I'm going to do this again. Ill put this out there until January 31 2018 and I am going to do it with or without you - I would prefer it was with you. I've secured an Interview with Rod Drury, from Xero Ltd. It will be in the form of questions put to Rod about his company via email. Where to from here and why. What I want from you dear reader is questions. Relevant ones, please. Put your questions down here and I will submit them. Either email questions @ shareinvestornz@gmail.com or leave the at the bottom of this post. Thanks, Darren.
Brokers have picked a diverse mix of stocks for 2018, in many cases opting for those that have underperformed in the last year or so.
It's always worth remembering that winning the Brokers' Picks competition requires different strategies to everyday investing. A single year is an arbitrary time frame – often not long enough for value investors but too long for traders.
It is interesting to see the way participants opt for different ends of that spectrum in an attempt to capture a market beating annual result.
Hamilton Hindin Greene has leaned most heavily towards value investing picking well established stocks that have been out of favour and could present a bargain.
The two most obvious examples in their selection are Fletcher Building and Comvita – both strong companies that were punished by investors in 2017.
"Fletcher Building aired plenty of dirty laundry in 2017," says Hamilton Hindin Greene's James Smalley
"Whilst the risk remains of more coming to light, we believe the risk of major surprises has been limited by the announcements to date, and the recent KPMG Audit."
When you strip out the downgrades associated with the Building & Interiors business unit, Fletcher Building actually had a reasonable year, Smalley and his team noted. "We expect continued strong performance from most divisions, and a return to more normal performance from the Building & Interiors business unit."
Comvita had a tough year, its share price falling 37 per cent at one point before almost recovering back almost to break even by December.
"The decline was the result of investors' concerns of a lower than usual honey harvest, the discovery of myrtle rust in the North Island, and a drop-off in grey channel sales," says Smalley.
"We see these headwinds as temporary, and see significant upside potential on the back of better climatic conditions, continuing natural health product market demand from China, and favourable societal trends."
Hamilton Hindin Green also picks both SkyCity and Sky TV.
SkyCity's share price has gone sideways for several years as the company continues to invest heavily into the expansion of its Auckland and Adelaide operations. We expect the benefits from this investment will materialise in the years ahead, Smalley notes.
Sky TV seems a more curious play given the widespread view that the life span of its satellite transmission business model is limited.
Sky TV's share price has been in a steady decline since 2014, and accelerated to the down side in 2017 to touch an all-time lows in December, Smalley notes.
"This is on the back of investor concerns regarding alternative internet based offerings such as Netflix and the ever present threat of Amazon. Despite this, it is worth noting Sky's revenue is still above where it was in 2013 and subscriber numbers above where they were in 2012."
That presents a potential short term upside – around the rights context for All Black rugby.
"We feel that given the complexity of the contracts with Sanzaar, and the wider rugby content distribution obligations, Sky is still the likely candidate. Negotiations are expected to begin in April 2018, with a renewal likely to ease investor concerns. The company has relatively low gearing, with total debt representing just over 20 months 2017 free cash flow. This free cash flow should also underpin a dividend that would be in the double digits at current prices."
Craigs Investment Partners takes a similar approach with established stocks but leans towards those that have performed well in 2017 and could continue their run.
Craigs head of Research Mark Lister notes it would have been nice to have had a2 milk in the mix for 2017 (it returned 274 per cent).
While the a2 chart might look a bit shocking to some "the fact is that a fair chunk of the gains have been driven by fundamental improvements in the business", Lister says.
In 2014 a2 generated EBITDA of just $3.6m, and in 2017 this increased to $141m. This is expected to growth even further, with EBITDA of more than $250m expected in the coming year.
Forsyth Barr also has a2 in its picks for 2018.Craigs head of Research Mark Lister notes it would have been nice to have had a2 milk in the mix for 2017 (it returned 274 per cent).
While the a2 chart might look a bit shocking to some "the fact is that a fair chunk of the gains have been driven by fundamental improvements in the business", Lister says.
In 2014 a2 generated EBITDA of just $3.6m, and in 2017 this increased to $141m. This is expected to growth even further, with EBITDA of more than $250m expected in the coming year.
Forsyth Barr also has a2 in its picks for 2018.
Tourism Holdings is another strong performer which Craigs is picking to continue its run in 2018. It delivered nearly 70 per cent return for 2017.
"The tourism sector remains in very good shape, despite some capacity issues in places like Queenstown," says Lister "THL is also a vastly different company than it was ten years ago, with management having made a lot of progress in reshaping the business and positioning it for growth.
More than half the company's revenue comes from outside New Zealand, so it also fits the bill for us in terms of global growth options and some international diversification."
The only stock to get picked by three brokers this is year is Restaurant Brands – another strong performer through 2017.
Craigs, Hobson Wealth and Vulcan Capital all have it in the mix.
"[Restaurant Brands is] well placed to continue their impressive growth trajectory through global expansion initiatives as well as the continued roll-out of store refreshes, Hobson Wealth Partners notes.
Says Lister: "RBD has approximately 45 per cent of revenues from outside New Zealand, which provides some insulation from a potentially slower economy, the benefit of any NZ dollar weakness, as well as a number of international growth opportunities."
After that the picks start to get pretty diverse. A number of brokers have picked small cap stocks that have potential for large percentage gains if they capture market attention.
MSL Capital Markets sticks with Green Cross Health and Plexure – two companies that dragged down their results in 2017.
Green Cross Health is a diversified healthcare business (owning or supporting 330 Pharmacies under the Life Pharmacy and Unichem Brands, 23,000 Community Nursing clients and 46 Medical Centres).
"It is our preferred exposure to the healthcare sector and ageing population theme," says MSL's Andrew McDouall. "The arrival of offshore competition to the Pharmacy division has seen share price weakness which we believe is an over-reaction and provides a buying opportunity."
Plexure is a digital advertising company (originally known as V-Mob). It moved into profitability in 2017, notes McDouall, and is selling now on a revenue multiple of less than 1 times.
"Given the quality of their main contract with McDonalds and the worldwide rollout through the McDonalds franchises there should be significant earning uplift in 2018," he says.
First NZ Capital also picks some outsiders this year including EROAD – a tech company specialising in road transport payment solutions. And Tilt Renewables a solar and wind generation player formed from the de-merger of Trustpower.
The ultimate speculative play this year comes from Vulcan's Brett Wilkinson who's included a company called QEX logistics – which is expected to list in January. Wilkinson notes that the QEX, whose directors include former Federated Farmers chairman
Connor English (Bill's brother) and local rich Lister Danny Chan has completed capital raising and is ready to roll.
However, the NZX notes that (at time of writing) QEX Logistics have not yet released a listing and quotation notice.
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