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HHG's Preferred New Zealand and Australian Equities

The stocks listed below have varying advantages and will suit different investment objectives. They have one common trait in that they have all been selected with a long-term focus.

 

Contact Energy has a narrow economic moat, which reflects the oligopolistic structure of New Zealand’s electricity market. The firm generates a fourth of the country’s electricity and supplies power to more than 400,000 residential customers. Being a net generator, Contact Energy benefits from high spot prices. These typically occur during a dry year when lake levels are below average. The establishment of the low-cost geothermal plant has lowered Contact Energy’s cost of generation and improved its competitiveness. The medium-term outlook is tough as the Tiwai Point aluminium smelter closure will leave the industry with a short term oversupply, particularly in the South Island. Earnings are likely to fall on a combination of lower generation and sales prices.

 

Ebos operates a conglomerate business offering a range of products and services targeting the healthcare and animal-care markets in both Australia and New Zealand. Ebos has grown primarily via acquisition during the past 2 decades. Its transformational Symbion acquisition in 2013 propelled Ebos to the second-largest and most diversified pharmaceutical wholesaler and the largest hospital distributor in the Australian market. Ebos Group’s competitive advantage is predicated on the efficient scale it enjoys in the Australian pharmaceutical wholesaler market. The competitive advantage is best shown by a recent contract win, taking The Chemist Warehouse contract off their direct competitor, Sigma Healthcare Limited. We believe Symbion provides an attractive growth platform and opportunity to improve operating leverage through bolt-on acquisitions and additional contract wins in the hospital logistics division.

 

 

Mainfreight Ltd had their Annual Shareholder’s Meeting on the 30th of July, announcing strong revenue growth of 8% and profit before tax up 20%. Australia was the country driving the largest gains in profitability, up 167% on the prior year, followed by Asia up 63%. Australia generated a larger profit than New Zealand, in contrast to last year, where profitability in NZ was 2.7 times that of Australia. The main reason for this change relates to the strict lockdown in New Zealand relative to Australia. Profitability of the company is split between NZ 42% and Offshore 58%. The company’s gearing sits comfortably at only 11%, with undrawn credit facilities of $220m. In regards to industry concentration, top customers operate in a diverse range of industries, DIY/Homeware 16%, FMCG/Food/Beverages 15%, Technology/Electronics 11%, Retail 11% and medical/healthcare 7%. Mainfreight has continued to deliver impressive growth in contrast to difficult worldwide economic conditions. Mainfreight is an extremely well managed operation with over 8,000 employees in 26 countries. Their resilience and growth in profitability during a period of economic distress (COVID-19) is a testament to their management and the strength of the company. HHG is a long term holder of Mainfreight for clients.

 

 For Spark New Zealand, the medium-term outlook is solid, with mobile market share increasing and growth in fixed wireless helping to partly offset the decline in fixed-line broadband share. Coupled with a relatively benign regulatory environment, there is breathing space for Spark to consolidate its market position and canvas opportunities to reignite earnings growth, for instance, in the New Zealand IT services industry. Spark’s strong balance sheet also furnishes the group with defensive appeal and dividend security, especially in the current pandemic-induced uncertain environment.

 

Amcor is a global plastics packaging behemoth, with global sales of USD 12.9 billion expected in fiscal 2020. Amcor’s operations span 43 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets. Amcor looks reasonably attractive relative to the Morningstar fair value estimate of AUD$15.30 per share. Shares trade at a 9% discount to their valuation following the delivery of solid third quarter fiscal 2020 earnings. The innate immunity of Amcor’s global packaging franchise to COVID-19 was evident in the quarter. Volume growth strengthened to a robust 2% in the quarter that ended March 31, following a soft first six months of fiscal 2020. North America was particularly strong with flexible and rigid beverage packaging volumes surging 4% and 5%, respectively, as pandemic-related pantry stocking took place. Approximately 95% of Amcor’s packaging volumes are highly defensive, addressing food, beverage, healthcare, and household product end markets. The eventual recovery in the global economy is expected to restore normalised low-single-digit volumetric growth from fiscal 2023 onward. Therefore, Morningstar’s long-term expectation for top-line growth of an approximate 3% remains intact.

 

As Australia’s premier dedicated oil and gas player, Woodside Petroleum possesses operations encompassing liquefied natural gas, natural gas, condensate, and crude oil. LNG is the mainstay, with more than 20 years’ successful delivery of cargoes to East Asian customers. Woodside has operatorship and a one-sixth share in the North West Shelf Joint Venture, or NWS/JV, on the north-west coast of Western Australia. Under its watch, the number of LNG trains has grown from one to five, taking gross output to 16.4 million metric tons per year. This pedigree is unmatched in the Australian oil and gas space, and there’s more potential development in the pipeline if prices will allow. Missteps, including commissioning delays and cost blowouts during the China-driven resources boom, are now past. Woodside has demonstrated commendable conservatism in capital allocation over several years.

 

ANZ Banking Group was established in 1951, with origins stretching back to London in 1835. It has a greater slant toward institutional banking and markets than its peers, but retail banking is still the core earnings contributor. While ANZ Bank delivers lower returns due to this earnings mix, the institutional division provides welcome diversification and access to low cost customer deposits which are used to fund growth in consumer loans. Designed to leverage fast-growing trade and investment flow within both Asia and both Australasia and New Zealand, the Asian growth strategy failed to deliver. ANZ has now downscaled its Asian operations, specifically targeting large clients and has walked away from lending to small business. Given ANZ would have no competitive advantage against local lenders, we support the revised strategy. Starved of revenue growth the bank will focus on cost-cutting initiatives.

 

We were positively surprised by the rebound in non-COVID-19 testing reported by Sonic at its fiscal 2020 result. Long-run volume growth is underpinned by support for preventative medicine of which diagnostics is a key part. We forecast five year revenue CAGR of 4.6%. Sonic is in a solid financial position and we expect the company to make opportunistic acquisitions to boost organic growth and include a 1% growth contribution in our revenue outlook. Sonic has a leading market position in most of its geographies and as a result is well placed to take advantage of a consolidating industry. Demographics and the focus on value-based based healthcare support the ongoing global volume growth in preventative diagnostics such pathology and imaging. There is potential upside to margins in both Laboratories, from synergies and operational efficiencies, and Imaging from re-indexation of prices.

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