Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
SPARK (SPK:NZ / SPK:AX) BUY: Sparkling Dividend
SPK shares continue to trend higher, surging after delivering a solid result for the 2019 financial year. Despite
revenue remaining flat, Spark managed to lift net profit after tax by +12.1% from last year to $409m by cutting
operating expenses by -4.3% thanks to Spark’s three year ‘Quantum’ transformation programme, introducing
more digitisation and automation initiatives. Spark has grown their business in the highly competitive mobile
and cloud services categories, held their broadband position, entered new markets like sports streaming, are
looking to expand their Lightbox entertainment streaming business, and continue to lead on cost
management. These factors were partially offset by further weakness in voice business, and a lower dividend
from the Southern Cross business which is investing funds into a NEXT cable for growth. The highlight was the
25 cent per share dividend which was unchanged from last year and management guided they would maintain
this level of dividend payment for 2020, providing a stable outlook while maintaining an attractive dividend of
5.7% at current levels. In a low interest rate environment Spark’s attractive dividend remains appealing.
The margin expansion and cost saving benefits being realised have also increased our confidence in Spark and
helped offset the tailwind of weaker voice business. We maintain our BUY recommendation given the dividend
yield and upside potential from their streaming & digital businesses and benefits from a more agile and low-
cost business model, albeit there always some execution risks.
Sky TV (SKT:NZ / SKT:AX) SELL: Dividend Cancelled
Sky TV shares continue to plummet, trading at all-times lows as it announced it has axed its dividend after
delivering another weak result for the 2019 financial year despite being ahead of its guidance. Sky TV reported
a full-year loss of $607.8m, after another $670m write off against the value of its business as it believes it can
no-longer lift satellite subscriber numbers, which is its core business. Sky TV’s underlying (excluding one-off
writes offs) net profit after tax fell -18.4% from last year down to $97.4m reflecting lower revenue as Sky TV
continues to bleed high-value satellite subscribers, despite adding more streaming subscribers. With Spark
Sport entering the market Sky will lose its monopoly power forcing them to deliver a better value streaming
product which could see more existing high-valued satellite subscribers shift to its streaming service, lowering
revenue and earnings. Along with this, Disney+ is entering into the NZ market making Sky TV lose a significant
chunk of its children programming – losing its one-stop shop appeal for families that in the past justified its
higher pricing. SKT continues to lose ground as it struggles with the challenges of the “digital disruption” and
since our change in recommendation to SELL we have seen SKY TV’s share price continues to fall down to new
record lows. Our outlook continues to remain negative.
TREASURY WINE ESTATES (TWE:AX) BUY (High-Risk): Cloudy Outlook
TWE shares surged close to all-time highs after delivering an impressive 2019 full year result, guiding that solid
double-digit growth is expected to continue, shutting down recent reports by short sellers around the
performance of the business.
The result was driven by solid net sales revenue of $2,831.6m for the year up +17% from last year, partly
assisted by favourable currency movements, or up +12% on a constant currency basis representing the
strongest organic growth rate in the company’s history. A key driver of this growth was a +2.7% increase in
volume and a +9.5% growth in sales revenue per case, as TWE benefits from the positive momentum from
their premiumisation and price realisation strategy within the higher value Luxury and Masstige portfolio. Net
profit after tax was $419.5m, up +16% from last year, with strong performance across all regions, particularity
Asia. TWE also reiterated solid double-digit earnings growth is expected to continue through into the 2020
financial year, with increased investment into greater capacity to support the next level of growth. We
continue to maintain a positive view on TWE and believe they will continue to benefit from demand as the
Chinese consumer pallet evolves, as part of our dining boom investment theme and as a beneficiary of a
weaker Aussie dollar. Albeit with some political risks given the recent trade tension between the US and China
and other allegations (surrounding questionable sales tactics and aggressive accounting) which have yet to be
proven true. Hence, we change our recommendation to a High-Risk BUY. Given TWE now trades close to all-
time highs we would advise investors to time their entry point.
MYER HOLDINGS LIMITED (MYR:AX) HOLD: 1st Profit in 9 Years
Myer’s (MYR) share price popped after delivering its first increase in underlying net profit in nine years,
encouraging the market that the worst may be over for the retailer. Despite total sales falling -3.5% from last
year down to $2,991.8m, Myer’s underlying net profit after tax rose +2.2% from last year up to $33.2m.
Changes made by their new CEO John King appear to have stabilised Myer, as it focused on improving
profitability by dumping unprofitable brands, ripping out costs, reducing inventory and working with landlords
to reduce unwanted floorspace. A highlight was online sales were up +21.9% from last year to $292.1m, now
representing their largest store accounting for 9.8% of total sales and Myer managing to lower net debt by
$69m down to $39m. While the strategy appears to be showing signs of improvement, a full turnaround
appears possible over the medium-term, but not without execution risks. Not only is the retail environment
extremely competitive, the industry faces uncertainty with consumer spending likely to remain supportive at
current levels, due to heavy interest rate cuts used to encourage further spending and economic growth as
macro-economic conditions in Australia had started to weaken of late. For now, we maintain our HOLD rating
on Myer, although believe there is hope for current holders with a possible turnaround on the cards led by
new CEO John King – as further improvements are realised down the track.
INVOCARE (IVC:AX) BUY: Result Below High Market Expectations
Funeral services company IVC shares fell after releasing a generally positive set of number for the 2019 first
half result, as it showed positive contributions from their Protect & Grow strategy as customers reacted
positively towards their improved facilities and services. However, the market had higher expectations for the
funeral operator which had been trading at a high valuation recently. After a tough 2018 for Invocare, which
had lower death volumes in Australia, 2019 saw a return back to more normalising levels, which helped grow
case average for first half results. On top of that meaningful contributions from acquisitions made over the
last year and completion of a number of rejuvenated sites all drove revenue up +7% from last year to $241.5m,
and operating earnings by +16.9% from last year to $468.8m. Invocare also entered into the pet cremation
industry within the half, as it has been identified as a rapidly growing industry which is also a natural expansion
to Invovare’s core operations. Our long-term investment thesis remains intact as we believe IVC is set to
benefit from favourable demographics of an aging population.
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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