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>Equity Strategy</h2>
COVID-19 Winners, Losers, and Big Losers&nbsp;
The impact of&nbsp;COVID-19 will be far reaching and very significant across our companies under coverage; while several&nbsp;may benefit, most will be adversely impacted, some materially so,&nbsp;and thus&nbsp;require&nbsp;recapitalisation&nbsp;to survive. The near term outlook is extremely uncertain and while market valuations have been severely hit for many companies,&nbsp;we have a preference for higher quality assets with sustainable cash flows that should trade on a largely business-as-usual track through these challenging times. In contrast, companies most at risk include (1) those that&nbsp;have direct exposure to travel and tourism, (2) those that will be impacted by changing consumer behaviour (given social distancing and&nbsp;lock-down), and (3) those that are cyclical as a result of the impending domestic and global recession. We have subjectively screened all companies in our universe of coverage for&nbsp;COVID-19 risks (both negative and positive). Those most impacted will experience significant declines in profitability, with many likely to generate losses, and needing additional balance sheet support. At the other end of the&nbsp;spectrum there are companies in the&nbsp;telco,&nbsp;healthcare, and utilities sectors that should be largely unaffected. Our preferred larger cap exposures to navigate&nbsp;COVID-19 are OUTPERFORM rated Spark (SPK), Chorus (CNU), Contact (CEN), Genesis (GNE),&nbsp;Trustpower&nbsp;(TPW), and&nbsp;The A2 Milk Company (ATM); and NEUTRAL rated Vital&nbsp;Healthcare&nbsp;(VHP), Mercury (MCY), Meridian (MEL), Vector (VCT), and&nbsp;EBOS&nbsp;Group (EBO).
Figure 1. Companies most exposed to COVID-19
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/421/original/image_21242315321585010112113.png?1585010114" class="editor-image img-responsive" data-smartkarma-image-id="124421"></figure>
Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Figure 2. Companies least exposed to COVID-19
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/422/original/image_84241576731585010165318.png?1585010165" class="editor-image img-responsive" data-smartkarma-image-id="124422"></figure>
Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Relative safe havens
The companies with the least demand risk to COVID-19 include CNU, Fisher &amp; Paykel Healthcare (FPH), SPK, VHP, VCT, ATM, EBO, and the gentailers — CEN, MEL, MCY, GNE, TPW and Tilt Renewables (TLT). In fact CNU, FPH, VHP, ATM, SPK, and EBO are all potential demand beneficiaries of COVID-19.&nbsp;
Most adversely impacted&nbsp;
Companies with most exposure to&nbsp;COVID-19 are those that have exposure to (1) travel and tourism, where demand will fall materially and in many cases to zero, (2) the economic cycle, given the impending recession, (3)&nbsp;social distancing, as government actions (including lock-down) and consumer behaviour will change the way we live day to day, (4) at risk demographics, given the propensity of&nbsp;COVID-19 to have a greater impact on the elderly and those with pre-existing medical conditions, and (5) supply chain risks for those companies that are considered non-essential. The most exposed companies, based on our subjective assessment, include Air New Zealand (AIR), Tourism Holdings (THL), Kathmandu (KMD), Michael Hill (MHJ), Auckland Airport (AIA),&nbsp;Briscoe&nbsp;Group (BGP),&nbsp;SKYCITY&nbsp;(SKC), The Warehouse Group (WHS) and Sky TV (SKT).&nbsp;
Demand risk vs share price response thus far&nbsp;
The NZX50 has fallen by ~-32% since it peaked on 21 February 2020 and ~-29% since the Wuhan outbreak began surfacing in mainstream media in mid-January 2020. These percentages have been held up by the two largest index weightings, FPH and ATM, being the only two stocks that have generated positive share price performance. The median share price for the market has since fallen ~-40%.&nbsp;
In Figure 3 we show the subjective COVID-19 demand risk scores that we determine later in this report relative to share price performance since 13&nbsp;January 2020. While we recognise the market peaked on 21 February 2020, we are conscious that companies with primary exposure (i.e. travel and tourism in particular)&nbsp;to COVID-19 had&nbsp;already fallen materially by that stage. Key lower risk investment opportunities exist in the&nbsp;bottom centre of the chart circled in red, where companies have a neutral to positive demand impact from COVID-19, yet their share prices have been hit.
Figure 3. Share price performance since 13 January 2020 vs COVID-19 demand risk score
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/423/original/image_43810028741585010270664.png?1585010270" class="editor-image img-responsive" data-smartkarma-image-id="124423"></figure>
Source: Ekon, Forsyth Barr analysis
Key stock opportunities to navigate&nbsp;COVID-19
We believe the key stock opportunities for navigating&nbsp;the immediate&nbsp;COVID-19 outlook include those highlighted in Figure 3 as follows:&nbsp;&nbsp;
<ul type="disc">
<li>Telcos: Spark (SPK), Chorus (CNU)</li>
<li>Utilities: Contact (CEN), Genesis (GNE), Trustpower (TPW), Mercury (MCY), Meridian (MEL), Vector (VCT), Tilt Renewables (TLT)</li>
<li>Property:&nbsp;Vital&nbsp;Healthcare&nbsp;(VHP)</li>
<li>Healthcare:&nbsp;EBOS&nbsp;Group (EBO)</li>
</ul>
In addition, we also believe food/agri players including The A2 Milk Company (ATM), Synlait Milk (SML), Fonterra (FSF), and Scales (SCL) offer relative safe havens at undemanding valuations given (1) their health and well-being benefits, and (2) the protected essential services nature of their respective supply chains.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy
COVID-19 Winners, Losers, and Big Losers&nbsp;
The impact of&nbsp;COVID-19 will be far reaching and very significant across our companies under coverage; while several&nbsp;may benefit, most will be adversely impacted, some materially so,&nbsp;and thus&nbsp;require&nbsp;recapitalisation&nbsp;to survive. The near term outlook is extremely uncertain and while market valuations have been severely hit for many companies,&nbsp;we have a preference for higher quality assets with sustainable cash flows that should trade on a largely business-as-usual track through these challenging times. In contrast, companies most at risk include (1) those that&nbsp;have direct exposure to travel and tourism, (2) those that will be impacted by changing consumer behaviour (given social distancing and&nbsp;lock-down), and (3) those that are cyclical as a result of the impending domestic and global recession. We have subjectively screened all companies in our universe of coverage for&nbsp;COVID-19 risks (both negative and positive). Those most impacted will experience significant declines in profitability, with many likely to generate losses, and needing additional balance sheet support. At the other end of the&nbsp;spectrum there are companies in the&nbsp;telco,&nbsp;healthcare, and utilities sectors that should be largely unaffected. Our preferred larger cap exposures to navigate&nbsp;COVID-19 are OUTPERFORM rated Spark (SPK), Chorus (CNU), Contact (CEN), Genesis (GNE),&nbsp;Trustpower&nbsp;(TPW), and&nbsp;The A2 Milk Company (ATM); and NEUTRAL rated Vital&nbsp;Healthcare&nbsp;(VHP), Mercury (MCY), Meridian (MEL), Vector (VCT), and&nbsp;EBOS&nbsp;Group (EBO).
Figure 1. Companies most exposed to COVID-19

Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Figure 2. Companies least exposed to COVID-19

Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Relative safe havens
The companies with the least demand risk to COVID-19 include CNU, Fisher &amp; Paykel Healthcare (FPH), SPK, VHP, VCT, ATM, EBO, and the gentailers — CEN, MEL, MCY, GNE, TPW and Tilt Renewables (TLT). In fact CNU, FPH, VHP, ATM, SPK, and EBO are all potential demand beneficiaries of COVID-19.&nbsp;
Most adversely impacted&nbsp;
Companies with most exposure to&nbsp;COVID-19 are those that have exposure to (1) travel and tourism, where demand will fall materially and in many cases to zero, (2) the economic cycle, given the impending recession, (3)&nbsp;social distancing, as government actions (including lock-down) and consumer behaviour will change the way we live day to day, (4) at risk demographics, given the propensity of&nbsp;COVID-19 to have a greater impact on the elderly and those with pre-existing medical conditions, and (5) supply chain risks for those companies that are considered non-essential. The most exposed companies, based on our subjective assessment, include Air New Zealand (AIR), Tourism Holdings (THL), Kathmandu (KMD), Michael Hill (MHJ), Auckland Airport (AIA),&nbsp;Briscoe&nbsp;Group (BGP),&nbsp;SKYCITY&nbsp;(SKC), The Warehouse Group (WHS) and Sky TV (SKT).&nbsp;
Demand risk vs share price response thus far&nbsp;
The NZX50 has fallen by ~-32% since it peaked on 21 February 2020 and ~-29% since the Wuhan outbreak began surfacing in mainstream media in mid-January 2020. These percentages have been held up by the two largest index weightings, FPH and ATM, being the only two stocks that have generated positive share price performance. The median share price for the market has since fallen ~-40%.&nbsp;
In Figure 3 we show the subjective COVID-19 demand risk scores that we determine later in this report relative to share price performance since 13&nbsp;January 2020. While we recognise the market peaked on 21 February 2020, we are conscious that companies with primary exposure (i.e. travel and tourism in particular)&nbsp;to COVID-19 had&nbsp;already fallen materially by that stage. Key lower risk investment opportunities exist in the&nbsp;bottom centre of the chart circled in red, where companies have a neutral to positive demand impact from COVID-19, yet their share prices have been hit.
Figure 3. Share price performance since 13 January 2020 vs COVID-19 demand risk score

Source: Ekon, Forsyth Barr analysis
Key stock opportunities to navigate&nbsp;COVID-19
We believe the key stock opportunities for navigating&nbsp;the immediate&nbsp;COVID-19 outlook include those highlighted in Figure 3 as follows:&nbsp;&nbsp;

Telcos: Spark (SPK), Chorus (CNU)
Utilities: Contact (CEN), Genesis (GNE), Trustpower (TPW), Mercury (MCY), Meridian (MEL), Vector (VCT), Tilt Renewables (TLT)
Property:&nbsp;Vital&nbsp;Healthcare&nbsp;(VHP)
Healthcare:&nbsp;EBOS&nbsp;Group (EBO)

In addition, we also believe food/agri players including The A2 Milk Company (ATM), Synlait Milk (SML), Fonterra (FSF), and Scales (SCL) offer relative safe havens at undemanding valuations given (1) their health and well-being benefits, and (2) the protected essential services nature of their respective supply chains.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464


Equity Strategy: COVID-19 Winners, Losers, and Big Losers 