Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
TOURISM HOLDINGS (THL:NZ) BUY (High-Risk): Finding Support?
THL remains under pressure due to the coronavirus impact on Chinese tourism, and the Australian bushfires both resulting in cancelled holiday bookings and tourism related travel. THL management anticipate 2020 net profit after tax will be $24m, -14% lower than previously anticipated. This is another unfortunate update as challenges in 2020 continue to add up, after earlier announcing weakness in the US operations. However, these risks appear to be more one-off and shorter term in nature, with a turnaround in the US business anticipated for 2021. At the same time operating performance in Australia and New Zealand remains supportive – even after taking to account recent events. At the current juncture THL appears fairly priced taking into account the recent news flow and we would not panic sell. We maintain our BUY rating givenvaluation, assuming a return to normal operating conditions over the medium-term but with a high-risk caveatif risks surrounding coronavirus escalate further than currently anticipated. The core Australia and NewZealand business continue to perform despite unfortunate events and remain supportive enough to providea healthy dividend yield of ~7% (assuming a dividend cut) – which remains attractive in a low interest ratemarket. In saying that, THL is a cyclical business and the recent announcement shows that investment is notwithout risk.
We have also updated our technicals on THL in the technical corner of the website:
THL stock touched a strong support level @ $2.50 and bounced right back to the levels of $2.90 creating a case for strong trend reversal.
Briscoes Group (BGP:NZ) HOLD: Margin Pressure Ahead
BGP shares pulled back after delivering a weaker than expected result for the fourth quarter of the 2019
financial year. Strong sales updates for the second and third quarter increased resulted in an overall sound performance for 2019, but also raised expectations. 2019 full year sales came in at $653m, up +3.34% from last year helped by strong performance from the sports division and additional stores. Unfortunately, 2019 fourth quarter sales came in at $209.7m for the group, up +1.84% from last year, and adjusting for store additions, same store sales fell 0.32% from last year as the group succumbed to retail pressure which shows no signs of easing. Net profit after tax is expected to be $64m for 2019, +1% higher than the previous year – but more alarming is managements return to a more pessimistic outlook as gross margins tighten to protect sales, as challenging retail environment becomes more difficult as competition remains intense – whilst demand is likely to remain stable over the medium-term. In saying that, given Briscoes strong past performance it remains as one of our top retail sector picks, which provides investors with a stable dividend yield of 5.0%. But given challenging retail environment a relatively inflated valuation (compared to the recent past) we continue to maintain our HOLD rating.
Ooh! Media (OML:AX) BUY (High-Risk): New CEO Hunt
OML shares fell after announcing its CEO and managing director & founder, Brendon Cook, would be stepping down from the role this year. As part of the announcement, OML reaffirmed December’s upgraded guidance range for 2019 operating earnings of A$138-143m, albeit towards the bottom of the range – with the full year result to be released later this month. In our opinion this appears to be a bit of an overreaction, with OML now trading at a more attractive valuation of ~12x earnings. Given the recent pull-back, OML shares appear attractively priced given our medium view remains unchanged. While there might be some near-term challenges for the new CEO we remain comforted that Brendon Cook will remain as a strategic advisor. Overall, we continue to believe their assets have considerable long-term value, given data remains supportive that spending on out of home advertising is increasing, with traditional formats losing out first with recent cost cutting. The structure of the outdoor advertising industry post consolidation appears to be more favourable than any time over the last 5 years. However, risks include technology changes, relaxations in billboard regulations, and changes to the economic outlook and advertising spending impacting billboard inventory. We
maintain our BUY rating but with a high-risk caveat – taking into account weakness across their large number of non-digital signs and sensitivity to economic conditions.
AUSTRALIAN AGRICULTURAL CO. (AAC:AX) HOLD: Can’t Catch a Break
AAC shares recovered late last year after another challenging year plagued with a once-in-a century downpour throughout Western Queensland severely impacted 4 of its 21 properties – coupled with persistent drought conditions. ACC delivered a better than expected result for the first half of the 2020 financial year (ending September 2019), helped by improving operating conditions across its premium wagyu beef brands and suspending operations across low value and unprofitable Livingstone brands with. AAC delivered operating earnings (EBITDA) of $6.3m, despite improved operating performance challenging drought conditions did result in $36m of adverse impacts. AAC are yet to update on the weather impacts over the Australian summer 2019/2020 which appears to be worse given the major bushfires – therefore we are concerned challenging weather conditions are likely to persist, resulting in inflated costs to maintain current demand. We had high hopes for AAC’s transition to becoming an integrated beef seller where it could benefit from value-add opportunities and capitalise on the ‘dining boom’ investment thematic. While the recent one-off weather event was unfortunate, we believe challenging weather could pose more near-term threats we see limited upside with significant work required from here on out.
Johnson & Johnson (JNJ:NYSE) BUY: Legal Relief
JNJ shares managed to bounce back making some ground regarding legal proceedings against them which have plagued the share price and trust regarding the safety surrounding their healthcare products. With the asbestos saga squashed as it was found JNJ talcum powder is safe, and that the laboratory that initially delivered the contamination report was itself contaminated by a portable air condition unit. JNJ delivered a reasonably sound fourth quarter result for the 2019 fiscal year, with earnings slightly ahead of expectations whilst revenue missed. JNJ delivered revenue of $20.75 billion, with operational growth offset by unfavourable currency movements, and baby care products being slightly weak given the Talcum powder dispute. Adjusted earnings per share came in at $1.88 per share, down -4.6% from last year more and slightly ahead of market expectations by $0.01 per share. It seems financial and reputational damage around JNJ has been somewhat mitigated, with more work needed in regard to opioid allegations. While JNJ seems to be constantly hit be legal claims, JNJ have been successful at disputing these claims to protect its reputation and trust towards the brand.