Brief Equities Bottom-Up: Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20. and more

In this briefing:

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
2. Subaru: Another Month, Another Recall
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
5. SGP: Ready for New Growth Cycle

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

2. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

5. SGP: Ready for New Growth Cycle

We initiate coverage of SGP with a BUY rating and a 2019E target price of Bt14.00, derived from 10.9x PE’19E, which is +0.5 SD of its 3-year trading average. We believe that a new growth cycle is poised to act as a re-rating catalyst.

The story:

• Regional LPG player with upstream transportation network
• New businesses to drive new growth cycle
• LPG price set to bottom out
• Expected earnings to recover in 2019E

Risks: 

             Currency  fluctuation

             Raw material price fluctuation

             Overseas investment failure