Weekly Report
Here’s your weekly update of news, analysis and research from . The full reports can be read on the
stock pages.
New Stock Reports
XERO (XRO:AX) BUY: Profitability Becoming a Reality
Xero announced another solid result driven by strong subscriber growth which delivered the companies first positive operating earnings (EBITDA) of $26 million. Subscriber growth was strongest within the UK and Xero added 351,000 new subscribers over the year to hit 1,386,000. It seems the market is now also viewing the company more positively as it transitions from a loss-making tech company to a self-funding one with a proven business model and sizeable structural growth opportunities. We expect gross profit and operational margins will continue to improve as a percentage of revenue, as both top-line growth and operational efficiencies develop. Execution in the US market remains the key risk given the
presence of a major competitor (namely Inituit).
TELSTRA (TLS:AX) HOLD: Dividend Trap?
Telecommunications giant TLS has slumped to a seven year low given intense competition. TLS has announced a trading update and expects operating earnings to be at the bottom end of the $10.1 billion to $10.6 billion range. Despite managing to add customers, average revenue per user was down and the cost of signing up and maintaining customers grew. At the same time the fixed (Voice and Data) business is struggling. At face value TLS trades at what appears to be an attractive dividend yield of 7.5% and a low PE multiple. However, we are well aware that this level of dividend pay-out may be a one off, with many (including us) expecting further dividend cuts to follow. We expect that competitive pressure will be overwhelming for the incumbent telco giant. While Telstra are cutting costs to offset declining
revenue (with fixed costs expected to decline by -7% from the 2017 financial year) we do not
see this as a sustainable answer. Something drastic needs to happen to turn things around.
SCALES CORPORATION (SCL:NZ) BUY: Cash to Grow
Shares in apple producer and storage & logistics business SCL were higher after it announced it has agreed to sell its cold storage businesses for $151.4m. Our initial thoughts are that the transaction is a positive for SCL and frees up capital to pursue attractive growth opportunities in the agriculture sector. It also means SCL can invest funds into areas which are more in line with their strengths and potentially deliver a better return on capital employed (relative to the return on capital intensive cold storage facilities). While agribusinesses do come with associated risks – believes Scales still offers an attractive risk reward opportunity to gain exposure to global agricultural trends. The proposed transaction only backs our view, as SCL can focus on growing its export business and leverage off their solid network into the Chinese market.
ELDERS (ELD:AX) BUY: Acquisition Phase
Shares in diversified agri-business Elders (ELD.AX) have continued their strong run after posting a solid 2018 half year result. Elders reported a +8% rise in net profit after tax to $41.4m driven by strong performance in their retail business and additional earnings through bolt-on acquisitions. We see this as another sign that the business has completely restructured itself. One Acquisition in Elders sight is New Zealand based diversified agriculture services group PGG Wrightson (PGW). While in early days, analysts have valued PGW at around $600m, but Elders have emphasised there were several other acquisition targets under consideration and it would only proceed on a deal if it is earnings per share
accretive. ELD’s management are now benefiting from the successful execution of their 8-
point plan as it continues to divest underperforming assets and embrace growth both
organically and via acquisition.
Electronic Arts (EA:NASDAQ) BUY: Competitive Gaming
It was another solid quarter from EA that has been underpinned by strong digital revenue growth, which was partially offset by shrinking sales of packaged goods. Earnings for the 2018 fourth quarter per share came in at $1.95 per share which beat analyst expectations of $1.16 and were up +7.7% from last year. Non-financial highlights also include the growth in competitive gaming community across their sporting games which is up more than 75% from last year. Over the long term we maintain our view that growth will accelerate as digital sales take over packaged goods in total sale and this trend continued in the quarter. Our investment theme is that gaming has engagement levels and demographic support that are
the envy of other digital media and entertainment providers.