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>Kathmandu Holdings</h2>
<p><strong>Treading New Tracks; Reinstate at OUTPERFORM</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>Kathmandu (KMD) has begun to reopen its store doors as its trading markets look to exit lockdowns and consumer activity begins to return; KMD offers attractive risk reward in our view and we reinstate with an OUTPERFORM rating. The KMD share price experienced a significant sell off as a result of COVID-19 related disruption, and although we expect the near term earnings hit to be material, we are attracted to 1) KMD's strong management team and track record of execution, 2) its bolstered balance sheet strength, and 3) its well recognised adventure brands, which are backed by a loyal customer base, and 4) trading at a two year forward PE multiple of 8x, valuation is undemanding in our opinion. We reinstate coverage with an NZ$1.20 target price.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/131/655/original/image_54614699321588726209260.png?1588726210" class="editor-image img-responsive" data-smartkarma-image-id="131655"></figure>
<p><strong>Online sales surge; store doors starting to reopen</strong></p>
<div id="m_2512750831841561797ih1x9-2">
<p>KMD's&nbsp;online sales surged during&nbsp;lockdown, providing some offset to store closures. Online sales were up +2.5x to +3.0x on prior year levels through April, which we estimate reflects effective online penetration of ~25%. Australia saw the biggest online increases, in part driven by a longer period of the channel being open (New Zealand was limited to 'essential' items during Alert Level 4). As Governments look to ease&nbsp;lockdown&nbsp;restrictions,&nbsp;KMD&nbsp;is beginning to open stores, with most stores in New South Wales and Queensland now operating. We expect store traffic to remain subdued for an extended period, with social distancing policies limiting operating capacity. Insight into early trading in Australia and China suggests that&nbsp;although traffic is significantly below pre&nbsp;COVID-19 levels, sales conversion rates are higher, providing some offset.</p>
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<p><strong>Outlook uncertain but early signs positive for&nbsp;KMD</strong></p>
<div id="m_2512750831841561797iaklv-2">
<p>The near-term outlook remains opaque, and retail sector earnings headwinds exist from subdued consumer activity post lockdown and a bleak economic backdrop. However, we view KMD as well positioned as consumer activity resumes given 1) recent data points to positive buying intentions in the outdoor goods category, 2) the proposition of a Trans-Tasman bubble is supportive of an adventure tourism led lift, and 3) KMD has a strong loyalty scheme through which to drive targeted customer interactions and activity.</p>
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<p><strong>Balance sheet robust; risks reduced with recent capital raise</strong></p>
<div id="m_2512750831841561797iwcgr-2">
<p>KMD's balance sheet is in a solid position following the completion of an NZ$207m capital raise, providing liquidity for the next 12-months. The company has successfully negotiated waivers to covenant breach clauses within its banking group through to January 2021, and a relaxation of certain covenants for the period to July 2021. We currently expect net debt to EBITDA to peak in FY20 at 2.3x.</p>
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<div><strong>Guy Hooper</strong></div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
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Kathmandu Holdings
Treading New Tracks; Reinstate at OUTPERFORM
OUTPERFORM
Kathmandu (KMD) has begun to reopen its store doors as its trading markets look to exit lockdowns and consumer activity begins to return; KMD offers attractive risk reward in our view and we reinstate with an OUTPERFORM rating. The KMD share price experienced a significant sell off as a result of COVID-19 related disruption, and although we expect the near term earnings hit to be material, we are attracted to 1) KMD's strong management team and track record of execution, 2) its bolstered balance sheet strength, and 3) its well recognised adventure brands, which are backed by a loyal customer base, and 4) trading at a two year forward PE multiple of 8x, valuation is undemanding in our opinion. We reinstate coverage with an NZ$1.20 target price.

Online sales surge; store doors starting to reopen

KMD's&nbsp;online sales surged during&nbsp;lockdown, providing some offset to store closures. Online sales were up +2.5x to +3.0x on prior year levels through April, which we estimate reflects effective online penetration of ~25%. Australia saw the biggest online increases, in part driven by a longer period of the channel being open (New Zealand was limited to 'essential' items during Alert Level 4). As Governments look to ease&nbsp;lockdown&nbsp;restrictions,&nbsp;KMD&nbsp;is beginning to open stores, with most stores in New South Wales and Queensland now operating. We expect store traffic to remain subdued for an extended period, with social distancing policies limiting operating capacity. Insight into early trading in Australia and China suggests that&nbsp;although traffic is significantly below pre&nbsp;COVID-19 levels, sales conversion rates are higher, providing some offset.

Outlook uncertain but early signs positive for&nbsp;KMD

The near-term outlook remains opaque, and retail sector earnings headwinds exist from subdued consumer activity post lockdown and a bleak economic backdrop. However, we view KMD as well positioned as consumer activity resumes given 1) recent data points to positive buying intentions in the outdoor goods category, 2) the proposition of a Trans-Tasman bubble is supportive of an adventure tourism led lift, and 3) KMD has a strong loyalty scheme through which to drive targeted customer interactions and activity.

Balance sheet robust; risks reduced with recent capital raise

KMD's balance sheet is in a solid position following the completion of an NZ$207m capital raise, providing liquidity for the next 12-months. The company has successfully negotiated waivers to covenant breach clauses within its banking group through to January 2021, and a relaxation of certain covenants for the period to July 2021. We currently expect net debt to EBITDA to peak in FY20 at 2.3x.




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




Kathmandu Holdings: Treading New Tracks; Reinstate at OUTPERFORM