New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kathmandu Holdings</h2>
1H20 Result — A Mountain to Climb
RESTRICTED&nbsp;
Kathmandu (KMD) reported strong headline 1H20 earnings growth due to the first-time inclusion of Rip Curl, while earnings for the Kathmandu brand declined as a result of gross margin contraction. The near-term outlook is highly uncertain against the backdrop of COVID-19, with the majority of store doors temporarily closed. To help partially offset sales declines, KMD is aggressively addressing its cost base with additional support from government subsidies and possible partial rent relief. In addition, KMD has announced an NZ$207m equity raise in order to de-lever its balance sheet.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">KMD</td>
<td style="width: 48pt;">Financials:Jul/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$1.12</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">56.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">3.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">n/a</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">25.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">4.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">4.8</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">284.4m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">16.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">4.5</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$319m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 43.2pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">14.3</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">316.3k (NZ$792k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">19.8</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
</tbody>
</table>
1H20 result&nbsp;— A good start for Rip Curl
KMD&nbsp;reported 1H20 underlying&nbsp;EBIT&nbsp;of NZ$29.0m, up +47% on the prior year and in line with market expectations, with&nbsp;headline growth reflecting the three month inclusion of Rip Curl. 1H20 same store sales growth was positive across all brands, with recent acquisitions&nbsp;Oboz&nbsp;and Rip Curl&nbsp;stand outs in the period. In the three months of&nbsp;KMD&nbsp;ownership, same&nbsp;store sales increased +2.7% on the prior period, helped by a particularly strong North American result. The robust Rip Curl result is an encouraging early sign. Offsetting slightly, Kathmandu brand gross margin contracted as a&nbsp;result of increased clearance sales mix and negative FX movements.&nbsp;&nbsp;
COVID-19; Majority of bricks &amp; mortar stores closed
As a result of COVID-19, the majority of KMD's store doors are temporarily closed across its various markets. In the lead in to closures, social distancing policies had weighed on foot traffic. KMD is aggressively reviewing its cost base, with government wage subsidies and possible landlord support also likely to provide short-term relief to a usually predominantly fixed cost base. Other internal cost initiatives include deferring all non-essential capex (expected to save NZ$8m in FY20E) and a restructure of the head office functions (expected to deliver NZ$15m of cost out).&nbsp;
Addressing the balance sheet, raising capital
KMD&nbsp;reported 1H20 net debt of NZ$273m and net debt to&nbsp;EBITDA&nbsp;of 1.9x (1H19 0.9x), with leverage increasing as a result of its Rip Curl acquisition. In light of elevated gearing,&nbsp;COVID-19 related disruption, and outlook uncertainty,&nbsp;KMD&nbsp;has signalled an NZ$207m capital raise via an NZ$30m underwritten placement to certain institutional investors, together with an&nbsp;~NZ$177m underwritten 1.2 for 1 pro-rata&nbsp;accelerated entitlement offer. The equity will be used to pay down debt and provide additional cash, with&nbsp;KMD&nbsp;expecting to have sufficient liquidity for the next 12-months.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Kathmandu Holdings
1H20 Result — A Mountain to Climb
RESTRICTED&nbsp;
Kathmandu (KMD) reported strong headline 1H20 earnings growth due to the first-time inclusion of Rip Curl, while earnings for the Kathmandu brand declined as a result of gross margin contraction. The near-term outlook is highly uncertain against the backdrop of COVID-19, with the majority of store doors temporarily closed. To help partially offset sales declines, KMD is aggressively addressing its cost base with additional support from government subsidies and possible partial rent relief. In addition, KMD has announced an NZ$207m equity raise in order to de-lever its balance sheet.
         


NZX Code
KMD
Financials:Jul/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$1.12
NPAT* (NZ$m)
56.8&nbsp;
n/a
n/a
n/a
EV/EBITDA
3.5&nbsp;
n/a
n/a
n/a


Target price
n/a
EPS* (NZc)
25.1&nbsp;
n/a
n/a
n/a
EV/EBIT
4.1&nbsp;
n/a
n/a
n/a


Risk rating
High
EPS growth* (%)
4.8
n/a
n/a
n/a
PE
4.5&nbsp;
n/a
n/a
n/a


Issued shares
284.4m
DPS (NZc)
16.0&nbsp;
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;
Price/NTA
4.5
n/a
n/a
n/a


Market cap
NZ$319m
Imputation (%)
100
n/a
n/a
n/a
Cash div yld (%)
14.3
0.0&nbsp;
0.0&nbsp;
0.0&nbsp;


Avg daily turnover
316.3k (NZ$792k)
*Based on normalised profits


Gross div yld (%)
19.8
n/a
n/a
n/a



1H20 result&nbsp;— A good start for Rip Curl
KMD&nbsp;reported 1H20 underlying&nbsp;EBIT&nbsp;of NZ$29.0m, up +47% on the prior year and in line with market expectations, with&nbsp;headline growth reflecting the three month inclusion of Rip Curl. 1H20 same store sales growth was positive across all brands, with recent acquisitions&nbsp;Oboz&nbsp;and Rip Curl&nbsp;stand outs in the period. In the three months of&nbsp;KMD&nbsp;ownership, same&nbsp;store sales increased +2.7% on the prior period, helped by a particularly strong North American result. The robust Rip Curl result is an encouraging early sign. Offsetting slightly, Kathmandu brand gross margin contracted as a&nbsp;result of increased clearance sales mix and negative FX movements.&nbsp;&nbsp;
COVID-19; Majority of bricks &amp; mortar stores closed
As a result of COVID-19, the majority of KMD's store doors are temporarily closed across its various markets. In the lead in to closures, social distancing policies had weighed on foot traffic. KMD is aggressively reviewing its cost base, with government wage subsidies and possible landlord support also likely to provide short-term relief to a usually predominantly fixed cost base. Other internal cost initiatives include deferring all non-essential capex (expected to save NZ$8m in FY20E) and a restructure of the head office functions (expected to deliver NZ$15m of cost out).&nbsp;
Addressing the balance sheet, raising capital
KMD&nbsp;reported 1H20 net debt of NZ$273m and net debt to&nbsp;EBITDA&nbsp;of 1.9x (1H19 0.9x), with leverage increasing as a result of its Rip Curl acquisition. In light of elevated gearing,&nbsp;COVID-19 related disruption, and outlook uncertainty,&nbsp;KMD&nbsp;has signalled an NZ$207m capital raise via an NZ$30m underwritten placement to certain institutional investors, together with an&nbsp;~NZ$177m underwritten 1.2 for 1 pro-rata&nbsp;accelerated entitlement offer. The equity will be used to pay down debt and provide additional cash, with&nbsp;KMD&nbsp;expecting to have sufficient liquidity for the next 12-months.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255


Kathmandu Holdings: 1H20 Result — A Mountain to Climb