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><a target="_blank">Equity Strategy</a></h2>
The Year Ahead; Five/Five for 2020
A new year and a new decade follows the longest bull market in modern history, with the NZX50 delivering a CAGR of +13.4% during the 2010s and a tidy +29.2% in 2019-to-date. Markets are in uncharted territory — record high valuations (at least domestically) and record low interest rates. Key drivers (growth, rates, and regulation) will remain supportive to elevated valuations through 2020, in our opinion. Our key picks for the year ahead are A2 Milk, Arvida, Contact Energy, Chorus and Sanford.
Five themes for 2020
<ul>
<li>Late cycle recovery: Global economic growth is expected to accelerate modestly through 2020 as central bank stimulus takes hold and the US–China trade war eases or resolves. Domestically, a robust housing market and improving consumer confidence point to a modestly positive outlook, supportive to corporate EPS growth holding firm in the mid-single digits.</li>
<li>Elections: The upcoming New Zealand election will inevitably have a temporary dampener on consumer demand, but to be announced policies are unlikely to have any meaningful impact on NZX companies, in our view. The US election promises to be more divisive, albeit few NZX companies will be directly impacted.</li>
<li>Rates: We expect the RBNZ to hold the cash rate through 2020. Recent yield curve steepening reflects more optimism around growth. However, rates will be capped to the upside by monetary policy, the reach for yield, and the inability of the global economy to sustain materially higher rates.</li>
<li>Sustainability drive: At Government, investor, corporate and consumer levels, the drive for sustainable behaviours and outcomes will increase in importance. From measuring and disclosing greenhouse gas emissions, to actively reducing waste, NZX companies will be at pains to stress their greater focus on green initiatives.</li>
<li>M&amp;A: The NZX lost TradeMe, Methven, Orion Healthcare and SLI Systems to M&amp;A in 2019. Others (e.g. Abano) will likely follow in 2020. While market valuations are relatively high, cheap debt and cashed up private equity means more companies could be subject to bids through the year ahead, particularly those that have been beaten up. Our M&amp;A screen suggests potential targets include Refining NZ, Z Energy and Gentrack.</li>
</ul>
Five picks for 2020
<ul>
<li>A2 Milk (ATM): Notwithstanding a CEO change, we are attracted to the opportunity for ATM in existing markets and optionality of new markets and products.</li>
<li>Arvida (ARV): ARV has an attractive blend of a solid dividend yield of ~5% on a 40% pay-out of underlying earnings and a building growth profile given its expanded development expertise, track record and pipeline.</li>
<li>Chorus (CNU): We remain attracted to CNU’s fundamental value underpinned by the considerable long-term free cash flow we expect the company to generate once its fibre network is complete in 2022.</li>
<li>Contact Energy (CEN): We view CEN as offering the best value amongst the generator/retailers. It offers an attractive dividend yield and has one of the best potential development projects (Tauhara) in the country.</li>
<li>Sanford (SAN): SAN has a unique asset in its significant holdings of commercial fishing quota and extensive marine farming operations. Its strategy to move up the value chain appears both sensible and achievable. Execution on EBIT/kg target is likely to be a key driver of performance.<a target="_blank">&nbsp;</a></li>
</ul>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Will McManus will.mcmanus@forsythbarr.co.nz +64 4 495 8242

Equity Strategy
The Year Ahead; Five/Five for 2020
A new year and a new decade follows the longest bull market in modern history, with the NZX50 delivering a CAGR of +13.4% during the 2010s and a tidy +29.2% in 2019-to-date. Markets are in uncharted territory — record high valuations (at least domestically) and record low interest rates. Key drivers (growth, rates, and regulation) will remain supportive to elevated valuations through 2020, in our opinion. Our key picks for the year ahead are A2 Milk, Arvida, Contact Energy, Chorus and Sanford.
Five themes for 2020

Late cycle recovery: Global economic growth is expected to accelerate modestly through 2020 as central bank stimulus takes hold and the US–China trade war eases or resolves. Domestically, a robust housing market and improving consumer confidence point to a modestly positive outlook, supportive to corporate EPS growth holding firm in the mid-single digits.
Elections: The upcoming New Zealand election will inevitably have a temporary dampener on consumer demand, but to be announced policies are unlikely to have any meaningful impact on NZX companies, in our view. The US election promises to be more divisive, albeit few NZX companies will be directly impacted.
Rates: We expect the RBNZ to hold the cash rate through 2020. Recent yield curve steepening reflects more optimism around growth. However, rates will be capped to the upside by monetary policy, the reach for yield, and the inability of the global economy to sustain materially higher rates.
Sustainability drive: At Government, investor, corporate and consumer levels, the drive for sustainable behaviours and outcomes will increase in importance. From measuring and disclosing greenhouse gas emissions, to actively reducing waste, NZX companies will be at pains to stress their greater focus on green initiatives.
M&amp;A: The NZX lost TradeMe, Methven, Orion Healthcare and SLI Systems to M&amp;A in 2019. Others (e.g. Abano) will likely follow in 2020. While market valuations are relatively high, cheap debt and cashed up private equity means more companies could be subject to bids through the year ahead, particularly those that have been beaten up. Our M&amp;A screen suggests potential targets include Refining NZ, Z Energy and Gentrack.

Five picks for 2020

A2 Milk (ATM): Notwithstanding a CEO change, we are attracted to the opportunity for ATM in existing markets and optionality of new markets and products.
Arvida (ARV): ARV has an attractive blend of a solid dividend yield of ~5% on a 40% pay-out of underlying earnings and a building growth profile given its expanded development expertise, track record and pipeline.
Chorus (CNU): We remain attracted to CNU’s fundamental value underpinned by the considerable long-term free cash flow we expect the company to generate once its fibre network is complete in 2022.
Contact Energy (CEN): We view CEN as offering the best value amongst the generator/retailers. It offers an attractive dividend yield and has one of the best potential development projects (Tauhara) in the country.
Sanford (SAN): SAN has a unique asset in its significant holdings of commercial fishing quota and extensive marine farming operations. Its strategy to move up the value chain appears both sensible and achievable. Execution on EBIT/kg target is likely to be a key driver of performance.&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;
Will McManus will.mcmanus@forsythbarr.co.nz +64 4 495 8242

Equity Strategy: The Year Ahead; Five/Five for 2020

A2 Milk Co Ltd

Equity Strategy: The Year Ahead; Five/Five for 2020