New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Delegat Group<br>FY21&nbsp;Result&nbsp;— Hitting the Notes</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Delegat&nbsp;Group (DGL) reported a pre-guided FY21 operating NPAT of NZ$65.5m, up +8% on the prior year as a drop in case sales was offset by higher prices/lower expenses incurred due to COVID-19. DGL is a quality operator with a strong brand and good track record which continues to invest in growth. Trading on a 12 month forward PE ratio of 23x, we view valuation as fair. NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;We trim FY22 NPAT -1.1% to NZ$59.6m (guidance NZ$57.0m to NZ$61.0m).&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;We cut our target price&nbsp;-25cps (-1.6%) to NZ$15.50 on the back of earnings changes and as we factor in higher&nbsp;capex&nbsp;assumptions.</li>
</ul>
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<h3>FY21 result takeouts</h3>
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<ul>
<li><strong>Price increases partially offset a volume decline</strong> —&nbsp;Case sales fell -3% on the prior year period to 3.3m cases, the first decline in nine years. Supply chain challenges are expected to continue into FY22, with disruption having worsened in the 2H. Sales revenue fell -1% on the prior year period&nbsp;as a +2% lift in the average realised price&nbsp;helped offset the decline in volume. Contributing to the value uplift&nbsp;prices increased +3%, positive mix changes contributed +1%, while negative foreign exchange&nbsp;movements dampened NZ dollar&nbsp;prices -2%.
<ul>
<li>DGL has signalled further price growth&nbsp;in FY22&nbsp;with a price increase expected to&nbsp;be implemented in the UK/Ireland.</li>
</ul>
</li>
<li><strong>Continuing to invest in growth</strong> —&nbsp;FY21&nbsp;capex&nbsp;of NZ$62m was ahead c. +20% of expectations, with continued investment into its vineyards and wineries. The key difference vs. expectations was the purchase&nbsp;of undeveloped land in Marlborough, which should support further case growth beyond the explicit period.
<ul>
<li>DGL has&nbsp;guided to FY22&nbsp;capex&nbsp;of NZ$30m, which includes further vineyard and winery developments across its producing regions, with go forward&nbsp;capex&nbsp;beyond FY22 likely to be c. NZ$40m to NZ$50m.</li>
</ul>
</li>
<li><strong>FY21 net debt increased +4% on the prior year period to NZ$249m (2.0x net debt/EBITDA)&nbsp;</strong>— A lift in working capital and higher capital requirements drove the increase. Supply chain congestion remains a theme for exporters&nbsp;and may be a possible driver behind higher inventory holdings.</li>
</ul>
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<h3>Guidance reiterated with a decline in profitability expected</h3>
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<p>DGL reiterated its recently provided FY22 NPAT guidance range of NZ$57m to NZ$61m (FB NZ$60m).&nbsp;The forecast decline in profitability is due to the impact of a lower yielding 2021 vintage, which has the impact of increasing the cost of goods sold per case. This impact is predominantly captured in FY22 although with some carry through into FY23.&nbsp;Our forecasts assume a return to average yields in 2022&nbsp;and therefore expect gross margin to normalise with limited longer-term valuation impacts.</p>
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Delegat Group FY21&nbsp;Result&nbsp;— Hitting the Notes

NEUTRAL
Delegat&nbsp;Group (DGL) reported a pre-guided FY21 operating NPAT of NZ$65.5m, up +8% on the prior year as a drop in case sales was offset by higher prices/lower expenses incurred due to COVID-19. DGL is a quality operator with a strong brand and good track record which continues to invest in growth. Trading on a 12 month forward PE ratio of 23x, we view valuation as fair. NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;We trim FY22 NPAT -1.1% to NZ$59.6m (guidance NZ$57.0m to NZ$61.0m).&nbsp;
Target price:&nbsp;We cut our target price&nbsp;-25cps (-1.6%) to NZ$15.50 on the back of earnings changes and as we factor in higher&nbsp;capex&nbsp;assumptions.



FY21 result takeouts



Price increases partially offset a volume decline —&nbsp;Case sales fell -3% on the prior year period to 3.3m cases, the first decline in nine years. Supply chain challenges are expected to continue into FY22, with disruption having worsened in the 2H. Sales revenue fell -1% on the prior year period&nbsp;as a +2% lift in the average realised price&nbsp;helped offset the decline in volume. Contributing to the value uplift&nbsp;prices increased +3%, positive mix changes contributed +1%, while negative foreign exchange&nbsp;movements dampened NZ dollar&nbsp;prices -2%.

DGL has signalled further price growth&nbsp;in FY22&nbsp;with a price increase expected to&nbsp;be implemented in the UK/Ireland.


Continuing to invest in growth —&nbsp;FY21&nbsp;capex&nbsp;of NZ$62m was ahead c. +20% of expectations, with continued investment into its vineyards and wineries. The key difference vs. expectations was the purchase&nbsp;of undeveloped land in Marlborough, which should support further case growth beyond the explicit period.

DGL has&nbsp;guided to FY22&nbsp;capex&nbsp;of NZ$30m, which includes further vineyard and winery developments across its producing regions, with go forward&nbsp;capex&nbsp;beyond FY22 likely to be c. NZ$40m to NZ$50m.


FY21 net debt increased +4% on the prior year period to NZ$249m (2.0x net debt/EBITDA)&nbsp;— A lift in working capital and higher capital requirements drove the increase. Supply chain congestion remains a theme for exporters&nbsp;and may be a possible driver behind higher inventory holdings.



Guidance reiterated with a decline in profitability expected


DGL reiterated its recently provided FY22 NPAT guidance range of NZ$57m to NZ$61m (FB NZ$60m).&nbsp;The forecast decline in profitability is due to the impact of a lower yielding 2021 vintage, which has the impact of increasing the cost of goods sold per case. This impact is predominantly captured in FY22 although with some carry through into FY23.&nbsp;Our forecasts assume a return to average yields in 2022&nbsp;and therefore expect gross margin to normalise with limited longer-term valuation impacts.


Delegat Group: FY21 Result — Hitting the Notes