Weekly, TWE | IFT | SYD | MET | TSLA | NZR

3 February 2020

Weekly Report

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

TREASURY WINE ESTATES (TWE:AX) (High Risk) BUY: Tumbling Commercial Volumes
TWE shares tumbled after announcing a weaker first half result for the 2020 financial year, with challenging conditions in the US due to wine over-supply for its commercial brands, which are likely to persist resulting in a downgrade in 2020 full year earnings guidance. As a result, net sales revenue was $1,536.1m for the half and operating earnings (EBIT) came in at $366.7m, both up +2% and +6% respectively from the previous year – as significantly lower sales volumes (and heavy discounting) for commercial wines offset sales growth for premium branded wines and favourable currency movements. The Aussie wine group is forecasting operating earnings growth of 5% to 10% in the 2020 financial year compared to its previous 15% to 20% guidance range. It also revised its 2021 forecast growth to a 10% to 15% range – and given its prior premium valuation there was a low margin of error and high expectations. However, guidance does not incorporate a possible impact from the coronavirus on Chinese consumer purchasing patterns – critical to the success of the Penfolds brand is its “apparent scarcity”. Overall, we still remain somewhat positive view towards TWE’s underlying business (assuming normal market conditions and growth across their premium brands) however given the greater level of uncertainty, particularly from corona virus, we maintain our High-Risk BUY recommendation. With a long-term investment horizon, we would not panic sell at the current juncture and would advise new investors to wait for some consolidation and certainty regarding the corona virus before entering as the current valuation is more or less fair rather than ‘cheap’.

INFRATIL (IFT:NZ / IFT:AX) BUY: Data Explosion
IFT shares have continues to climb higher, surging to new highs after announcing the valuation of its Canberra Data Centres (CDC) increased significantly, up +65% in less than a year. Infratil’s investment into Canberra Data Centres (CDC) were recently valued at A$1,274m to A$1,604m (NZ$1,326m to NZ$1,668m) as at 31 December 2019, reflecting the completion of additional capacity and favourable refinancing ensuring additional funding to complete further development – to increase datacentre capacity. This is in response to continual growth in demand for services provided by datacentres as expansions of data creation and requirement for reliable storage grows. Accordingly, Infratil’s 2020 financial year run rate
earnings (EBITDAF) from CDC is expected to be between $135m to $145m, up +55% from last year. Highlighting the strong demand growth potential across the data thematic. We maintain our BUY rating on IFT as we believe there are strong tailwinds and growth potential for many of IFT’s businesses – with the Vodafone acquisition boosting overall group earnings and supplementing cashflow to reinvest into its data centre business and other medium-term growth projects. Despite Infratil’s share price trading at record highs and ‘stretched valuation’ we still see upside potential from their growth businesses and anticipate their dividend to continue to grow after 2020 at a healthy rate – making it our favoured ‘defensive’ infrastructure pick over the expensive power generators and utility peers on the NZX.

SYDNEY AIRPORT (SYD:AX) BUY (High-Risk): Short-Term Turbulence
After surging to all-time highs towards the end of 2019, shares in Sydney Airport (SYD) fell following concerns around potentially weaker passenger numbers. The first being the devastating Australian bushfires which have caused tourists to cancel holiday trips to Australia, and the second and more recent being concerns surrounding the deadly coronavirus outbreak from China, which might undercut economic growth and travel (directly effecting tourism facing stocks), limiting travel especially heading into the peak Chinese new year season. Both are relatively short-term risks in our opinion. SYD also released its latest set of traffic numbers, which were sound overall as 44.4m passengers passed though the airport throughout 2019, virtually flat with the record 2018 – CEO Geoff Culbert, who also said trading conditions were currently the toughest in a decade. We maintain our BUY (High-Risk) rating on SYD as a solid defensive holding in our Australian portfolio largely due to its relatively attractive dividend in a low interest rate market and long-term growth potential as a strategic piece of infrastructure. However, our rating now comes with a “High Risk” caveat, given at its current elevated valuation there is at risk of a pull-back if the impacts of the corona virus are greater than what the market is currently anticipating. We feel more comfortable if new investors would either enter at a more attractive valuation or wait for more certainty around the coronavirus.

METLIFECARE (MET:NZ) HOLD: Attractive Takeover Bid
MET shares have been on a strong run lately due to positive news flows, largely from further gradually
increasing takeover bids. MET’s board have now allowed to proceed further with a takeover bid for $7.00 per share which meets their internal valuation. The takeover will be subject to regulatory approval and
shareholder approval at a special meeting set to held in April 2020 with MET board recommending
shareholders to vote in favour for. The $7.00 per share offer sits just ahead of MET’s NTA per share of $6.96, and it has traditionally traded at a heavy discount over the past few years and well above where MET had been trading pre-initial takeover announcement. The takeover backs our thesis that MET is a valuable business with its shares previously being undervalued. We would advise MET shareholders to take up the offer as it represents significant value since we initially recommended our BUY recommendation – and well above its 10- year high. There would be no reason for new shareholders to enter a position at this stage and we downgrade to a HOLD rating.
Tesla Inc (TSLA:NASDAQ) HOLD: Firing on All Cylinders
Tesla shares soared to new all-time highs as the company reported fourth-quarter earnings of $2.14 per share, well ahead of expectations for $1.72 per share. The result was driven by record vehicle deliveries of 112,000 for the quarter well ahead of expectations given solid production rate at its Shanghai giga factory resulting in Tesla ending the whole year delivering 368,000 vehicles. Tesla expects positive cash flow and net income on a continuing basis going forward barring one-time production investments. They also remain upbeat ramping up production levels, expecting vehicle deliveries to “comfortably exceed 500,000 units for 2020”. Leading up to the result Tesla shares have been firing on all cylinders with positive updates including solid order intake for its new Cybertruck and model 3 vehicles in China. Earlier production commencement for model Y at Fremont and China, as well as building of a site in Berlin to meet growing European demand which is set to commence vehicle production in 2021. 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 rally shows Tesla is now priced for perfection and unencumbered growth, likely understating the potential risk of competition restricting Tesla’s growth as large established manufacturers enter the EV market.

NEW ZEALAND REFINING (NZR:NZ) HOLD: A Bad Run
NZR shares continue to slide after delivering another weaker operational update, as processing fees for the 2019 year were dragged down by weaker gross refining margins (GRM). NZR reported $19.2m in processing fees for the November and December 2019 period, this was down -61.7% from the same corresponding period last year due to lower refinery throughput volumes impacted by the unscheduled Transpower outages and weaker refinery margins. Despite the power outage in November, NZR managed to achieve record throughput volumes for the 2019 year processing 42.69m barrels of crude oil thanks to the maintenance works done in 2018. Unfortunately, these operational efficiencies are being offset by weaker GRM with an uncertain outlook. Given recent events, we maintain our HOLD on the basis that GRM are more likely to remain weaker (compared to recent historical levels) offsetting any increase in throughput volumes from last year’s maintenance works. While NZR shares have been beaten down to reflect weaker GRM, its profitability will be adversely impacted if margins remain weaker, with no certainty on a recovery we do not see any real upside from here given current market confidence remains bleak. Also, we have lost confidence in our view on USD strength, with the exchange rate expected to remain rangebound around current levels.

02-Feb-20

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