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

New Zealand King Salmon / Equity Bottom-Up

<h2>New Zealand King Salmon</h2>
FY19 — Swimming Upstream
New Zealand King Salmon (NZK) FY19 earnings were in line with expectations as the company faced another challenging period. Harvest volume fell as higher water temperatures led to elevated mortalities. Volume growth is expected to be flat over the coming years as the company recovers biomass and shifts to a new operating model that is more aligned with best practice. The medium-term volume uplift available under current consents drives attractive earnings growth, while material upside exists outside of our base case from 1) a positive farm relocation decision and 2) possible open ocean farming. Reiterate OUTPERFORM.
What’s changed?
<ul>
<li>Earnings: Minor changes to FY20/FY21E, material uplift to FY22E on updated volume guidance</li>
<li>Target Price: Increased to NZ$2.65 from NZ$2.50</li>
<li>Rating:&nbsp;OUTPERFORM</li>
</ul>
FY19 challenging; Price growth highlights strength of the brand
A second consecutive summer of elevated water temperatures in FY19 caused production issues for NZK, with sales volumes falling -3% on the prior period. A highlight within the period was continued pricing growth, up an impressive +11% as the company optimised sales mix towards higher value markets (North America) and products (Ōra King). Underlying price growth was also strong across all markets, highlighting the strength of NZK’s branded product. Looking forward, harvest guidance implies flat volumes through FY20 and FY21 (~8,000MT) with a significant (+15%) increase in FY22 to 9,200MT, ahead of our prior forecasts. NZK has reaffirmed its FY20 guidance range of Operating EBITDA of NZ$25.0m to NZ$28.5m.
FY20 capex elevated with investment in fish performance
NZK reaffirmed FY20 capex guidance of NZ$20m, as it transitions to a site single year class operating model aimed at addressing fish performance. We expect mortality rates to return to a more normal level over the coming years as a result of the new operating model, upwelling systems recently installed at all farms, and vaccination of all smolt prior to ocean transfer. Additional investment into the processing facility and hatchery is expected to lift efficiencies and provide capacity for future volume uplifts.
Considerable volume upside exists to our base case
Material upside optionality exists outside of our forecasts from either a positive decision on NZK’s outstanding farm relocation or possible open ocean farming opportunities. NZK recently applied for its first open ocean farming consent in the Cook Strait. Assuming a smooth consenting process the earliest possible harvest from the site would be mid-FY23, with forecast production of ~4,000MT over an 18 month cycle. Whilst we view positive outcomes as more likely than not, we note that both opportunities remain at least four years away from delivering harvest outcomes with significant uncertainty around timeframes.&nbsp;
<div class="content-highlight">
Investment View
NZK is a fully integrated King salmon producer which has consistently achieved premium prices. We view NZK’s product offering as industry leading. Aquaculture operations are on the right side of sustainable farming trends, which should help benefit future growth. OUTPERFORM.
</div>
&nbsp;Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

New Zealand King Salmon
FY19 — Swimming Upstream
New Zealand King Salmon (NZK) FY19 earnings were in line with expectations as the company faced another challenging period. Harvest volume fell as higher water temperatures led to elevated mortalities. Volume growth is expected to be flat over the coming years as the company recovers biomass and shifts to a new operating model that is more aligned with best practice. The medium-term volume uplift available under current consents drives attractive earnings growth, while material upside exists outside of our base case from 1) a positive farm relocation decision and 2) possible open ocean farming. Reiterate OUTPERFORM.
What’s changed?

Earnings: Minor changes to FY20/FY21E, material uplift to FY22E on updated volume guidance
Target Price: Increased to NZ$2.65 from NZ$2.50
Rating:&nbsp;OUTPERFORM

FY19 challenging; Price growth highlights strength of the brand
A second consecutive summer of elevated water temperatures in FY19 caused production issues for NZK, with sales volumes falling -3% on the prior period. A highlight within the period was continued pricing growth, up an impressive +11% as the company optimised sales mix towards higher value markets (North America) and products (Ōra King). Underlying price growth was also strong across all markets, highlighting the strength of NZK’s branded product. Looking forward, harvest guidance implies flat volumes through FY20 and FY21 (~8,000MT) with a significant (+15%) increase in FY22 to 9,200MT, ahead of our prior forecasts. NZK has reaffirmed its FY20 guidance range of Operating EBITDA of NZ$25.0m to NZ$28.5m.
FY20 capex elevated with investment in fish performance
NZK reaffirmed FY20 capex guidance of NZ$20m, as it transitions to a site single year class operating model aimed at addressing fish performance. We expect mortality rates to return to a more normal level over the coming years as a result of the new operating model, upwelling systems recently installed at all farms, and vaccination of all smolt prior to ocean transfer. Additional investment into the processing facility and hatchery is expected to lift efficiencies and provide capacity for future volume uplifts.
Considerable volume upside exists to our base case
Material upside optionality exists outside of our forecasts from either a positive decision on NZK’s outstanding farm relocation or possible open ocean farming opportunities. NZK recently applied for its first open ocean farming consent in the Cook Strait. Assuming a smooth consenting process the earliest possible harvest from the site would be mid-FY23, with forecast production of ~4,000MT over an 18 month cycle. Whilst we view positive outcomes as more likely than not, we note that both opportunities remain at least four years away from delivering harvest outcomes with significant uncertainty around timeframes.&nbsp;

Investment View
NZK is a fully integrated King salmon producer which has consistently achieved premium prices. We view NZK’s product offering as industry leading. Aquaculture operations are on the right side of sustainable farming trends, which should help benefit future growth. OUTPERFORM.

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

New Zealand King Salmon: FY19 — Swimming Upstream