Fonterra Shareholders' Fund

FSF Details

Improving scenario for demand-led Consumer and Foodservice portfolios: For the 12 months ended 31 July 2017, Fonterra Shareholders' Fund’s (ASX: FSF) revenues declined 46% year on year (yoy) to NZ$79. Normalised EBIT for the Group was $1,155 million, delivering a net profit after tax of $745 million, 11% lower than last year due to lower margins. FY17 has been otherwise one year of significant rebalance in supply and demand for the global dairy industry, which has been the biggest driver in an increased Farmgate Milk Price (FGMP) of $6.12. During the year, company witnessed a significant uplift in the demand-led Consumer and Foodservice portfolios with an additional 576 million of Liquid Milk Equivalents turned into these higher value products while in the Ingredients business it has achieved a 9% increase in sales volumes for higher value Advanced Ingredients. FSF has declared a final dividend of 20 cents per share.As a result, unit holders will receive a final distribution of 20 cents per unit. The record date for the final distribution is 9 October 2017 and the payment date is 20 October 2017. This brings the total distribution for the 2017 financial year to 40 cents per unit. The Distribution Reinvestment Plan (DRP) continued to operate at a discount of 2.5 per cent to the strike price.

The stock fell over 2.0% in the last three months while it is marginally down 0.7% in the past one year (as on September 22, 2017). Given the improving scenario for food service portfolios, we give a “Hold” recommendation on the stock at the current market price of $ 5.60

Treasury Wine Estates Ltd

TWE Details

Rise in earnings per share: Treasury Wine Estates Ltd (ASX: TWE) has been optimistic about its growth outlook for Asia, and had recently reported FY17 Net Profit After Tax (NPAT) growth of 55% to $269.1m and Earnings Per Share (EPS) up 50% to 36.5 cents per share. TWE reported Earnings Before Interest, Tax, SGARA and material items (EBITS) of $455.1m, up 36% on a reported currency basis. The Company also delivered its high-teens EBITS margin target three years ahead of the initial plan of FY20, with margin accretion of 4.0ppts, up to 19.0%; and achieved Return on Capital Employed (ROCE) accretion of 2.3ppts to 11.6%. Notably, the result was delivered despite the group continuing to sell through short vintages of Luxury and Masstige wine, and highlights its continued focus on strategic customer partnerships in markets, significantly enhanced sales and marketing execution, and optimisation of its cost base.

Australia & New Zealand (ANZ) reported 24% EBITS growth to $111.1m and an EBITS margin of 18.8%, driven by above-category volume growth in Australia, supported by outstanding consumer and brand-led activations, price realisation in Luxury and continued optimisation of supply and overhead costs. Europe reported 0.6% EBITS growth to $48.0m and an EBITS margin of 13.6%. Excluding the impact of adverse foreign exchange rate movements, EBITS increased 46% led by the integration of Diageo Wine coupled with Masstige-led organic portfolio premiumisation and lower Cost of Doing Business (CODB) margin.

Further, TWE’s Supply Chain Optimisation initiative delivered incremental Cost of Goods Sold (COGS) savings of $39m in F17 bringing total cumulative savings to $80m, driven by realisation of cost reductions and benefits from production asset optimisation.The Company is on track to deliver at least $100m in run-rate savings before FY20 and in F17, these savings were partially offset by higher underlying vintage costs from the 2014 and 2015 vintages in Australia and the 2015 vintage in the US.

The stock has moved up 16.9% in the past six months while it is up 29.0% in the last one year (as on September 22, 2017) and currently trading at higher levels. We give an “Expensive” recommendation at the current price of $ 14.01

Webster Ltd

WBA Details

Improving conditions: Webster Ltd (ASX: WBA) reported 93.9% increase in underlying operating profit before tax of $28.9 million for the 12- month period ended 30 June 2017.  Revenue and other income were up 23.6% to $217.4 million.  The strong operating result was driven by significantly improved yields from Webster’s walnut portfolio compared to the prior year, partially offset by a decline in cotton yields due to unfavourable weather conditions in NSW during the year. On a statutory basis, Webster reported a net profit after income tax of $65.7 million compared to a net loss after tax of $80.7 million for the prior year. The reported profit includes a $37.1 million profit on sale from water entitlements and decommissioning at Lake Tandou and includes the associated impairment of assets at Lake Tandou of $22.2 million. During the year, WBA enhanced its walnut orchard portfolio with the 250-hectare Motspur Park acquisition and added 185,000 hectares of land and organic stock of 13,500 breeding dorper ewes with the acquisition of Kalabity station in South Australia.

The stock moved up 20.3% in the last one year (as of September 22, 2017) owing to robust results and improving outlook. We give a “Hold” recommendation on the stock at the current price of $ 1.39

Wesfarmers Ltd

WES Details

FY18 to be impacted by Coles segment: Wesfarmers Ltd (ASX: WES) reported a revenue growth of 3.7% yoy to $68.444 million in fiscal year of 2017 while EBITDA surged over 114.5% on a yoy basis. Excluding significant items, underlying net profit after tax increased 22.1% to $2,873 million. Accordingly, Earnings per share increased 21.6% to $2.55 and return on equity rose from 9.6% to 12.4%. Increases in earnings from the Industrial businesses, Kmart and Bunnings in Australia and New Zealand as well as reduced losses in Target, more than offset the fall in profits in Coles supermarkets and losses in the United Kingdom and Ireland home improvement business.

However, Coles segment continued to face pressure with EBIT losing 13.5% yoy to $1,609 million during the year. Coles’ return on capital (RoC) fell to 9.7% during fiscal year of 2017 from 11.2% in the prior corresponding period. The group expects the competition for Coles to continue going forward, and accordingly estimate FY18 earnings to be affected by the annualization of 2H17 investment in the customer offer, lower property earnings and lower Financial Services’ earnings following the sale of Coles’ credit card receivables.

There is a speculation that Wesfarmers is eying to bid for sodium cyanide maker, Cyanco Holdings; and the group already owns a sodium cyanide business called Australian Gold Reagents. It is expected that the purchase can boost WES credentials.
Given the trading position and headwinds including those encountered by Coles, we maintain our “Expensive” recommendation on the stock at the current price of $ 41.07

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