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

New Zealand King Salmon / Equity Bottom-Up

<h2>New Zealand King Salmon<br>1H21 — Tough Waters but Horizon in View</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>New&nbsp;Zealand&nbsp;King Salmon (NZK) reported a weak result with sales disruption, higher freight costs, and additional promotional activity&nbsp;weighing on margins. This was not unexpected given the challenging operating environment, while&nbsp;pleasingly sales volumes have accelerated in recent months to above pre COVID-19 levels. The company is expecting to clear its excess inventory by mid-2021. Although earnings are likely to remain under pressure while borders are shut and inventory clears, the long-term opportunity remains unchanged, in our view. NZK produces a premium product with well established brands, with near-term earnings exposed to a possible tailwind&nbsp;from&nbsp;foodservice&nbsp;recovery. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp;We make significant near-term reductions. We lower FY21 and FY22 operating EBITDA -20% and -7% respectively reflecting higher freight costs and negative margin impact from inventory clearance.</li>
<li><strong>Target price</strong>:&nbsp;We lower our target price -35cps to NZ$2.30 as a result of lower earnings forecasts and cost of capital changes.</li>
</ul>
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<h3>Result highlights</h3>
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<ul>
<li><strong>Sales volume flat on prior year, accelerating&nbsp;in recent months</strong> —&nbsp;Despite disruption in&nbsp;foodservice&nbsp;and supply-chains, volumes remained steady versus the prior comparable period driven by a strong Q4 which saw monthly sales ahead of pre COVID-19 levels. Sales volume has been boosted by new a&nbsp;step-up in exports to lower margin markets such as Japan.
<ul>
<li>During the period NZK signed a new retail distribution agreement with US retailer Fresh Thyme, which has a&nbsp;network of 74 stores. This is an encouraging development, offering future growth and channel diversity.</li>
</ul>
</li>
<li><strong>Prices held up well, with no price concessions on branded product</strong>&nbsp;—&nbsp;Average realised price declined -2.3% to NZ$23.9/kg, driven by mix and increased domestic promotional activity. Impressively, NZK was able to hold price on all branded product.</li>
<li><strong>Inventory surged</strong>&nbsp;—&nbsp;Unsurprisingly, 1H21 inventory was&nbsp;elevated, up&nbsp;+61% on the prior year period. However, given recent sales momentum this is expected to clear by mid-2021, albeit at&nbsp;negative margin.
<ul>
<li>Net debt increased&nbsp;+NZ$12m to NZ$43m in the period, due to higher working capital and soft cash flow. Inventory clearance will assist in unwinding this balance.​​​​​​​​​​​​​​</li>
</ul>
</li>
</ul>
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<h3>Outlook commentary limited with a change in balance date</h3>
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<p>NZK has removed outlook commentary and will reassess this when it announces its result for 12 months to January 2021 in late March (change in balance date from year end June to year end January). NZK is approaching a key period for fish mortality. To date water temperatures have been cooler than prior periods in the high-risk areas which is supportive of steady forecast harvest volumes. Although sales results are encouraging, the operating environment remains difficult and is likely to continue to weigh on margins in the near-term.&nbsp;</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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New Zealand King Salmon 1H21 — Tough Waters but Horizon in View

OUTPERFORM
New&nbsp;Zealand&nbsp;King Salmon (NZK) reported a weak result with sales disruption, higher freight costs, and additional promotional activity&nbsp;weighing on margins. This was not unexpected given the challenging operating environment, while&nbsp;pleasingly sales volumes have accelerated in recent months to above pre COVID-19 levels. The company is expecting to clear its excess inventory by mid-2021. Although earnings are likely to remain under pressure while borders are shut and inventory clears, the long-term opportunity remains unchanged, in our view. NZK produces a premium product with well established brands, with near-term earnings exposed to a possible tailwind&nbsp;from&nbsp;foodservice&nbsp;recovery. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;We make significant near-term reductions. We lower FY21 and FY22 operating EBITDA -20% and -7% respectively reflecting higher freight costs and negative margin impact from inventory clearance.
Target price:&nbsp;We lower our target price -35cps to NZ$2.30 as a result of lower earnings forecasts and cost of capital changes.



Result highlights



Sales volume flat on prior year, accelerating&nbsp;in recent months —&nbsp;Despite disruption in&nbsp;foodservice&nbsp;and supply-chains, volumes remained steady versus the prior comparable period driven by a strong Q4 which saw monthly sales ahead of pre COVID-19 levels. Sales volume has been boosted by new a&nbsp;step-up in exports to lower margin markets such as Japan.

During the period NZK signed a new retail distribution agreement with US retailer Fresh Thyme, which has a&nbsp;network of 74 stores. This is an encouraging development, offering future growth and channel diversity.


Prices held up well, with no price concessions on branded product&nbsp;—&nbsp;Average realised price declined -2.3% to NZ$23.9/kg, driven by mix and increased domestic promotional activity. Impressively, NZK was able to hold price on all branded product.
Inventory surged&nbsp;—&nbsp;Unsurprisingly, 1H21 inventory was&nbsp;elevated, up&nbsp;+61% on the prior year period. However, given recent sales momentum this is expected to clear by mid-2021, albeit at&nbsp;negative margin.

Net debt increased&nbsp;+NZ$12m to NZ$43m in the period, due to higher working capital and soft cash flow. Inventory clearance will assist in unwinding this balance.​​​​​​​​​​​​​​





Outlook commentary limited with a change in balance date


NZK has removed outlook commentary and will reassess this when it announces its result for 12 months to January 2021 in late March (change in balance date from year end June to year end January). NZK is approaching a key period for fish mortality. To date water temperatures have been cooler than prior periods in the high-risk areas which is supportive of steady forecast harvest volumes. Although sales results are encouraging, the operating environment remains difficult and is likely to continue to weigh on margins in the near-term.&nbsp;




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




New Zealand King Salmon: 1H21 — Tough Waters but Horizon in View