Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
New Stock Reports
Tesla Inc (TSLA:NASDAQ) HOLD: Electric Result
Tesla shares have surged on the back of their third quarter result which surprised the market,
smashing their expectations and reigniting investor confidence. Tesla’s outperformance was
driven by a +70% increase in revenue from the previous quarter. Tesla also delivered their
first every profit, with net profit of $312m. The carmaker greatly improved Model 3 production
efficiency and cut costs substantially, as the Model 3 has become the best-selling car in
America (in terms of revenue) for the quarter. Prior to the result, Tesla shares have been on
a volatile run, with a number of distractions for the business such as Elon Musk’s tweet that
he is considering taking Tesla private at a price per share of $420 per share, saying “funding
is secured” (which has subsequently turned out to not be true). We find it difficult to upgrade
our rating at current valuations and our HOLD recommendation remains unchanged. 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. It is also a step-change to see the start of profitability.
Amazon.com (AMZN:NASDAQ) HOLD: Amazing Run Over?
At face value e-commerce giant Amazon delivered another solid result for the third quarter of
2018 on the back of strong revenue growth and widening margins across most businesses.
However, Amazon’s shares fell sharply on the result, largely due to its weaker than expected
revenue guidance for the fourth quarter. While Amazon shares are also down given the
broader re-rating lower across tech sector valuations by the market. We continue to believe
Amazon is a great company and they will continue to grow and expand, although given its
size their growth rate will continue but at a more moderate rate. Amazon’s ability to grow
internationally may also experience some speed bumps, be it regulatory, or by other
established businesses. Because Amazon operates many businesses it is difficult to grasp
how to value it, and the stock is still priced for expansive growth. We maintain our HOLD
rating, and the current dip is an example of what happens when the does not meet the
market’s high expectations.
NEXT DC (NXT:AX) BUY: Landlord Overhang Removed
NEXTDC shares have been hit hard recently as it has been caught up in the recent tech
sector sell-off. While it is difficult to determine when the volatility will end, we still hold a
positive view on NEXT DC, as the fundamentals around the business remains unchanged
and the explosion in data thematic will continue to drive NEXT DC’s business over the
medium term. In other news, NEXT DC has ended its long-running battle with its landlord,
announcing it will it will take over a property trust which owns three facilities for $232m. The
deal is well below the valuation of $261m given in June and significantly below the $300m
offer given at the start of the year. We reiterate our BUY recommendation and view this pull-
back as an attractive entry point for medium term investors.
FONTERRA (FSF:NZ / FSF:AX) HOLD: No Upside from Here?
Fonterra released a disappointing 2018 full year result, due to significant items including a
$196m settlement to Danone and $405m impairment charge against their Beingmate infant
formula business, which was earlier flagged to the market. Operating earnings were down –
22% from last year to $902m due to lower sales volumes, weaker margins due to a higher
Farmgate milk price and increased operating expenses. Fonterra are also likely to face further
margin pressure with global supply outstripping demand, causing global dairy prices to fall
over the near-term. Fonterra has strong market share and positioning in the global dairy
market as a high-quality dairy provider, although to date has failed to deliver on its “value-
add” strategy. We recently removed Fonterra from our model portfolio as without the ability
to execute on their strategy effectively, 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).
AUSTRALIAN AGRICULTURAL CO. (AAC:AX) HOLD: Limited Upside
AAC shares have been stable over the last few months. After slumping on its earnings
guidance, AAC’s shares jumped on its result which came in as expected, but the market liked
their decision to suspend operations of loss generating Livingstone beef. Soon after, AAC
shares also jumped on rumours that Brazilian based Minerva Foods are eyeing up AAC as
an acquisition target. More into the result, AAC’s revenue was down -15% from last year to
$379.7m due to lower sales volumes of its cattle and lower valued beef brands. We were
hopeful on AAC’s transition to becoming an integrated beef seller where it could benefit from
value-add opportunities and capitalise on the ‘dining boom’ thematic. However, due to macro factors moving against them and now that A A C is considering shifting most their business
back to more stable cattle sales (which are lower risk), we see less potential upside.
