New Zealand Professional Investment Services Firm

Forsyth Barr

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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

New Zealand King Salmon / Equity Bottom-Up

<h2>New Zealand King Salmon</h2>
<p><strong>Diverging Channels</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>New Zealand King Salmon (NZK) is facing difficult market conditions, although strong operating performance is expected to offset near-term sales disruption. NZK's key foodservice export market​​​​​​​ is likely to be under pressure into FY21E in our opinion, as COVID-19 weighs on freight availability impacting margin. However, medium-term growth, underpinned by current consents, remains attractive in our view. Although not captured in our forecasts, we see significant upside should NZK be successful in gaining additional water space, particularly offshore, where volume uplifts could be meaningful. Reiterate OUTPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/131/842/original/image_12500091221588810474982.png?1588810477" class="editor-image img-responsive" data-smartkarma-image-id="131842"></figure>
<p><strong>Volumes take a&nbsp;COVID-19 hit...</strong></p>
<div id="m_-6342080813299087202iw72s">
<p>NZK has flagged a c. -20% drop in expected FY20E sales volume, on the back of foodservice channel disruption and &nbsp;supply chain challenges. The demand impact of COVID-19 has varied significantly by channel, with foodservice collapsing and retail/online sales surging; providing some level of offset as the company looks to redeploy additional volume through alternative channels. Prior to COVID-19, NZK derived ~75% of its sales through the foodservice channel, with most of that fresh product sold into export markets. We view the sales disruption as a deferral rather than a loss, with ability to delay harvest or increase frozen product providing flexibility. Whilst sales disruption is likely to be a timing issue, the collapse of air travel has weighed on freight availability and put pressure on near-term margins.</p>
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<p><strong>... fish performance improvements provide earnings offset</strong></p>
<div id="m_-6342080813299087202ippn1">
<p>NZK&nbsp;reiterated its FY20E Operating&nbsp;EBITDA&nbsp;guidance range of NZ$25.0m to NZ$28.5m, despite lower sales volume with improved fish performance providing a significant earnings offset. Performance gains driven by 1) lower summer water temperatures in the Marlborough Sounds, 2) investment into fish health including vaccinations and&nbsp;upwelling&nbsp;systems, and 3) gains from a shift in operating model to single year class (all salmon reared at a site are from the same year class).</p>
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<p><strong>Uncertain near-term outlook, underlying favourable drivers unchanged</strong></p>
<div id="m_-6342080813299087202iuif7">
<p>The near-term outlook is highly uncertain with key questions around foodservice recovery and improvements in freight availability. We expect a combination of channel redeployment and a recovery in the foodservice sector to drive a lift in sales in FY21E, however, we lower our margin assumptions on the back of elevated freight rates. We have made minor earnings changes across FY20E and FY21E, largely reflecting sales timing differences, with no changes further out. We remain comfortable with the medium-term growth outlook, post a recovery in sales markets. We leave our OUTPERFORM rating and NZ$2.65 target price unchanged.</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
Diverging Channels
OUTPERFORM
New Zealand King Salmon (NZK) is facing difficult market conditions, although strong operating performance is expected to offset near-term sales disruption. NZK's key foodservice export market​​​​​​​ is likely to be under pressure into FY21E in our opinion, as COVID-19 weighs on freight availability impacting margin. However, medium-term growth, underpinned by current consents, remains attractive in our view. Although not captured in our forecasts, we see significant upside should NZK be successful in gaining additional water space, particularly offshore, where volume uplifts could be meaningful. Reiterate OUTPERFORM.

Volumes take a&nbsp;COVID-19 hit...

NZK has flagged a c. -20% drop in expected FY20E sales volume, on the back of foodservice channel disruption and &nbsp;supply chain challenges. The demand impact of COVID-19 has varied significantly by channel, with foodservice collapsing and retail/online sales surging; providing some level of offset as the company looks to redeploy additional volume through alternative channels. Prior to COVID-19, NZK derived ~75% of its sales through the foodservice channel, with most of that fresh product sold into export markets. We view the sales disruption as a deferral rather than a loss, with ability to delay harvest or increase frozen product providing flexibility. Whilst sales disruption is likely to be a timing issue, the collapse of air travel has weighed on freight availability and put pressure on near-term margins.

... fish performance improvements provide earnings offset

NZK&nbsp;reiterated its FY20E Operating&nbsp;EBITDA&nbsp;guidance range of NZ$25.0m to NZ$28.5m, despite lower sales volume with improved fish performance providing a significant earnings offset. Performance gains driven by 1) lower summer water temperatures in the Marlborough Sounds, 2) investment into fish health including vaccinations and&nbsp;upwelling&nbsp;systems, and 3) gains from a shift in operating model to single year class (all salmon reared at a site are from the same year class).

Uncertain near-term outlook, underlying favourable drivers unchanged

The near-term outlook is highly uncertain with key questions around foodservice recovery and improvements in freight availability. We expect a combination of channel redeployment and a recovery in the foodservice sector to drive a lift in sales in FY21E, however, we lower our margin assumptions on the back of elevated freight rates. We have made minor earnings changes across FY20E and FY21E, largely reflecting sales timing differences, with no changes further out. We remain comfortable with the medium-term growth outlook, post a recovery in sales markets. We leave our OUTPERFORM rating and NZ$2.65 target price unchanged.




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




New Zealand King Salmon: Diverging Channels