Weekly, Telstra | MPG | Crown Downgrade | Tesla

31 July 2019

Weekly Report

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

Telstra (TLS:ASX) HOLD: HOLD
TLS shares have been on a strong run in 2019, despite no significant news flow since our last report
where Telstra delivered a weak 2019 interim result and announced it will be cutting its dividend.
Given all the negativity at the time it appeared to be attractively priced, especially in an expensive
market with interest rates moving lower and expected to remain lower for longer making Telstra’s
somewhat “stable and sustainable” dividend attractive for many income investors. Positive
sentiment has also returned as the market appears optimistic on Telstra’s ability to turn things
around from here especially as they react to challenges in the market, cutting costs, reducing debt
and becoming a simpler business which would become more profitable. The reduced risk around
another large mobile network competitor in TPG Telecom entering the market is also supportive for
Telstra. We expect competitive pressures to ease and expect a more stable financial outcome from
Telstra following its recent decline in earnings, but based on its current valuation the market is
expecting solid growth from here on out. Telstra is now trading at an uninspiring 3.8% dividend yield
and a forward price to earnings multiple of 19.8x. We remain on the side-lines with a HOLD
recommendation largely as its valuation seems full.
METRO PERFORMANCE GLASS (MPG:NZ / MPP:AX) BUY (High-Risk): Fragile Future
MPG shares slid lower after another subdued earnings guidance announcement for the 2020 financial
year failed to inspire investors. MPG expects group operating earnings (EBIT) for the 2020 financial
year to be between $25m to $27m, up slightly from the $25.2m reported in the 2019 financial year,
providing no real surprises surrounding the commentary around the basis of their guidance. At the
same time MPG expect to further reduce net debt by $15m over the 2020 financial year as they aim
to reduce their net debt to operating earnings (EBITDA) multiple of ~1.5x, before reintroducing their
dividend possibly within the 2021 financial year. Management appear hopeful on an Australian
turnaround given the opportunity in the Australian market if double glazing uptake increases to
similar levels to what is being experienced in New Zealand. It is also promising to see New Zealand is
performing well improving profitability however supply side constraints and new competition are
restricting any upside. We continue to believe there is still a chance of a turnaround, particularly
given the bar has been set very low and there is a lot of negativity priced MPG at the moment,

meaning it would take very little to see a significant upswing in share price – albeit we caution
investors it does come a considerable amount of risk.
CROWN RESORTS (CWN:AX) HOLD (was BUY): Investigation Uncertainty
CWN fell following a report in The Age and The Sydney Morning Herald newspapers over the weekend
that alleged links between organised crime and the junket operators that bring Chinese gamblers to
Crown’s Australian casinos. Crown have denied these accusations and stressed that it is not in breach
of Chinese law and advised that it has not been charged with an offence in China. Soon after attorney
general Christian Porter announced it will spark a federal investigation between Crown and government agencies, and given the above allegations warranted the possibility of further investigation. It is too early and difficult to determine what the possible outcome is, creating a cloud of uncertainty over Crown’s share price at the moment, especially if the above allegations are validated. If anything, it does put a spotlight on Crown’s VIP business which may limit their turnaround opportunity. Assuming CWN makes it out relatively unscathed we see Crown’s core business as a beneficiary of Australia’s growing tourism industry – albeit at more moderating level, especially with their Sydney project. However, given the recent events we downgrade our recommendation on CWN due to the uncertainty surrounding the government investigation and seriousness of allegations.
Tesla (TSLA:NASDAQ) HOLD: Last Quarterly Loss?
Tesla shares took another hit following a worse-than-expected second quarter result and news that
their chief technology officer, JB Strubel, who had been with the company for 15 years and played
crucial role in its battery technology, is stepping down. Tesla delivered another (non-GAAP) loss of
$1.12 per share, which missed market expectations by a significant $0.72 per share largely due to a
greater portion of sales attributed to lower margin model 3 vehicles, also missing revenue expectations as Tesla’s performance lags behind its ‘lofty’ expectations. However, this was a significant improvement from a poor previous quarter (2019 first quarter) thanks to achieving record deliveries of 95,356 vehicles and record production of 87,048 vehicles making progress in managing global logistics and improved demand. The highlight was operational improvements which helped generate $614m of free cash flow putting Tesla in a comfortable position as they prepare to launch Model 3 production in China and Model Y production in the US. Tesla remains optimistic about the rest of the year, expecting to continue to be cashflow positive with the business now grown to the point of being self-funding. Tesla are aiming for positive GAAP net income in the third quarter and following quarters to follow maintaining their guidance of 360,000 to 400,000 total deliveries for the full year. From a big picture point of view, we have said that buyers of Tesla shares in essence need to believe in the Tesla story and Elon Musk – as an industry disruptor and his ability to develop market leading technology. However, their market leading position might be under threat as well-established car manufacturers (with better manufacturing capabilities) enter the market with their EV’s with technology likely to catch up, making the market more competitive and challenging for Tesla.

weekly 31 jul 19

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