Weekly, Tourism Holdings | SCL | BOQ | GNE | Tesla

28 October 2019

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: Slow Start in the States
After making back some ground recently, Tourism Holdings (THL) shares dropped after announcing average sales margins in the US are down -40% for the first quarter of the 2020 financial year. Margin pressure is being driven by large volume discounts in the wholesale market and general retail price pressure in the US market. 2020 was going to be a transitional period for the US business given previous indications of a deterioration in market conditions – with much of this negativity priced in during earlier updates. However, the recent update indicates the near-term pinch is worse than initially anticipated. THL remain proactive, reducing capex and supply, and we would note that peak season for the US business is not until the Northern Hemisphere Spring (May, June), but clearly things are off to a slow start. Encouragingly, outside of the US business expectations remain as previously indicated, with rental forward bookings in all businesses positive for the 2020 calendar year compared with the 2019 calendar year. Vehicle sales in New Zealand and Australia are in line with expectations. At the current juncture THL appears attractively priced and we maintain our BUY rating given its valuation. The core Australia and New Zealand business continue to perform well albeit at more modest growth rates, enough to support a healthy dividend yield of 7.0% (assuming a small cut) – which is attractive in a low interest rate market. We see upside potential from US business stabilisation and further medium-term growth potential driven by the US based Togo Group Joint Venture. In saying that, THL is a cyclical business and the recent announcement shows that investment is not without risk.

SCALES CORP (SCL:NZ) BUY: Fruitful Outlook
SCL shares broke into new all-time highs recently after delivering a well-received result for the first half of the 2019 financial year, as newly acquired businesses perform well. Scales reported net profit after tax of $121.8m, up significantly from the previous year of $34.8m as the recent result included a one-off fair value gain of $93.2m from Scales divestment activity. Ignoring the one-offs underlying net profit after tax was $30.1m, up +2.3% from last year, and underlying operating earnings (EBITDA) was $47.3m up marginally (+$0.2m) from last year. A strong start from the new businesses was offset by one-off inventory write-offs, and the core horticulture businesses strong performance in Asia and local markets offset by slower start in the European market. While agribusinesses do come with associated risks – such as impacts from weather, currency moves, and commodity prices, we believe Scales still offers an attractive risk reward opportunity to gain exposure to global agricultural trends. We remain confident in SCL’s ability to growth their earnings both organically and via strategic acquisitions given the additional funds it has to reinvest – as it actively searches to make a value add agri acquisition.

GENESIS ENERGY (GNE:NZ / GNE:AX) HOLD: Power Generators at Risk?
Genesis (GNE) and other New Zealand energy generators all fell sharply after mining giant Rio Tinto announced it was reviewing the Tiwai Point aluminium smelters future which included the possibility of closure, after rejecting Meridians new proposed pricing. The fall represents the real risk of closure given it is owned by Mining giant Rio Tinto and represents a small part of their business which is not performing well, while the smelter plant accounts for approximately 13% of New Zealand’s power consumption and could hit the generators profitability and attractive dividends near term. While the fall was sudden, to put it into context, Genesis and the other generators are trading close to where they were two-months ago, offsetting the recent rally. Operationally Genesis Energy remains our top pick in the sector – primarily due to its diverse production base. But given its current valuation we believe Genesis and the other NZ power generators are fully priced

paying a relatively modest dividend yield of 5%, which now faces a risk of falling significantly in the event the Tiwai point smelter is closed down – creating a cloud of uncertainty which is not ideal. While our base case assumption is that Rio & Meridian negotiate, closure risk cannot be ignored. We maintain our HOLD
recommendation as we see limited upside at current valuations across the sector.

BANK OF QUEENSLAND (BOQ:AX) HOLD: Dividend Cut
BOQ shares continue to slide after delivering a disappointing result for the 2019 financial year. Falling short of expectations despite the market being well aware of the challenging operating environment characterised by slowing credit demand, lower interest rates (tightening net interest margins), and a rise in regulatory costs and changes impacting non-interest income. The result illustrates the challenges for smaller banking players given a mounting regulatory cost burden without the scale to spread the pain. The result saw a -14.5% (or -11 cents per share) dividend cut. BOQ’s cash profit after tax for the 2019 financial year fell -14% from last year down to $320m, as income fell in a challenging and competitive market whilst operating expenses were higher and asset impairments rose, due to weaker economic growth and flat wage growth impacting arrears and the outlook. Headwinds impacting BOQ in 2019 financial year are unlikely to ease over the near-term and are likely to get worse, for both interest income and non-interest income segments. BOQ’s attractive dividend at face value is also not without risk, as shown by the recent announcement. On balance we remain HOLD rated on BOQ, although BOQ is operating in a challenging environment, especially if competition continues to intensify
with the big banks able to leverage off their larger scale.

TESLA (TSLA:Nasdaq) HOLD: Surprise Profit
Shares in Tesla shares soared higher after posting a surprise profit for the third quarter of the 2019 fiscal year. Tesla delivered a record 91,186 vehicles in the quarter up +16% year on year, however revenue remained almost flat on the previous quarter and down -8% year on year – due to a higher proportion of vehicles being leased and unfavourable product mix, with a higher proportion of model 3 deliveries. The surprise profit came from improved gross margins for the model 3 despite further lowering the average selling price, as Tesla benefitting from operational efficiencies, increasing scale and producing the same car at a lower cost. Tesla has swung things around from two recent quarters of losses, to a GAAP net profit of 143 million, or $0.80 per share. Tesla’s guidance was also upbeat given the completion of its Shanghai Gigafactory ahead of schedule and bringing forward Model Y production earlier than initially anticipated, aiming for a 2020 summer launch. 2019 full year vehicle deliveries are expected above 360,000 and at a minimum expected to be up +46% from 2018, with sequential quarterly vehicle delivery growth expected. Financial cash flow and net profit are expected to remain positive going forward, with the exception for a launch and ramp up of new products. 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. The recent result once again highlights the volatility involved with holding Tesla shares

08-Oct-19

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