Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
SUMMERSET (SUM:NZ / SNZ:AX) BUY: Upgrade to BUY
SUM shares jumped after delivering a well-received first half result for the 2019 financial year. Summerset
reported net profit after tax of $92.6m (which includes unrealised valuation gains) for the half, which was
down -4% from last year due to lower levels of retirement unit pricing increases. Underlying profit, which is the retirement villages preferred metric (which excludes unrealised valuation gains in the fair value of
investment property) was $47.8m, up +6% from last year due to growing scale of the business delivering higher deferred management, care and service fees. Despite lower sales volumes, better margins from new builds helped deliver a higher profit than last year. Total assets hit $3.03 billion, up +24% from last year, largely due to the purchase of six new villages since the start of the year, as SUM increase their land bank to almost 5000 to support a future development target of 600 units per year, two to three years from now. We previously had a negative view on the property market and now believe the market is more likely to remain stable after heavy interest rate cuts by RBNZ this year. It appears less likely NZ will experience a continued property boom and at the same time a crash from here on out, so Summerset’s margins on resales will start to moderate, and earnings growth will be hinged towards development activity. Given Summerset’s trades closer to its NTA (Net Tangible Asset) and at a much lower premium than it has in the past, we believe it is more attractively priced and we upgrade our recommendation to a BUY.
CSL LIMITED (CSL:AX) BUY: Star Performance to Continue
CSL shares have broken out to new all-time highs after the global biotech giant delivered another solid result for the 2019 financial year. Reported net profit after tax (NPAT) was US$1.919 billion which was up +17%, on the back of +11% revenue growth (under constant currency), while reported growth rates were lower due to unfavourable currency movements. The result was driven by solid growth from CSL’s core immunoglobulin portfolio and Seqirus influenza flu both performing well. Earnings (EBIT) grew at a slower rate, as CSL ramped up research and development and increased operating expenditure to increase capacity and drive future demand to fuel further growth. Pleasingly, management expects the solid growth to continue in the 2020 financial year and has provided net profit after tax growth guidance of +7% to +10%. This includes the one-off financial impact on its albumin sales of $340m to $370m as it transitions to a new model of direct distribution in China – with the above investments ready to set up for an even better 2021 result. CSL continues to be a star performer, and we continue to hold it in our Australian portfolio given its positive outlook as a defensive healthcare business.
SKYCITY ENTERTAINMENT (SKC:NZ / SKC:AX) BUY: Dividend Still Supportive
SkyCity has announced a small increase in underlying earnings and signalled growth in the current year despite challenging conditions. The casino operator delivered an in-line with expectations result lifting normalised net profit after tax +1.9% from last year to $173m, which smooths out the impact of big wins by its high rollers.
The main Auckland site showed mixed signs, with gaming machine revenue growth of +7.4% highlighting
pleasing momentum in that business, albeit a combination of lower win rates and some cannibalisation from tables to EGMs saw lighter main gaming floor revenue growth, with overall growth offset by softer hotel performance as supply outpaced demand. SkyCity isn’t yet experiencing the full impact of a slowdown in tourism but chief executive Graeme Stephens says he’s braced for the challenge, taking a conservative view over the medium-term focusing capital expenditure towards completion of its Auckland and Adelaide projects – maintaining a capital light approach. We have been vocal supporters and continue to believe SKC shares are attractively priced in a relatively expensive market, paying an attractive 5% dividend yield. We also expect SKC should continue to benefit from stable tourism numbers despite tourism industry showing signs that growth is slowing down, & overall growth should be supported by the completion of major growth projects over the medium-term.
QBE INSURANCE (QBE:AX) HOLD: Downgrade to HOLD
QBE’s reported net profit after tax for the first half of the 2019 financial year came in at $463m, up +29% from last year, with the result driven by materially stronger investment returns of +6.8%, up significantly from 2.1% in the prior period and well ahead of its target range of 3.0% to 3.5% . QBE’s underlying business benefitted from an average +4.7% increase in premiums which helped lower the insurance giant’s attritional claims ratio. Overall it was an in-line result, with the turnaround in QBE’s underlying underwriting profit exceeding expectations. As we have discussed in the past, QBE is one of the only Australasian listed companies which benefits directly from higher US interest rates (as it improves QBE’s investment income). Unfortunately, rate cuts from the Federal reserve (as opposed to our previous view of interest rate hikes) and likelihood that interest rates are now expected to remain lower for longer will negatively impact QBE’s earnings. We change our recommendation on QBE to a HOLD given at the current share price there is limited upside given margins from QBE’s underlying business are now likely to stabilise adding to the negative impacts of a low-interest environment on QBE’s net investment income.
FONTERRA (FSF:NZ / FSF:AX) HOLD: “Don’t Cry Over Spilt Milk”
Dairy giant Fonterra (FSF) saw its shares fall further as it is forecasting another big loss as it writes down the value of under-performing overseas assets. The co-operative is forecasting a loss of between $590 million and $675 million for the current financial year. FSF will realise $820m to 860m of asset write-downs and cut the 2019 financial year dividend to zero. The company’s new strategy will be presented in September. While FSF will likely signal an exit from some of the businesses being written down, in a number of cases current earnings are likely lower than required to realise book value. Fonterra have delivered another disappointing update, which has been a regular occurrence over the last two-years now as it fails to deliver on its promised “value-add” strategy to date and as a result its share price continues to be punished, “spilling” down to new all-time lows. We have been HOLD rated for some time now and have lost confidence in the company due to their inability to execute on their strategy, and we do not believe they will be able to deliver a meaningful return to shareholders (adding to the inherent issues with the company’s structure). We will continue to watch how its portfolio review & potential restructure plays out from the side lines, but we aren’t confident a turnaround will materialise anytime soon.
JAMES HARDIE (JHX:AX) BUY (High-Risk):
JHX shares jumped higher after the building materials company said it expected to make more profit this year than the analysts had forecast, after delivering a better than expected first quarter result for the 2020 financial year. The upgraded guidance was underpinned by meaningful contributions from Europe, and modest growth in the US housing market, outperforming as overall construction activity fell lowering market expectations. Despites sales only increasing by +1% from last year, adjusted operating earnings (EBIT) came in at US$124.4 and adjusted net operating profit tax (NOPAT) was US$90.2m for the quarter both up +16% and +13% respectively from the same corresponding period last year. This was helped by strong performance in North American Fibre cement segment, delivering good volume growth despite being in a down market and widening earnings (EBIT) margins. A strong contribution from the Europe building product segment also offset weakness across Asian Pacific, predominately Australia. Given most business sectors are heading into a more challenging environment with growth expected to slow down and fall in some places, we have a relatively cautious view on JHX. However, operationally if JHX are able to deliver and outperform the market in a low-interest rate environment, potentially boosting construction activity (especially in the US), we maintain our High-Risk BUY
recommendation.
