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>Changing Tack</h2>
<p></p>
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<h2>RESEARCH&nbsp;INSIGHTS</h2>
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<p>New Zealand King Salmon (NZK) appears to be&nbsp;benefitting&nbsp;from strong salmon prices, partly mitigating significant mortality losses from the 2022 summer. NZK is able to pass on higher costs as King salmon is an in-demand premium product and the global&nbsp;foodservice&nbsp;recovery is driving a rebound in seafood prices.&nbsp;Nevertheless, NZK is not expected to return to profitability until FY24 at the earliest. This follows material earnings pressure in recent years, with successive warm summers contributing to significant fish&nbsp;mortalities,&nbsp;compounded by COVID impacts. Following the company’s decision to scale back operations at warm water sites over summers, the outlook for NZK is&nbsp;now reliant on a successful Blue Endeavour application.&nbsp;If approved, this is likely to be a positive catalyst as NZK will have access to cooler waters and more than double existing capacity once fully operational. A high degree of execution risk still remains but the open ocean model has clear benefits for NZK and fish health.&nbsp;</p>
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<h3>What's changed?</h3>
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<ul>
<li><strong>Earnings</strong>: Stronger salmon prices support an increase to our FY23/FY24/FY25 forecast EBITDA of&nbsp;+NZ$2m/+NZ$6m/+NZ$2m.</li>
</ul>
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<h3>Revisiting the near-term earnings path — strong demand offsets cost pressures</h3>
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<div id="m_-7322857059520989006ivhdl">
<p>We adjust our forecasts to reflect stronger salmon prices as the sector continues to benefit from the global&nbsp;foodservice&nbsp;recovery. Harvest volumes are capped in the near term, but a strong pricing environment and the sell-down of frozen inventory supports revenue growth. Frozen sales were historically lower margin but this appears to be improving as COVID has driven increased adoption of at-home seafood consumption. We increase our margin forecasts (but remain below pre-COVID levels). Cost&nbsp;inflation and supply chain constraints are&nbsp;likely to be offset by price increases, a reduction in employee costs, and beneficial changes in mix. Our forecast FY23 EBITDA loss of -NZ$9m&nbsp;is at the lower end of guidance range (-NZ$8m to -NZ$12m).&nbsp;&nbsp;</p>
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<h3>Operating model changes expected to improve fish health and earnings resilience</h3>
</div>
<div id="m_-7322857059520989006ibozm">
<p>NZK’s earnings in recent years has been volatile due to high mortality losses, primarily at its warm sites in the Queen Charlotte and&nbsp;Pelorus&nbsp;Sounds. NZK expects closing these sites over summer will improve the resilience of fish health and overall earnings stability.</p>
</div>
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<h3>Blue Endeavour — the key catalyst going forward</h3>
</div>
<div id="m_-7322857059520989006ivhdl-2">
<p>The outcome of&nbsp;NZK's&nbsp;consent application with Marlborough District Council for open ocean farming is expected in September 2022. Management retains a positive outlook as additional information requests appear operational in nature and there has been less opposition than its past experience. If successful, Blue Endeavour would&nbsp;more than double existing annual harvest capacity.</p>
</div>

New Zealand King Salmon Changing Tack


RESEARCH&nbsp;INSIGHTS

New Zealand King Salmon (NZK) appears to be&nbsp;benefitting&nbsp;from strong salmon prices, partly mitigating significant mortality losses from the 2022 summer. NZK is able to pass on higher costs as King salmon is an in-demand premium product and the global&nbsp;foodservice&nbsp;recovery is driving a rebound in seafood prices.&nbsp;Nevertheless, NZK is not expected to return to profitability until FY24 at the earliest. This follows material earnings pressure in recent years, with successive warm summers contributing to significant fish&nbsp;mortalities,&nbsp;compounded by COVID impacts. Following the company’s decision to scale back operations at warm water sites over summers, the outlook for NZK is&nbsp;now reliant on a successful Blue Endeavour application.&nbsp;If approved, this is likely to be a positive catalyst as NZK will have access to cooler waters and more than double existing capacity once fully operational. A high degree of execution risk still remains but the open ocean model has clear benefits for NZK and fish health.&nbsp;

What's changed?



Earnings: Stronger salmon prices support an increase to our FY23/FY24/FY25 forecast EBITDA of&nbsp;+NZ$2m/+NZ$6m/+NZ$2m.



Revisiting the near-term earnings path — strong demand offsets cost pressures


We adjust our forecasts to reflect stronger salmon prices as the sector continues to benefit from the global&nbsp;foodservice&nbsp;recovery. Harvest volumes are capped in the near term, but a strong pricing environment and the sell-down of frozen inventory supports revenue growth. Frozen sales were historically lower margin but this appears to be improving as COVID has driven increased adoption of at-home seafood consumption. We increase our margin forecasts (but remain below pre-COVID levels). Cost&nbsp;inflation and supply chain constraints are&nbsp;likely to be offset by price increases, a reduction in employee costs, and beneficial changes in mix. Our forecast FY23 EBITDA loss of -NZ$9m&nbsp;is at the lower end of guidance range (-NZ$8m to -NZ$12m).&nbsp;&nbsp;


Operating model changes expected to improve fish health and earnings resilience


NZK’s earnings in recent years has been volatile due to high mortality losses, primarily at its warm sites in the Queen Charlotte and&nbsp;Pelorus&nbsp;Sounds. NZK expects closing these sites over summer will improve the resilience of fish health and overall earnings stability.


Blue Endeavour — the key catalyst going forward


The outcome of&nbsp;NZK's&nbsp;consent application with Marlborough District Council for open ocean farming is expected in September 2022. Management retains a positive outlook as additional information requests appear operational in nature and there has been less opposition than its past experience. If successful, Blue Endeavour would&nbsp;more than double existing annual harvest capacity.


New Zealand King Salmon

New Zealand King Salmon: Changing Tack