Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100, <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> and S&amp;P/ASX300 as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.</p><p>The review period for the rebalance ends on 20 August, so there are only 3 days to go in the review period with 124 days completed.</p><p>For the ASX100, we see <a href="https://www.smartkarma.com/entities/boral-ltd" target="_blank" data-smartkarma-citation="entities:1487:1" rel="noopener">Boral Ltd (BLD AU)</a> as a potential deletion following the reduction in its free float following <a href="https://www.smartkarma.com/entities/seven-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:803:1" rel="noopener">Seven Group Holdings (SVW AU)</a>'s tender offer. This is the possibility of another change with <a href="https://www.smartkarma.com/entities/steadfast-group-ltd" target="_blank" data-smartkarma-citation="entities:8181:1" rel="noopener">Steadfast (SDF AU)</a> replacing <a href="https://www.smartkarma.com/entities/beach-energy-ltd" target="_blank" data-smartkarma-citation="entities:795:1" rel="noopener">Beach Energy (BPT AU)</a> in the index.</p><p>For the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a>, we see <a href="https://www.smartkarma.com/entities/pinnacle-investment-management" target="_blank" data-smartkarma-citation="entities:20624:1" rel="noopener">Pinnacle Investment Management (PNI AU)</a>, <a href="https://www.smartkarma.com/entities/sealink-travel-group-ltd" target="_blank" data-smartkarma-citation="entities:6400:1" rel="noopener">Sealink Travel (SLK AU)</a>, <a href="https://www.smartkarma.com/entities/de-grey-mining-ltd" target="_blank" data-smartkarma-citation="entities:6192:1" rel="noopener">De Grey Mining (DEG AU)</a> and <a href="https://www.smartkarma.com/entities/amalgamated-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20978:1" rel="noopener">Event Hospitality and Entertainment (EVT AU)</a> as potential inclusions, while <a href="https://www.smartkarma.com/entities/nuix-limited" target="_blank" data-smartkarma-citation="entities:31040:1" rel="noopener">Nuix Limited (NXL AU)</a>, <a href="https://www.smartkarma.com/entities/nrw-holdings-ltd" target="_blank" data-smartkarma-citation="entities:9271:1" rel="noopener">NRW Holdings (NWH AU)</a>, <a href="https://www.smartkarma.com/entities/g8-education-ltd" target="_blank" data-smartkarma-citation="entities:581:1" rel="noopener">G8 Education (GEM AU)</a> and <a href="https://www.smartkarma.com/entities/westgold-resources-ltd" target="_blank" data-smartkarma-citation="entities:24269:1" rel="noopener">Westgold Resources (WGX AU)</a> are potential deletions.</p><p>For the ASX300, potential inclusions are <a href="https://www.smartkarma.com/entities/paladin-energy-ltd" target="_blank" data-smartkarma-citation="entities:10117:1" rel="noopener">Paladin Energy (PDN AU)</a>, <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a>, <a href="https://www.smartkarma.com/entities/liontown-resources-ltd" target="_blank" data-smartkarma-citation="entities:20488:1" rel="noopener">Liontown Resources (LTR AU)</a>, <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a>, <a href="https://www.smartkarma.com/entities/novonix-ltd" target="_blank" data-smartkarma-citation="entities:29093:1" rel="noopener">Novonix Ltd (NVX AU)</a>, <a href="https://www.smartkarma.com/entities/dubber-corp-ltd" target="_blank" data-smartkarma-citation="entities:15396:1" rel="noopener">Dubber Corp Ltd (DUB AU)</a>, <a href="https://www.smartkarma.com/entities/johns-lyng-group-ltd" target="_blank" data-smartkarma-citation="entities:26649:1" rel="noopener">Johns Lyng (JLG AU)</a> and <a href="https://www.smartkarma.com/entities/strike-energy-ltd" target="_blank" data-smartkarma-citation="entities:12473:1" rel="noopener">Strike Energy (STX AU)</a>, while potential deletions are <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a>, <a href="https://www.smartkarma.com/entities/synlait-milk-ltd" target="_blank" data-smartkarma-citation="entities:16298:1" rel="noopener">Synlait Milk (SML NZ)</a>, <a href="https://www.smartkarma.com/entities/integrated-research-ltd" target="_blank" data-smartkarma-citation="entities:6744:1" rel="noopener">Integrated Research (IRI AU)</a>, <a href="https://www.smartkarma.com/entities/maca-ltd" target="_blank" data-smartkarma-citation="entities:11390:1" rel="noopener">Maca Ltd (MLD AU)</a> and <a href="https://www.smartkarma.com/entities/medical-developments-international" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a>.</p><p>The impact is quite large on the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> expected changes while there could be a large impact on <a href="https://www.smartkarma.com/entities/steadfast-group-ltd" target="_blank" data-smartkarma-citation="entities:8181:1" rel="noopener">Steadfast (SDF AU)</a> if it is included in the ASX100.</p>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 100, S&amp;P/ASX 200 (AS51 INDEX) and S&amp;P/ASX300 as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.The review period for the rebalance ends on 20 August, so there are only 3 days to go in the review period with 124 days completed.For the ASX100, we see Boral Ltd (BLD AU) as a potential deletion following the reduction in its free float following Seven Group Holdings (SVW AU)'s tender offer. This is the possibility of another change with Steadfast (SDF AU) replacing Beach Energy (BPT AU) in the index.For the S&amp;P/ASX 200 (AS51 INDEX), we see Pinnacle Investment Management (PNI AU), Sealink Travel (SLK AU), De Grey Mining (DEG AU) and Event Hospitality and Entertainment (EVT AU) as potential inclusions, while Nuix Limited (NXL AU), NRW Holdings (NWH AU), G8 Education (GEM AU) and Westgold Resources (WGX AU) are potential deletions.For the ASX300, potential inclusions are Paladin Energy (PDN AU), Imugene Ltd (IMU AU), Liontown Resources (LTR AU), BetMakers Technology Group (BET AU), Novonix Ltd (NVX AU), Dubber Corp Ltd (DUB AU), Johns Lyng (JLG AU) and Strike Energy (STX AU), while potential deletions are Bubs Australia (BUB AU), Synlait Milk (SML NZ), Integrated Research (IRI AU), Maca Ltd (MLD AU) and Medical Developments International (MVP AU).The impact is quite large on the S&amp;P/ASX 200 (AS51 INDEX) expected changes while there could be a large impact on Steadfast (SDF AU) if it is included in the ASX100.

ASX100/200/300 Index Rebalance Preview: Big Impact & Large Shorts

<p>S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 300 Index as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.</p><p>We have 8 days to go in the review period. The index currently has 297 members, so there will be 3 more adds as compared to the deletes.</p><p>We see 8 potential inclusions at the review: <a href="https://www.smartkarma.com/entities/paladin-energy-ltd" target="_blank" data-smartkarma-citation="entities:10117:1" rel="noopener">Paladin Energy (PDN AU)</a>, <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a>, <a href="https://www.smartkarma.com/entities/liontown-resources-ltd" target="_blank" data-smartkarma-citation="entities:20488:1" rel="noopener">Liontown Resources (LTR AU)</a>, <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a>, <a href="https://www.smartkarma.com/entities/novonix-ltd" target="_blank" data-smartkarma-citation="entities:29093:1" rel="noopener">Novonix Ltd (NVX AU)</a>, <a href="https://www.smartkarma.com/entities/dubber-corp-ltd" target="_blank" data-smartkarma-citation="entities:15396:1" rel="noopener">Dubber Corp Ltd (DUB AU)</a>, <a href="https://www.smartkarma.com/entities/johns-lyng-group-ltd" target="_blank" data-smartkarma-citation="entities:26649:1" rel="noopener">Johns Lyng (JLG AU)</a> and <a href="https://www.smartkarma.com/entities/strike-energy-ltd" target="_blank" data-smartkarma-citation="entities:12473:1" rel="noopener">Strike Energy (STX AU)</a>. </p><p>We see 5 potential deletions at the review: <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a>, <a href="https://www.smartkarma.com/entities/synlait-milk-ltd" target="_blank" data-smartkarma-citation="entities:16298:1" rel="noopener">Synlait Milk (SML NZ)</a>, <a href="https://www.smartkarma.com/entities/integrated-research-ltd" target="_blank" data-smartkarma-citation="entities:6744:1" rel="noopener">Integrated Research (IRI AU)</a>, <a href="https://www.smartkarma.com/entities/maca-ltd" target="_blank" data-smartkarma-citation="entities:11390:1" rel="noopener">Maca Ltd (MLD AU)</a> and <a href="https://www.smartkarma.com/entities/medical-developments-interna" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a>.</p><p>Among the potential adds, shorts have risen sharply on <a href="https://www.smartkarma.com/entities/imugene-ltd" target="_blank" data-smartkarma-citation="entities:20276:1" rel="noopener">Imugene Ltd (IMU AU)</a> and <a href="https://www.smartkarma.com/entities/betmakers-technology-group-ltd" target="_blank" data-smartkarma-citation="entities:25489:1" rel="noopener">BetMakers Technology Group (BET AU)</a> while shorts have risen on <a href="https://www.smartkarma.com/entities/medical-developments-interna" target="_blank" data-smartkarma-citation="entities:18644:1" rel="noopener">Medical Developments International (MVP AU)</a> and <a href="https://www.smartkarma.com/entities/bubs-australia-ltd" target="_blank" data-smartkarma-citation="entities:6296:1" rel="noopener">Bubs Australia (BUB AU)</a> among the potential deletions.</p>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 300 Index as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.We have 8 days to go in the review period. The index currently has 297 members, so there will be 3 more adds as compared to the deletes.We see 8 potential inclusions at the review: Paladin Energy (PDN AU), Imugene Ltd (IMU AU), Liontown Resources (LTR AU), BetMakers Technology Group (BET AU), Novonix Ltd (NVX AU), Dubber Corp Ltd (DUB AU), Johns Lyng (JLG AU) and Strike Energy (STX AU). We see 5 potential deletions at the review: Bubs Australia (BUB AU), Synlait Milk (SML NZ), Integrated Research (IRI AU), Maca Ltd (MLD AU) and Medical Developments International (MVP AU).Among the potential adds, shorts have risen sharply on Imugene Ltd (IMU AU) and BetMakers Technology Group (BET AU) while shorts have risen on Medical Developments International (MVP AU) and Bubs Australia (BUB AU) among the potential deletions.

ASX300 Sep 2021 Index Rebalance Preview: Changes Galore

New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Synlait Milk<br>FY21 Guidance Cut</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Synlait&nbsp;Milk (SML) has further downgraded FY21 guidance, with 'new' management revisiting assumptions for pre-existing areas of uncertainty and challenges. Revised guidance is seemingly conservative and it is not difficult to forecast future earnings materially ahead of what appears to be a low-point in FY21. However, low visibility, a multitude of moving parts and heightened uncertainty limits our confidence and means there is a high margin of error in earnings forecasts. Return on capital is also unlikely to return to prior highs, in our view. Current valuation metrics are not demanding, however, given the uncertainty and risk we require a much higher margin of safety.&nbsp; NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/208/730/original/image_83787716541621900631483.png?1621900633" class="editor-image img-responsive" data-smartkarma-image-id="208730"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_-5334906454732623528iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY21E materially cut, consistent with guidance. Medium-term also lowered -9% to -15%.</li>
<li><strong>Target price</strong>:&nbsp;Lowered to NZ$3.45&nbsp;(-11%).</li>
</ul>
</div>
<div>
<h3>FY21 guidance lowered, again</h3>
</div>
<div id="m_-5334906454732623528id9fr">
<p>SML has lowered FY21 guidance, now signalling expectations for an NPAT loss of -NZ$20m to -NZ$30m. This is materially below prior guidance (~NZ$0m) and market expectations. The change reflects revised assumptions and appears to be 'new' management taking a more conservative stance on the risks/areas of uncertainty, rather than a further deterioration in the business or new issues. Key downgrade drivers (evenly split): (1) ingredient sales delays (up to 10,000 MT) due to shipping constraints —&nbsp;a timing issue, (2) lower pricing&nbsp;for ingredients products, (3) a more conservative approach to year-end inventory volumes and valuation.&nbsp;</p>
</div>
<div>
<h3>Where to from here? Still no clearer</h3>
</div>
<div id="m_-5334906454732623528ih2ok">
<p>FY21 has been a dismal year&nbsp;with a plethora of (now) well-publicised issues, amplified by one-offs, the rapid pace of change and timing (at the end of its expansionary&nbsp;capex&nbsp;phase). The path from here is still no clearer, with a high margin of error in earnings forecasts, not helped by low external visibility on key drivers, a volatile backdrop and high leverage.&nbsp;Our base case is for some recovery in FY22E, with an&nbsp;alleviation of temporary issues seen in FY21, some self-help initiatives and an&nbsp;improved infant formula situation.&nbsp;We assume a further step-up in FY23E, aligned to our a2 Milk volume forecasts and first-time impact of&nbsp;SML's&nbsp;new multi-national customer.</p>
</div>
<div>
<h3>Elevated gearing; temporary covenant waiver provided</h3>
</div>
<div id="m_-5334906454732623528i1ajl">
<p>SML has removed one current risk, stating it "does not intend to undertake a capital raising" and securing covenant waivers for FY21. Our revised forecast is for net debt to EBITDA of ~3.2x in FY22E, above its internal long-term target (~2.5x) albeit within covenants (total leverage ratio ~4x). This assumes (1) execution on earnings recovery initiatives, (2) a reversal of temporary timing impacts seen in FY21 (which led to elevated inventory) and (3) a modest capex outlook. These assumptions (particularly #1) are not risk-free.&nbsp;</p>
</div>
<div>
<div>
<div><strong>Chelsea Leadbetter, CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Synlait Milk FY21 Guidance Cut

NEUTRAL
Synlait&nbsp;Milk (SML) has further downgraded FY21 guidance, with 'new' management revisiting assumptions for pre-existing areas of uncertainty and challenges. Revised guidance is seemingly conservative and it is not difficult to forecast future earnings materially ahead of what appears to be a low-point in FY21. However, low visibility, a multitude of moving parts and heightened uncertainty limits our confidence and means there is a high margin of error in earnings forecasts. Return on capital is also unlikely to return to prior highs, in our view. Current valuation metrics are not demanding, however, given the uncertainty and risk we require a much higher margin of safety.&nbsp; NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY21E materially cut, consistent with guidance. Medium-term also lowered -9% to -15%.
Target price:&nbsp;Lowered to NZ$3.45&nbsp;(-11%).



FY21 guidance lowered, again


SML has lowered FY21 guidance, now signalling expectations for an NPAT loss of -NZ$20m to -NZ$30m. This is materially below prior guidance (~NZ$0m) and market expectations. The change reflects revised assumptions and appears to be 'new' management taking a more conservative stance on the risks/areas of uncertainty, rather than a further deterioration in the business or new issues. Key downgrade drivers (evenly split): (1) ingredient sales delays (up to 10,000 MT) due to shipping constraints —&nbsp;a timing issue, (2) lower pricing&nbsp;for ingredients products, (3) a more conservative approach to year-end inventory volumes and valuation.&nbsp;


Where to from here? Still no clearer


FY21 has been a dismal year&nbsp;with a plethora of (now) well-publicised issues, amplified by one-offs, the rapid pace of change and timing (at the end of its expansionary&nbsp;capex&nbsp;phase). The path from here is still no clearer, with a high margin of error in earnings forecasts, not helped by low external visibility on key drivers, a volatile backdrop and high leverage.&nbsp;Our base case is for some recovery in FY22E, with an&nbsp;alleviation of temporary issues seen in FY21, some self-help initiatives and an&nbsp;improved infant formula situation.&nbsp;We assume a further step-up in FY23E, aligned to our a2 Milk volume forecasts and first-time impact of&nbsp;SML's&nbsp;new multi-national customer.


Elevated gearing; temporary covenant waiver provided


SML has removed one current risk, stating it "does not intend to undertake a capital raising" and securing covenant waivers for FY21. Our revised forecast is for net debt to EBITDA of ~3.2x in FY22E, above its internal long-term target (~2.5x) albeit within covenants (total leverage ratio ~4x). This assumes (1) execution on earnings recovery initiatives, (2) a reversal of temporary timing impacts seen in FY21 (which led to elevated inventory) and (3) a modest capex outlook. These assumptions (particularly #1) are not risk-free.&nbsp;



Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



<h2>Synlait Milk<br>FY21 Guidance Withdrawn&nbsp;— As Clear As Milk</h2>
<div></div>
<p><strong>NEUTRAL</strong></p>
<p>Synlait&nbsp;Milk (SML) has withdrawn its FY21 guidance, signalling prior guidance (for NPAT down ~-50%) is no longer attainable; the third downgrade in five months. SML will see a profit crunch in FY21E, primarily due to substantially lower Infant Formula (IF) volumes and accordingly a much higher weighting to low margin commodity Ingredients production. Detail is lacking and the backdrop volatile; accordingly there is a high margin of error in forecasts. Valuation metrics are undemanding (and marginally below&nbsp;Fonterra) — trading at ~1.05x FY21E book value.&nbsp;We believe a modest premium to book is justified, particularly to factor in the value of its China license. Confidence has been dented by the recent downgrade cycle&nbsp;— we expect this will take time to rebuild, reliant on improved clarity on the near-term earnings path, gearing and levers available to help offset any sustained pressure/volatility. We require a higher margin of safety for a directional call. NEUTRAL.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/192/354/original/image_56416307121614901354038.png?1614901357" class="editor-image img-responsive" data-smartkarma-image-id="192354"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_512969511808480651iwrmo3">
<ul>
<li><strong>Earnings:</strong>&nbsp;Materially lowered&nbsp;— FY21E NPAT down -24%, FY22E -12%, FY23E -13%.</li>
<li><strong>Target price:</strong>&nbsp;NZ$3.90; downgraded due to earnings revisions, revised cost of capital inputs and lower price to book multiple.&nbsp;</li>
</ul>
</div>
<div>
<h3>Prior FY21 guidance pulled</h3>
</div>
<div id="m_512969511808480651ip3hs">
<p>FY21E profit will be substantially below historic levels, and we expect near-term returns will be well below WACC. Key drivers include: (1) lower demand from key customer The a2 Milk Company (ATM), due to COVID-19 headwinds for its English label IF, and excess inventory levels which will take time to run-down; (2) global shipping delays; (3) volatile commodity prices. Detail is lacking, particularly around the magnitude of each driver. We will be looking for better clarity at the 1H21 result on Monday 29 March.</p>
</div>
<div>
<h3>Where to from here?</h3>
</div>
<div id="m_512969511808480651ixbjp">
<p>There are a lot of unknowns, with visibility low and accordingly a high margin of error in earnings forecasts. This is only amplified by a volatile backdrop and high operating leverage given a large fixed cost base.&nbsp;Our base case is for some recovery in FY22E, factoring in a return to growth for ATM and normalisation in inventory ordering, coupled with a reversal of temporary phasing issues from global supply chain challenges. We assume a more meaningful step-up in FY23E, aligned to our ATM volume growth expectations and the first-time impact of&nbsp;SML's&nbsp;new multi-national customer contract.</p>
</div>
<div>
<h3>Gearing returns to elevated levels near-term</h3>
</div>
<div id="m_512969511808480651i75y9">
<p>We expect gearing to return into focus — with questions likely until we have improved clarity on the near-term earnings profile. Our revised forecast is for net debt to EBITDA of ~3.2x in FY21E, above its internal long-term target (~2.5x) albeit well within covenants (total leverage ratio ~4x). SML is nearing the end of its expansionary capex phase and this, coupled with expected earnings growth from FY22E, should see leverage reduce in the medium-term.</p>
</div>
<div>
<div>
<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Synlait Milk FY21 Guidance Withdrawn&nbsp;— As Clear As Milk

NEUTRAL
Synlait&nbsp;Milk (SML) has withdrawn its FY21 guidance, signalling prior guidance (for NPAT down ~-50%) is no longer attainable; the third downgrade in five months. SML will see a profit crunch in FY21E, primarily due to substantially lower Infant Formula (IF) volumes and accordingly a much higher weighting to low margin commodity Ingredients production. Detail is lacking and the backdrop volatile; accordingly there is a high margin of error in forecasts. Valuation metrics are undemanding (and marginally below&nbsp;Fonterra) — trading at ~1.05x FY21E book value.&nbsp;We believe a modest premium to book is justified, particularly to factor in the value of its China license. Confidence has been dented by the recent downgrade cycle&nbsp;— we expect this will take time to rebuild, reliant on improved clarity on the near-term earnings path, gearing and levers available to help offset any sustained pressure/volatility. We require a higher margin of safety for a directional call. NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;Materially lowered&nbsp;— FY21E NPAT down -24%, FY22E -12%, FY23E -13%.
Target price:&nbsp;NZ$3.90; downgraded due to earnings revisions, revised cost of capital inputs and lower price to book multiple.&nbsp;



Prior FY21 guidance pulled


FY21E profit will be substantially below historic levels, and we expect near-term returns will be well below WACC. Key drivers include: (1) lower demand from key customer The a2 Milk Company (ATM), due to COVID-19 headwinds for its English label IF, and excess inventory levels which will take time to run-down; (2) global shipping delays; (3) volatile commodity prices. Detail is lacking, particularly around the magnitude of each driver. We will be looking for better clarity at the 1H21 result on Monday 29 March.


Where to from here?


There are a lot of unknowns, with visibility low and accordingly a high margin of error in earnings forecasts. This is only amplified by a volatile backdrop and high operating leverage given a large fixed cost base.&nbsp;Our base case is for some recovery in FY22E, factoring in a return to growth for ATM and normalisation in inventory ordering, coupled with a reversal of temporary phasing issues from global supply chain challenges. We assume a more meaningful step-up in FY23E, aligned to our ATM volume growth expectations and the first-time impact of&nbsp;SML's&nbsp;new multi-national customer contract.


Gearing returns to elevated levels near-term


We expect gearing to return into focus — with questions likely until we have improved clarity on the near-term earnings profile. Our revised forecast is for net debt to EBITDA of ~3.2x in FY21E, above its internal long-term target (~2.5x) albeit well within covenants (total leverage ratio ~4x). SML is nearing the end of its expansionary capex phase and this, coupled with expected earnings growth from FY22E, should see leverage reduce in the medium-term.



Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Synlait Milk: FY21 Guidance Withdrawn — As Clear As Milk

<h2>Food for Thought<br>China Flexes its Mussels</h2>
<p></p>
<div id="m_-6301220319520010085iubdj">
<p>China's suspension of imports from two seafood processing plants highlights existing market risk, however, at face value can be addressed through implementation of stricter COVID-19 protocols. Imports from Sanford’s (SAN) Havelock mussel factory and a Sealord finfish processing plant have been suspended following scheduled video audits of the plants. The key takeaways for the listed New Zealand Food &amp; Beverage sector, in our view, are (1) the use of virtual audits lowers risk that Chinese registration lapses given border restrictions, and (2) advanced warning for food exporters of China's expectations and increasing scrutiny on quality and safety. We understand the companies under our coverage are able to adapt to stronger COVID-19 protocols relatively quickly, if required, albeit this likely brings some productivity and/or cost ramifications.</p>
</div>
<div>
<h3>Global expectations&nbsp;— stricter COVID-19 protocols required by China</h3>
</div>
<div id="m_-6301220319520010085itqdp">
<p>Our understanding is that the current import restrictions have arisen due to China's global expectation&nbsp;of more stringent COVID-19 protocols, akin to those that were in place under New Zealand’s Alert Level 3 and 4. SAN, and most other New&nbsp;Zealand&nbsp;exporters we have spoken to, are operating under protocols consistent with New Zealand’s Alert Level 1, given the country’s community COVID-19 free status. We understand exporters are geared to adapt to stricter protocols quickly if required, however, depending on the automation of supply chains there could be productivity and cost ramifications. SAN has previously indicated that it can run at c. 80% capacity at its on-land processing facilities under Alert Level 3. Companies that have less labour intensive processing, such as&nbsp;Synlait&nbsp;(SML), are likely to be less impacted.</p>
</div>
<div>
<h3>Processing plant audits taking place virtually</h3>
</div>
<div id="m_-6301220319520010085ikqui">
<p>China has been conducting its scheduled GACC (Chinese authority responsible for Chinese customs)&nbsp;audits of New&nbsp;Zealand&nbsp;processing plants virtually, with various seafood plants the most recent focus. We view virtual audits as taking risk off in terms of possible registration lapses, given earlier uncertainty over how/if China would conduct audits with borders closed.</p>
</div>
<div>
<h3>Recent step forward in NZ-China trade relationship</h3>
</div>
<div id="m_-6301220319520010085ix8s5">
<p>New&nbsp;Zealand&nbsp;and China upgraded their free trade agreement in January 2021, with the agreement designed to ease trade flows by reducing administration red tape, lowering/removing tariffs on certain goods, and reducing handling requirements for perishable goods (e.g. seafood). The agreement illustrates a step forward in the trading relationship between China and New&nbsp;Zealand, against a backdrop of strained trade relationships between China and other countries.</p>
</div>
<div>
<h3>Takeaways for key stocks</h3>
</div>
<div id="m_-6301220319520010085iwonz">
<ul>
<li>SAN:&nbsp;In recent months China has exhibited reasonable demand for mussels, making up 25% of export value (17% over the same time period 12 months prior). We estimate SAN’s&nbsp;China mussel revenue is c. 6% of total revenue. We expect to see a resolution to the import restrictions, however, time frames are uncertain at this stage in the process. In the interim SAN has some mitigation avenues, with scope to re-route products given its geographic diversity, although note the demand backdrop remains tough.&nbsp;</li>
<li>SML, a2 Milk (ATM):&nbsp;SML is coming into its audit cycle —&nbsp;SAMR registration for a2 is coming up for renewal in September 2022 (for ATM’s China label product, ~34% of revenue), with GACC registration for SML’s&nbsp;Dunsandel&nbsp;facility up for renewal prior to this. More specific timing isn’t clear but there is time to work through any additional changes should they be required. Quality of protocols, processes and product is&nbsp;a key strength of SML, in our view. While there is risk inherent in re-registration and increasing scrutiny on quality &amp; safety, we see SML/ATM as well positioned to navigate this&nbsp;— our forecasts assume re-registration is achieved. We expect this process (~950 Infant Formula, IF, product registrations up for renewal in 2022) may also see a further round of industry consolidation, with the IF industry still highly fragmented, with a long tail of smaller brands.&nbsp;​​​​​​​</li>
</ul>
</div>
<div>
<div>
<div><strong>Guy Hooper</strong></div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
</div>
</div>

Food for Thought China Flexes its Mussels


China's suspension of imports from two seafood processing plants highlights existing market risk, however, at face value can be addressed through implementation of stricter COVID-19 protocols. Imports from Sanford’s (SAN) Havelock mussel factory and a Sealord finfish processing plant have been suspended following scheduled video audits of the plants. The key takeaways for the listed New Zealand Food &amp; Beverage sector, in our view, are (1) the use of virtual audits lowers risk that Chinese registration lapses given border restrictions, and (2) advanced warning for food exporters of China's expectations and increasing scrutiny on quality and safety. We understand the companies under our coverage are able to adapt to stronger COVID-19 protocols relatively quickly, if required, albeit this likely brings some productivity and/or cost ramifications.


Global expectations&nbsp;— stricter COVID-19 protocols required by China


Our understanding is that the current import restrictions have arisen due to China's global expectation&nbsp;of more stringent COVID-19 protocols, akin to those that were in place under New Zealand’s Alert Level 3 and 4. SAN, and most other New&nbsp;Zealand&nbsp;exporters we have spoken to, are operating under protocols consistent with New Zealand’s Alert Level 1, given the country’s community COVID-19 free status. We understand exporters are geared to adapt to stricter protocols quickly if required, however, depending on the automation of supply chains there could be productivity and cost ramifications. SAN has previously indicated that it can run at c. 80% capacity at its on-land processing facilities under Alert Level 3. Companies that have less labour intensive processing, such as&nbsp;Synlait&nbsp;(SML), are likely to be less impacted.


Processing plant audits taking place virtually


China has been conducting its scheduled GACC (Chinese authority responsible for Chinese customs)&nbsp;audits of New&nbsp;Zealand&nbsp;processing plants virtually, with various seafood plants the most recent focus. We view virtual audits as taking risk off in terms of possible registration lapses, given earlier uncertainty over how/if China would conduct audits with borders closed.


Recent step forward in NZ-China trade relationship


New&nbsp;Zealand&nbsp;and China upgraded their free trade agreement in January 2021, with the agreement designed to ease trade flows by reducing administration red tape, lowering/removing tariffs on certain goods, and reducing handling requirements for perishable goods (e.g. seafood). The agreement illustrates a step forward in the trading relationship between China and New&nbsp;Zealand, against a backdrop of strained trade relationships between China and other countries.


Takeaways for key stocks



SAN:&nbsp;In recent months China has exhibited reasonable demand for mussels, making up 25% of export value (17% over the same time period 12 months prior). We estimate SAN’s&nbsp;China mussel revenue is c. 6% of total revenue. We expect to see a resolution to the import restrictions, however, time frames are uncertain at this stage in the process. In the interim SAN has some mitigation avenues, with scope to re-route products given its geographic diversity, although note the demand backdrop remains tough.&nbsp;
SML, a2 Milk (ATM):&nbsp;SML is coming into its audit cycle —&nbsp;SAMR registration for a2 is coming up for renewal in September 2022 (for ATM’s China label product, ~34% of revenue), with GACC registration for SML’s&nbsp;Dunsandel&nbsp;facility up for renewal prior to this. More specific timing isn’t clear but there is time to work through any additional changes should they be required. Quality of protocols, processes and product is&nbsp;a key strength of SML, in our view. While there is risk inherent in re-registration and increasing scrutiny on quality &amp; safety, we see SML/ATM as well positioned to navigate this&nbsp;— our forecasts assume re-registration is achieved. We expect this process (~950 Infant Formula, IF, product registrations up for renewal in 2022) may also see a further round of industry consolidation, with the IF industry still highly fragmented, with a long tail of smaller brands.&nbsp;​​​​​​​




Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255





Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262



Food for Thought: China Flexes Its Mussels

New Zealand

Seeka Limited operates as a produce company. The Company produces apricots, cherries, pears, plums, bananas, papaya, kiwiberries, pineapples, kiwifruits, and avocado. Seeka offers professional orchard management services to kiwifruit growers.

Allied Farmers Limited is a New Zealand regional rural servicing company.  The Company offers its clients access to a range rural services including merchandising and bulk farm supplies, advice and trading in livestock, crop advice, wool storage and handling facilities, financial services and specialized regional real estate services.

New Zealand Coastal Seafoods Limited provides and distributes marine products. The Company offers various types of seafood. New Zealand Coastal Seafoods serves customers in New Zealand.

Good Spirits Hospitality Limited operates as an investment company. The Company offers sustainable cash flows, organic growth, and acquisition services. Good Spirits Hospitality serves customers in New Zealand.

New Zealand King Salmon Investments Limited provides fish farming services. The Company produces, grows, and sells salmons products. New Zealand King Salmon Investments serves customers worldwide.

PGG Wrightson Limited is a farm service organization on the South Island, operating in Otago and parts of Southland. The Company's operations include wool scouring and dumping, wool and livestock trading, farming financial services, residential real estate and retail farming merchandising, which includes animal health and nutrition and pasture improvements.

Livestock Improvement Corporation Limited provides herd improvement services to farmers in New Zealand.  The services provided by the Company include herd testing, animal health management, on farm consultancy, progeny testing, DNA analysis, artificial breeding and research and development.

T&G Global Limited is a domestic and international fruit and produce wholesale company. The Company wholesales fruits, vegetables and fresh flowers. The Company also manufactures fruit and vegetable products like juices and other ingredients for the food and beverage industry.

Fonterra Cooperative Group Ltd is a New Zealand multinational dairy co-operative and its farmer shareholders are the suppliers of milk to Fonterra in New Zealand. The Company operates Fonterra Shareholders' Fund, which provides additional financial flexibility for farmer shareholders who would have the opportunity to sell economic rights of shares to the fund.

Sanford Limited owns and manages deepwater and inshore fisheries throughout New Zealand waters.  The Company also operates cool-storage, ship-building, engineering and aquaculture businesses.  The Company exports seafood throughout the world.  The Company's seafood products include orange roughy, squid, hoki, tuna, mussels and salmon.

Honworld Group Limited manufactures and sells cooking wine. The Company offers a mixture of naturally-brewed yellow rice wine and naturally-brewed cooking wine.

Foodwell Corporation processes agricultural products such as peeled chestnuts and produces strawberry syrups.  The Company also manufactures jam, juice, frozen fruits, and canned fruits.

Riverview Rubber Estates Berhad cultivates rubber and oil palm in Malaysia.

Seoul Food Industrial Co., Ltd. produces bakery goods and snacks.  The Company also manufactures animal feedstuff and food waste disposal system.

TS Flour Mill Public Company Limited operates as a flour milling company. The Company produces noodle, bread, biscuit, cake, dough stick, and steamed bun flour. TS Flour Mill serves customers in Thailand.

McLeod Russel India Ltd.  cultivates, manufactures, and markets tea. The Group owns tea estates in Assam and Dooars.

Besunyen Holdings Company Ltd. processes and markets tea.  The Company produces both traditional and herbal teas.

NICHIWA SANGYO CO., LTD. produces mixed feed with poultry feed as its main product line.  The Company also raises livestock for the purpose of bioengineering research.

Global Palm Resources Holdings Limited is an agricultural company. The Company's activities include cultivating oil palms, harvesting of FFB from our oil palm plantation, and processing them (together with purchased FFB) into CPO and palm kernels.

NICHIRYO BAKING CO., LTD. makes and sells bread and pastries.  The Company also operates restaurants and manages real estate.

Synlait Milk Ltd is a milk production company.  The Company produces, processes, markets and distributes milk, milk powder products and ingredients.

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Synlait Milk (SML NZ)

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