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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Kathmandu Holdings</h2>
FY19 Result — On the Right Track
Kathmandu (KMD) reported a solid FY19 result ahead of expectations, underpinned by Oboz, which provided its first full 12 month contribution. Sales across the core brand were flat (after currency) with a positive Australian result offsetting a weak period in New Zealand; however, continued cost control and sales mix benefits enabled higher margins. Looking forward, we view the risk/reward as balanced given (1) a tougher backdrop facing the core Australasia business with rising cost and competition, and (2) a high degree of uncertainty in earnings contributions from its international expansion; but noting (3) positive Oboz momentum and possible international upside should execution on this growth path be faster/stronger than anticipated. NEUTRAL.
What’s changed?
<ul>
<li>Earnings: FY20E/FY21E NPAT up +1%/+5% reflecting improved cost control, albeit offset slightly in FY20 due to unfavourable FX movements</li>
<li>Target Price: Increased to NZ$2.95 from NZ$2.65</li>
<li>Rating:&nbsp;NEUTRAL</li>
</ul>
Strong FY19 result led by Oboz
KMD continues to exhibit strong operational execution, reporting earnings ahead of expectations. Australia was a highlight with sales growth accelerating in 2H19 despite cycling a strong prior period; however, this was offset by a drop in New Zealand sales with warmer weather impacting the sale of seasonal product. Headline sales growth of +10% was driven almost entirely by a 12 month contribution from Oboz which is gaining traction with key wholesale accounts (pro forma sales growth of +30%). A reduction in the cost of doing business was also a contributor to improved earnings with limited rent increases and a higher sales mix weighting towards the higher margin wholesale channel.
Continued reduction in debt levels; dividend upside
KMD continues to reduce debt, down -39% on the prior year period to NZ$19.3m, underpinned by strong operating cash flow. The conservative balance sheet provides KMD with flexibility for possible future bolt-on acquisitions or increased distributions to shareholders. KMD announced a fully imputed final dividend of 12cps, ahead of our expectations. Given the low levels of gearing we have lifted our forecast dividends.
Strong start to the year
KMD has not provided guidance for FY20 at this stage; however, it has highlighted the particularly strong start to the year, which is likely benefitting from cooler weather and a pull through of seasonal sales. KMD remains well positioned in terms of its core Australian and New Zealand business, albeit headwinds limit near-term growth. While it is gaining momentum in its international business, a possible source of upside for investors, it is worth noting the high degree of uncertainty in future earnings contributions and worsening macro backdrop.&nbsp;
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Investment View
KMD has a strong brand and market leading position in Australasia with its loyalty database and vertically integrated model also key strengths. KMD operates in a competitive sector and earnings are seasonal. The core business is in good shape, with focus now on the opportunity for the brand further afield. International is the key area of focus, with material capital committed to accelerate growth plans. Our rating is NEUTRAL.
</div>
Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Kathmandu Holdings
FY19 Result — On the Right Track
Kathmandu (KMD) reported a solid FY19 result ahead of expectations, underpinned by Oboz, which provided its first full 12 month contribution. Sales across the core brand were flat (after currency) with a positive Australian result offsetting a weak period in New Zealand; however, continued cost control and sales mix benefits enabled higher margins. Looking forward, we view the risk/reward as balanced given (1) a tougher backdrop facing the core Australasia business with rising cost and competition, and (2) a high degree of uncertainty in earnings contributions from its international expansion; but noting (3) positive Oboz momentum and possible international upside should execution on this growth path be faster/stronger than anticipated. NEUTRAL.
What’s changed?

Earnings: FY20E/FY21E NPAT up +1%/+5% reflecting improved cost control, albeit offset slightly in FY20 due to unfavourable FX movements
Target Price: Increased to NZ$2.95 from NZ$2.65
Rating:&nbsp;NEUTRAL

Strong FY19 result led by Oboz
KMD continues to exhibit strong operational execution, reporting earnings ahead of expectations. Australia was a highlight with sales growth accelerating in 2H19 despite cycling a strong prior period; however, this was offset by a drop in New Zealand sales with warmer weather impacting the sale of seasonal product. Headline sales growth of +10% was driven almost entirely by a 12 month contribution from Oboz which is gaining traction with key wholesale accounts (pro forma sales growth of +30%). A reduction in the cost of doing business was also a contributor to improved earnings with limited rent increases and a higher sales mix weighting towards the higher margin wholesale channel.
Continued reduction in debt levels; dividend upside
KMD continues to reduce debt, down -39% on the prior year period to NZ$19.3m, underpinned by strong operating cash flow. The conservative balance sheet provides KMD with flexibility for possible future bolt-on acquisitions or increased distributions to shareholders. KMD announced a fully imputed final dividend of 12cps, ahead of our expectations. Given the low levels of gearing we have lifted our forecast dividends.
Strong start to the year
KMD has not provided guidance for FY20 at this stage; however, it has highlighted the particularly strong start to the year, which is likely benefitting from cooler weather and a pull through of seasonal sales. KMD remains well positioned in terms of its core Australian and New Zealand business, albeit headwinds limit near-term growth. While it is gaining momentum in its international business, a possible source of upside for investors, it is worth noting the high degree of uncertainty in future earnings contributions and worsening macro backdrop.&nbsp;

Investment View
KMD has a strong brand and market leading position in Australasia with its loyalty database and vertically integrated model also key strengths. KMD operates in a competitive sector and earnings are seasonal. The core business is in good shape, with focus now on the opportunity for the brand further afield. International is the key area of focus, with material capital committed to accelerate growth plans. Our rating is NEUTRAL.

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

Kathmandu Holdings: FY19 Result — On the Right Track