as the investment case remains unchanged and continue to hold it in our NZ portfolio, especially as a defensive holding in a volatile market. Given market wide volatility, we would encourage new investors to enter positions during market ‘dips’.
NZ King Salmon (NZK:NZ / NZK:AX): Upgrade to High Risk BUY
NZK shares edged higher after providing a covid-19 update, as it kept operating earnings (EBITDA) guidance for the 2020 financial year unchanged at between $25m to $28.5m. farmer and processor of King salmon, NZ King Salmon operates within the primary industry food producer category which has been included in the Government’s list of essential services which can continue to operate. NZK said that while too early to make conclusions, harvest levels appear to be better than the last two years, partly thanks to cooler water returning to long-term average levels. The NZ dollar has also fallen
significantly which improves profits on NZK’s exports. There is a near term risk around demand from the US. Assuming a marginal hit to earnings due to covid-19 and return to near-normal economy later in the year, we upgrade NZK to a High-Risk BUY based on its current valuation. NZK has a premium product with strong demand, and harvest supply risks look to be lower and now well understood by the market. We remain mindful of past agriculture related risks but see a positive risk/reward trade off.
WOOLWORTHS (WOW:AX) SELL: Only One Leg to Stand On
Woolworths (WOW) shares have been under pressure since the covid-19 pandemic, and like many in the market recently removed guidance for the 2020 financial year, as it has been forced to close it hotels business and is unable to predict consumer spending habits. WOW highlight they have a strong balance sheet and that its supermarket business is continuing to perform well given the coronavirus outbreak, which should provide some support for overall the group. WOW will also defer the separation of their Endeavour drinks and hotel business until next year. WOW posted a solid result for the first half of the 2020 financial year (6-months ending December 2019), driven by strong performance from its supermarket business and Big W, which delivered its first operating profit since 2016. We continue to believe WOW core business will succumb to greater industry pressure, especially as supermarket industry becomes more competitive, but for the meantime is providing a reliable source of cashflow in a very challenging environment. Given the risks imposed
on retail and hotel, WOW’s other businesses will likely struggle significantly over the near-term.